THE TOP FIVE INVESTOR PITFALLS
Louis D. Tambaro 
Marks & Klein, LLP

Marks & Klein, LLP has represented, and continues to represent, both brokerage firms in defense of actions and customers in the prosecution of claims against broker dealers for years. While investor losses are more often than not associated with typical market risk that accompanies any type of investment (i.e., real estate, securities, or opening a new business), in the realm of the securities business real and ongoing threats to investors — with more malicious origins – do indeed exist, most of which can be avoided through education, awareness and the performance of due diligence before you invest hard-earned money with any broker, business or fund.

Every year, investors throughout the United States lose billions of dollars to investment fraud. The fundamental problem is that investor does not understand how and to what extent they are being harmed. The following is a “top five” list of scams, schemes and scandals that currently face investors.

1. ACTIONS OF UNSCRUPULOUS BROKERS. State securities regulators are still receiving a high level of complaints from investors of brokers cutting corners or resorting to outright fraud to fatten their wallets. Investors MUST give their brokerage statements a closer look and asking the right questions about unexplained fees, unauthorized trades or other irregularities. However MOST investors fail to do this, out of a lack of technical understanding or a fear of looking unsophisticated when asking questions. Brokers and broker-dealers can be easily vetted through FINRA’s “Brokerchek” database. Investors can easily learn in a matter of seconds, through a quick internet search, whether their broker has been previously sanctioned, cautioned or sued. This tool is invaluable and should be used by all investors, large or small.

2. PONZI SCHEMES. Named for swindler Charles Ponzi, who in the early 1900s took investors for $10 million by promising 40 percent returns, these schemes are a perennial favorite among con artists. The premise is simple: promise high returns to investors and use money from previous investors to pay new investors. Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion. Con artists typically attribute government intervention as the reason why new investors didn’t get their promised returns. Despite recent high-profile Ponzi scheme prosecution, these problems persist, but can be readily identified by professionals.

3. SENIOR CITIZEN INVESTMENT FRAUD. Volatile stock markets, low interest rates, rising health care costs, and increasing life expectancy, combined to create a perfect storm for investment fraud against senior citizen investors. State securities regulators say older investors are being targeted with increasingly complex investment scams involving unregistered securities, promissory notes, charitable gift annuities, viatical settlements, and Ponzi schemes all promising inflated returns.

4. MUTUAL FUND BUSINESS PRACTICES. Although mutual funds play a tremendous role in the wealth and savings of our nation, ongoing scandals throughout the industry clearly demonstrate that some in the mutual fund industry are putting their own interests ahead of America’s 95 million mutual fund shareholders. State securities regulators, the SEC, FINRA, and mutual-fund firms themselves have launched a series of inquiries into mutual fund trading practices. In the mid-2000s more than a dozen mutual funds were under investigation and several mutual funds and mutual fund employees have either plead guilty, been charged or settled with state regulators. Despite the best efforts of regulators these problems persist.

5. VARIABLE ANNUITIES. Sales of variable annuities have increased dramatically over the past decade. As sales have risen, so too have complaints from investors. Regulators remain concerned that investors aren’t being told about high surrender charges and the steep sales commissions agents often earn when they move investors into variable annuities Investors may also be misled by with claims of guaranteed returns when variable annuity returns actually are vulnerable to the volatility of the stock market. The benefits of variable annuities – tax-deferral, death benefits among others – come with strings attached and additional costs. High commissions often are the driving force for sales of variable annuities. Often pitched to seniors through investment seminars, regulators say these products are unsuitable for many retirees. Variable annuities make sense only for consumers willing to invest for 10 years or longer, but they are not suitable for many retirees who cannot afford to lock up their money for a long time.

If you believe that you have been taken advantage of by a broker or were not fully apprised of risks associated with certain investment vehicles, you may be entitled to relief. Marks & Klein, LLP is happy to provide free consultation to determine whether you may have claims based upon any of the aforesaid, or similar, investor pitfalls.