Don't Get Hooked by Investor Scams

By Michelle Singletary
Thursday, March 9, 2006

When the North American Securities Administrators Association announced its top investor traps to watch out for in 2006, there were the usual suspects.

On the list again this year were "prime bank schemes." These are sophisticated scams in which con artists promise high-yield, tax-free returns that are said to result from "off-shore trades of bank debentures." Investors are told that they are lucky to be privy to such information since only the rich know about such practically risk-free investments.

Need I say there are no such prime bank investments offering high-yield rates. This is a straight-up con.

The NASAA warns investors to watch out for schemes in which promoters offer great returns if you buy pay phones or ATMs. In order to make the deal more attractive, investors are told that after a given period, the equipment can be sold back to the seller at the investor's original purchase price.

Also on the list is a product that could easily confuse investors. Ever hear of an equity-indexed certificate of deposit?

The NASAA is particularly concerned that many seniors will confuse equity-indexed CDs with their older, completely federally insured cousin, the traditional certificate of deposit. They're not.

These hybrid securities products offer a return that is based on a certain stock market index, usually the S&P 500-stock index. Although your principal is FDIC-insured, your return is not. Instead, your return is dependent on the performance of the specific index. In fact, you could get no return at all on your investment.

The NASAA advises that this is not suitable for seniors who may need a guaranteed return for retirement expenses.

"The pace of innovation in financial services is ever increasing," said Patricia D. Struck, NASAA president and Wisconsin securities administrator. "There is a new hook weekly."

Investors may now choose among variable rate CDs, jumbo CDs, callable CDs and CDs with other special features. These CDs pose greater risks to investors.

Struck said she's concerned that with equity-indexed CDs, people will just hear "certificate of deposit" and not understand exactly what they are getting. "The risk isn't the product, but the way it's marketed," she said.

The warning about equity-indexed CDs should be heeded for other types of hybrid CDs as well, Struck said.

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