Top 10 Investor Threats (In Time for the Holidays)

Nov 29

We don’t mean to add to the stress of this long holiday season, but there is another kind of stress that makes decisions about holiday decorations look like a walk in the park.

It’s financial stress, and making ill-advised investment decisions is a leading cause. Sometimes it’s buying into a fraudulent scheme. Other times it is investing in a product that may be legal but makes no sense for your financial situation.

The Top Threats to Avoid in 2018 can help lower your financial stress level  if you avoid them.

We recognize that as you read them you’ll probably think, “I would never invest in something like that,” or “No way I would do business with that financial adviser.”

Keep in mind that thousands of ordinary Texas investors fall into these traps every year, the victims of unscrupulous investment promoters who promise high returns with little risk.

Listen to Enforcement Director Joseph Rotunda discuss the Top 10 Investor Threats on the NPR news program The Texas Standard.

Unregistered Individuals

Plumbers must be licensed. The same with barbers, used auto-parts recyclers, and the companies that attach the boot that immobilizes your truck when you don’t pay your parking tickets.

Yet many investors don’t know that people and firms who sell securities must be registered with the Texas State Securities Board.

Investment promoters who are not registered to sell securities are a three-story-tall red flag for investors. Generally, anyone acting as a sales agent for a company selling stocks, bonds, or other investments to the public must be registered to do so.

An investment promoter can’t simply set up a website or YouTube channel and sell investments unless the investments are registered or sold under one of the limited number of exemptions from registration.

Registering with the State Securities Board involves qualifications testing, background checks, and periodic review. To see if a person is registered to sell investments, visit Registration Checks or call (512) 305-8301. A sales agent who isn’t registered is likely violating the law.

Almost all criminal actions undertaken by the State Securities Board involve unregistered persons.


The old saying about bank robbers  they go where the money is  applies to today’s cybercriminals.

Hackers are inundating investors and financial firms with phishing attacks, malware, and other types of online attacks to try to trick you or your firm into disclosing your brokerage account or bank information, passwords, Social Security Number, and other discrete information.

The techniques include using spam email and fake websites to convince investors they’re dealing with a legitimate firm.  These illicit emails and websites appear authentic, and unsuspecting investors may either click on links that allow third-parties to steal their information or they may transfer funds to an account that appears to be maintained at their firm but in reality is controlled by a crook – often operating in anonymity, overseas, in a country that will not extradite criminals to Texas.

If you have any concerns about a website or email you have received from a financial institution, we suggest verifying that it’s from a legitimate source. Go to the business’ website and search online for other information. Independently check a link sent by a financial institution you have an account with by first going to the company’s website or calling a representative.

You should also closely check your account statements and trade confirmations for any suspicious activity. If you find a discrepancy, put your questions to the firm in writing so you have a record of your complaint.

More information on cyber-fraud is available from the U.S. Securities and Exchange Commission’s Investor Bulletin: Protecting Your Online Accounts from Fraud, and the Financial Industry Regulatory Authority’s Keeping Your Account Secure: Tips for Protecting Your Financial Information.

Oil and Gas

Oil and gas investments are highly speculative and staggeringly complex to anyone not versed in the energy business.

Yet some investors, attracted by the mythology surrounding the oil industry, have a blind spot when approached to invest in the business.

It is difficult for a potential investor to investigate a promoter’s claims about how much oil or gas will be produced or the time it will take to start production. The structure of the investment will affect revenue and potential profits.

In addition, not all investors in oil and gas projects have the expertise to decipher geological maps, production reports, and filings with state energy regulators.

Investors should not rely solely on the promoter’s promises about any aspect of the investment. It’s also critical to know the background of the promoters  some may be inexperienced or have repeatedly failed in previous ventures, but have not disclosed those facts to investors.

Even if the underlying project is legitimate, any revenue realized can be negated by high commissions and other fees or expenses skimmed off by the managing partner, who typically sets the terms and timing of payments to investors.

For these and a variety of other reasons, energy investments tend to be poor alternatives for those planning for retirement and should be avoided by anyone who cannot afford to strike out when trying to strike it rich.

Cashing Out

When you are invested in mainstream financial products  stocks, mutual funds, annuities, plain old savings accounts  you should be extremely cautious about cashing out.

In the investment world, there is always someone telling you they can earn you higher returns than you are getting. All you need to do is cash in some of your current holdings and hand them the money to manage.

Sometimes it’s a switch to a legitimate financial firm. Other times, though, an investment promoter may invest your money in expensive and risky products that will earn him rich commissions. He’ll be reaping the returns, but you probably won’t earn an extra dime.

Doing nothing can be a great virtue in investing.

Promissory Notes and High-Yield Investment Programs

Low yields on safe and secure products such as certificates of deposit and money market accounts have prompted some investors to look at alternative sources of income. Promissory notes are one way that investment promoters both registered and not entice those investors.

But promissory notes often turn out to be scams when broadly marketed to the public. Promissory notes are basically IOUs from companies or individuals who generally have limited operating histories and no meaningful sources of revenue.  In many cases, financial institutions may have refused to lend to the companies or individuals because they posed too great a risk for default.  Regardless, the companies and individuals may be selling notes to investors to fund everything from property development to oil and gas exploration, or to buy interests in a business partnership.

As an individual investor, you probably won’t be able to assess their creditworthiness, or evaluate the project that is supposed to generate enough revenue to pay the promised returns.

Legitimate promissory notes are generally marketed to sophisticated or corporate investors, who have the resources and expertise to evaluate the terms and conditions of notes and the companies behind them.

Also questionable are high-yield investment programs marketed as everything from “secured debt obligations” to investment contracts that promise to pay extraordinarily high returns.

Currency Trading

Foreign exchange (forex) investing involves the trading of currencies of other nations. As you can imagine, it’s extremely difficult to earn profits by executing forex contracts in the currencies of dozens of countries with different political systems and economies.

Investors should keep in mind the enormous complexity of forex whenever they hear an investment promoter say he has the can’t-miss trading formula to earn sky-high returns.

Foreign currency is a vast global market where prices are volatile, commissions can be back-breaking, and losses can pile up in a few hours. An individual is taking a huge risk by buying into an investment promoter’s promise that he can predict currency prices and lock in enormous profits with little or no risk.

Currency traders must be registered with one or more federal regulatory agencies and in most cases licensed with the Texas State Securities Board to sell investments based on forex trading.


It’s hard to avoid the buzz about cryptocurrencies like Bitcoin and Ethereum, and dozens of others.

Their increasing acceptance in the marketplace and wild price swings  losing and gaining a quarter of their value in a matter of weeks  have tempted even Main Street investors to get in on the next big thing.

Understanding cryptocurrencies is a different matter, however, and a lesson in the importance of knowing your investment.

Bitcoin is an electronic payment system that acts as an alternative currency. But it’s not tangible like cash in your wallet. It’s essentially a line of code that exists on computers and the internet. It’s not backed by a government, and its price is not set by a centralized authority.

Nonetheless, promoters are now selling investments that are tied to Bitcoin and other cryptocurrencies. They may be raising capital to develop smartphone applications such as e-wallets and tools that allow users to manage and transfer bitcoins, selling shares in “mining” operations designed to secure and share bitcoin among their memberships, or attempting to time the market in trading programs that incorporate bitcoins and other cryptocurrencies.

Moreover, Initial Coin Offerings (ICOs) are a relatively recent development where an issuer raises money by selling a new cryptocurrency to investors, typically in exchange for bitcoin or another established cryptocurrency.

The ICO coin can represent an equity or debt interest in the issuer itself or the business the issuer creates.

The SEC’s Investor Alert on ICOs identifies the warning signs of fraud in the market, including “guaranteed” high investment returns, unsolicited offers, and unlicensed sellers.

Although these red flags are often apparent in other fraudulent securities offerings, the risks may become increasingly dire in ICOs because the issuer may exist only in cyberspace, without any meaningful physical location, and its principals may be able to leverage the anonymity associated with cryptocurrencies to readily abscond with investors’ funds.

Overseas Investing

International investments are often sold with the promise of profits earned by selling much-needed products to untapped markets.

Investors should ask themselves if they really understand how money will be made. The State Securities Board has issued sanctions in cases involving real estate in France, medical testing kits in Southeast Asia, and bank deposits in West Africa and the Philippines.

How much could an individual investor possibly know about those investments? And if an investor’s money is deposited in an overseas bank, what are the odds of getting that money back?

Too often, investors make decisions based solely on the profits they have been promised.

Private Placement Offerings

Private placements are used to raise capital without having to comply with the registration requirements of securities laws.

A common exemption from registration allows companies to raise an unlimited amount of money, but only from investors who are fortunate enough to meet the definition of “accredited” net worth of $1 million, excluding the value of the primary residence, or annual income of $200,000 or more ($300,000 if married).

That high bar doesn’t prevent some promoters from trying to sell private placement offerings to any investor, regardless of their income or assets.  The promoters may be trying to lure in unaccredited investors on the Internet, in publications, and through free dinner seminars, telemarketing, cold-calling—you name it.  When questioned, the promoters may falsely try to convince unaccredited investors that they meet the investing standard. If someone labels you “accredited,” you may be inclined to believe them even if you don’t meet the standard.

Companies raising money through private placements often have a limited operating history and the investments themselves generally lack transparency. They are among the most common products or schemes that lead to regulatory enforcement actions, and to investors losing all or a considerable portion of their life savings.

Real Estate

Houses, land, development – the cornerstones of the American dream.

Investing in real estate is a lot more complicated than a slogan. Investment opportunities are often sold through investment contracts, notes, and other securities.

Promoters promise steady returns from a variety of investments, including the purchase, rehabilitation and sale of distressed houses and other property; the purchase of mortgage notes and real estate assets; and the development of shopping centers and other projects.

Investors should be skeptical of claims that real estate investment carries minimal risk because it is backed by a “hard asset” – which may or may not exist.

Depending on the structure of the offering, risk factors may include the illiquidity of the investment; changes in interest rates that can affect costs and profits; and changes in demographics, property valuation, and rental rates.

Some promoters of fraudulent real estate investments also claim to have special expertise that guarantees investors unrealistically high returns on investment.