Investors warned about popular scams

Ponzi scheme retains No. 1 spot

Published: Sunday, January 18, 2004 at 6:01 a.m.
Last Modified: Sunday, January 18, 2004 at 1:12 a.m.

Investors are likely to be faced with increasingly complex and confusing investment frauds in 2004, warned the Florida Department of Financial Services, which released a "Top 10" list of investment scams to watch out for this year.

This annual list, which is compiled by the North American Securities Administrators Association (NASAA) from its members input, boasts some new ones this year: mutual fund practices, senior investment fraud and variable annuities scams.

Holding on to its No. 1 spot is one of the oldest investment scams around - the Ponzi scheme, so-named after Charles Ponzi, who in the early 1900s bilked investors of about $10 million by promising 40 percent returns, according to the Department of Financial Services.

While this scheme has varied over the decades to accommodate a changing society, it still is recognizable by a basic theme: promising unbelievably high returns while using money from new investors to pay previous investors. Eventually the whole scheme falls apart, leaving the promoter as the chief one who consistently profits from the operation.

Investors lose billions annually to investment fraud, said Tom Gallagher, Florida's chief financial officer.

"Our fight against fraud never stops because each year con artists discover new ways to cheat consumers out of their hard-earned savings," he said. "Education and awareness are an investor's best defense against fraud."

The newest investment frauds on the block include one involving variable annuities, Gallagher said. Regulators are concerned that investors are not being told about high surrender charges, and the steep sales commissions agents earn.

"Variable annuities make sense only for consumers willing to invest for 10 years or longer," Gallagher said. "They are not suitable for many retirees who cannot afford to lock up their money for a long time."

A new, interactive fraud center on the Web site of the NASAA - - features the Top 10 scams and scandals and offers tips on how to avoid being victimized by them. This national site and the state site at explain how to complain should a problem arise.

Investors play an important role in helping regulators stop fraudulent schemes, according to Don Saxon, securities regulator for Florida.

"Prevention is really what regulation is all about. If you go in after the fact, normally the people who perpetrated the fraud are gone, and if not, almost always the money is gone," Saxon said.

He advised investors to take time to think and do some background checking on both the promoter and the investment before sinking their money into an offer.

Doris Chandler can be reached at 374-5094.

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