Scams involving unscrupulous stockbrokers and financial analysts with conflicting interests are for the first time among the top 10 investment frauds listed by the North American Securities Administrators Association. Fraudulent oil and gas investments and schemes involving charitable gift annuities also joined the annual list.
"Con artists know investors are concerned about the volatile stock market," said Joseph Borg, president of the group known as NASAA. "They pitch their scams as offering high returns with no risk — an impossible combination."
To avoid scams, investors should check with state regulators to make sure an opportunity is legitimate and must use common sense, Borg said at a news conference.
"If it sounds too good to be true, it probably is," he said.
The regulators ranked the frauds and risky investments they are fighting by how often they occur and their impact. It is the fourth list from NASAA, which represents securities regulators in the 50 states, the District of Columbia, Puerto Rico, Canada and Mexico.
The top-ranked scam for 2002 involved unlicensed individuals, such as independent insurance agents, selling securities. Borg said most agents are honest, but too many are lured by high commissions into selling high-risk or fraudulent investments.
The regulators ranked deceptive stockbrokers at No. 2., saying "the declining stock market has caused some brokers to cut corners or resort to outright fraud."
Last year, North Dakota's securities commissioner yanked the licenses of two brokers, saying they squandered millions by making speculative investments without their clients' permission. The brokers were affiliated with H.D. Vest Investment Services Inc., an Irving, Texas, firm that in December settled with regulators and agreed to repay customers more than $3.2 million.
Analyst research conflicts came in third on the regulators' list. State investigators are probing whether some analysts issued glowing research reports and made buy recommendations to win investment-banking business, NASAA said.
Merrill Lynch & Co., the nation's biggest brokerage, agreed in May to pay a $100 million fine and revamp its stock research practices in a settlement with the New York attorney general's office, which had charged that the firm's analysts were misleading investors for personal gain.
The other seven top investment frauds, in order, are:
Promissory notes, which typically involve loans to companies made by investors in exchange for a fixed amount of periodic income. Legitimate corporate promissory notes are not usually sold to the public and some schemes are fraudulent.
Prime bank schemes that promise investors risk-free, triple-digit returns on debt notes said to be guaranteed by the world's biggest banks.
Viatical settlements, which, when done legally, involve buying into the insurance policies of the terminally ill, who get a portion of the money to help with medical bills. The investor is supposed to get paid when the person dies, but in some fraudulent cases the policyholders aren't really dying or don't even exist.
Affinity fraud investing schemes that target religious, ethnic and professional groups and are performed by members of the groups who use their common backgrounds to gain trust.
Charitable gift annuities, in which a donor gives cash or stock to a charity in return for lifetime fixed payments based on age — the older the donor, the larger the payment. Regulators said investors should be cautious of little-known organizations offering such investments.
Oil and gas schemes, including investments in fraudulent operations or wells that don't produce.
Leasing scams involving telephones, automated teller machines and Internet kiosks.