Securities Bulletin

              SECURITIES bulletin
For many years, state securities adminis-trators
have tracked investment fraud
and published a list of Top 10 Securities
Scams. The No. 1 scam on this year’s list
is “affinity fraud.”
Each of us has an affinity to some group
— an ethnic group, a religious group, a
sports team or a veterans group. The list
reminds us to be vigilant when investing,
even with members of our affinity
groups. Just because a person is a
member of your church or civic organi-zation
doesn’t mean a particular invest-ment
they are advocating is right for you
or the person has the qualifications to
be selling investment products.
From affinity scams to Internet pump-and-
dump stock schemes to offerings
from unlicensed individuals to unsuit-able
investments, risky investment
opportunities merit your full attention
and research before forking over your
hard-earned cash. Before investing,
make sure your choices match up with
your age, your need for access to the
money, your investment goals and your
risk tolerance. And most importantly,
before committing any money to any
person or organization, be on the safe
side by first checking out the salesper-son
and/or product with the Securities
Department.
Remember, if an investment sounds too
good to be true, it
probably is.
Jesse White
Secretary of State
SUMMER 2007
1. Affinity Fraud — Con artists may be members of a particular group or pretend to be
members in order to gain a person’s trust. Cons often recruit a respected member of a com-munity
or religious congregation to promote their schemes. In many cases, even these lead-ers
become victims of what turns out to be Ponzi schemes. In a recent case, an Illinois pastor
was indicted on 30 counts of securities fraud and theft for luring congregants into a Christian
development investment.
2. Foreign Exchange Trading — Foreign exchange (Forex) trading can be legitimate for gov-ernments
and businesses concerned about fluctuations in international currencies, and it can
even be appropriate for some individual investors. But the average investor should be wary
when it comes to these complex markets. Forex scams attract customers with sophisticated-sounding
offers placed in newspaper advertisements, on the radio or on Internet sites.
3. Internet Fraud — Scammers continue to take advantage of technology to lure investors
into “pump-and-dump” stock schemes. The Securities Department recently issued an order
against an individual who used the Internet to lure investors for a purported movie deal.
Assets of the individual were seized, including a $400,000 home paid for with cash.
4. Investment Seminars — Promoters of unsuitable investments are increasingly seeking
potential investors — particularly senior citizens — by offering seminars, many of them prom-ising
a free meal along with “higher returns and little or no risk.” Unfortunately, in many of the
cases, it’s just the opposite — high risk and no returns.
5. Oil and Gas Scams — Rising oil and natural gas prices have made a variety of traditional
and alternative energy projects attractive to investors. A recent scam in Southern Illinois
resulted in investors losing millions. The perpetrators are facing criminal prosecution.
6. Promissory Note Schemes — Con artists peddling promissory notes promise above-mar-ket
interest rates and safety of principal. They often claim that an investor’s money will be
invested in small businesses, real estate ventures, trading programs and other moneymaking
deals. In reality, the money is spent on the con artist’s personal expenses.
7. Private Securities Offerings — Con artists are increasingly turning to private securities
offerings under Rule 506, Regulation D, of the federal Securities Act of 1933 to attract
investors without having to go through the full registration process. Although sometimes
legitimate, these offerings are often risky and at times fraudulent. Generally, private offerings
are designed for financially sophisticated investors.
8. Real Estate Investment Contracts — Despite the recent decline in property values, invest-ments
in real estate have long been viewed as a “sure thing,” one with little downside risk
and the potential for substantial returns. Some real estate investments are subject to full reg-ulation
under state and federal securities laws. An investment professional lost his license for
luring investors into a “guaranteed safe” real estate deal, but instead diverted the money for
a speculative investment in a hotel.
9. Unlicensed Individuals and Unregistered Products — Anyone selling securities or provid-ing
investment advice about buying or selling securities must be properly licensed. Anyone
engaging in these activities without a valid license should be a red alert for investors. Con
artists also bypass stringent state registration requirements to pitch viatical settlements, pay
telephone and ATM leasing contracts, and other investment contracts with the promise of
“limited or no risk” and high returns.
10. Unsuitable Investments — What might be a suitable investment for one investor may not
be right for another. Securities professionals must know their customers’ financial situations
and refrain from recommending investments that are unsuitable. For example, variable and
equity-indexed annuities are often unsuitable for senior citizens because the products are
generally long-term investments that limit access to invested funds.
Top 10 Securities Scams — 2007
IN
THIS
ISSUE
• TOP 10 SECURITIES SCAMS •
• PETRILLI SENTENCED TO 63 MONTHS •
• FAQ: FOREIGN CURRENCY CONTRACTS •
• MONEY SMART WEEK •
• 2008 RENEWAL FILING DATES •
A NEWSLETTER OF THE ILLINOIS SECURITIES DEPARTMENT • SECRETARY OF STATE JESSE WHITE