Financial con artists prey on greedy investors

Greedy investors and savers who seek low risk and unrealistic returns face big risks of being defrauded. As the stock market enters its third year of declines and former stock investors search for “safer” returns, it is likely that more fraudulent alternative investment schemes will pop up, state and federal securities regulators warn.

The recently resurrected case of fraud at the Baptist Foundation of Arizona provides a stark warning to such investors that even the most innocuous-sounding pitch can be dangerous. The 1999 bankruptcy of the religious foundation caused some 13,000 investors to lose $590 million. The case is back in the news because a trial is about to begin with a familiar target—the accounting firm Arthur Andersen LLP—defending its audits of the organization.

The Baptist Foundation was set up in 1948 by the Arizona Southern Baptist Convention. Its purpose was to raise money for religious purposes, such as building new churches. Investors, including many elderly persons and churches, bought promissory notes from the Foundation and earned competitive interest rates. The notes were marketed as ideal retirement investments that also promoted Christianity. Unfortunately for those investors, the Foundation’s holdings in Arizona real estate plunged in the late 1980s. The Foundation used accounting fraud to hide the losses and continued to take in new money from investors, paying rates as high as 12% at a time when market interest rates were much lower. Questions were raised in the late 1990s and the Foundation collapsed in 1999. Many elderly retirees saw their life savings wiped out, and they are now suing Andersen for damages.

The U.S. Securities and Exchange Commission warns investors who are offered high returns to scrutinize them carefully. Returns correlate with risk, it says: low risk equates to low returns. To get high returns you must assume high risk. “Most fraudsters spend a lot of time trying to convince investors that extremely high returns are ‘guaranteed’ or ‘can’t miss’,” the SEC says. “Don’t believe it.”

State securities regulators worry that promissory note schemes are growing because investors are afraid of more stock market downturns. “Investors should stay away from notes promising high returns—upwards of 12% monthly—from little-known companies,” warns the North American Securities Administrators Association. It says that recently scam artists have enlisted some unscrupulous independent insurance agents to peddle their notes. The association also warns about prime bank schemes. “Scam artists, often operating over the Internet, promise investors returns as high as 300% through access to the investment portfolios of the world’s elite banks,” NASAA says.

Your best advice: be very skeptical and use trusted advisors and securities regulators to check out any unusual investment.