January 31, 2012

Top 10 Investment Scams of 2011

The Investment View from Prescott, Arizona

Economic uncertainty is helping scam artists exploit the fear and greed of unsophisticated and often financially vulnerable investors according to a report from the enforcement section of the North American Securities Administrators Association.

To a great extent, the script of the scam never changes, just the names of the investment vehicles – and of course, the victims.

The hottest scam-products currently are distressed-real-estate schemes, energy investments, gold and precious metals, promissory notes and re-sales of existing life insurance policies. Scamming practices cited by the NASAA were affinity fraud, bogus credentials, mirror trading, private placements and investment advice offered by unlicensed persons.

In most cases, the fraudster is selling his or her alleged expertise in buying properties, trading commodities or assessing energy projects. In many of the pitches, the purveyor “guarantees” returns with promissory notes if the project doesn’t deliver as promised.

With the widely covered collapse of real estate prices and the rise in energy and precious-metals prices, scam artists use news reports as a marketing tool. Often, they are no more than Ponzi schemes.

In an example excerpted from InvestmentNews magazine, a Florida-based company, Gold Bullion Exchange, solicited nearly $30 million by phone from 1,400 investors to purchase precious metals. Investors were told if they put up a fraction of the cost, “margin” financing would cover the rest of the purchase price. Investigators found that no bullion ever was purchased.

A common strategy in these schemes is what regulators call affinity fraud, in which crooks solicit money within specific groups such as retiree communities, religious or ethnic groups – often posing as a member of the group.

Such strategies accounted for one in four Ponzi schemes over the last decade, according to the NASAA.  A 73-year-old man in North Carolina raised $18.5 million from more than 100 investors he knew from church and other social circles to invest in venture capital projects backed by promissory notes yielding between 10% and 50%. There were no investments.  He used new money to pay off earlier investors.

Things that can alert you to a possible scam are the offering of unregistered securities with no daily pricing available, and the absense of third party custodians to hold your money and send you statements.  Government sponsored Securities Investors Protection Corporation coverage (SIPC) is also something to insist upon for your investments.  All of your accounts at Hepburn Capital are SIPC protected.

Whether it’s an opportunity to get in on the ground floor of a new technology, a can’t-fail energy drilling project, or a “mirror trading” scheme that offers the chance to participate in the real-time trades of a “skilled” third party, you can protect yourself with a little common sense. If it sounds too good to be true, it is too good to be true. 

When in doubt, call Hepburn Capital at 778-4000 for a second opinion.  After all, your life savings are at stake.

A Slice of Life

The Divas were ON last Sunday.  My wife, Cathleen, along with friends Patricia McCarver, Joanne Lawson and the Doyen of Divas, Bonnie Shelley Hollister, put on a great show Sunday at the Divas concert here in Prescott.  These four highly accomplished singers wowed the crowd for 90 minutes and provided an encore after receiving a standing ovation. 

There was a video being recorded, so hopefully we can get a copy and put it on the Internet for you all to see.

And word has it that the highly acclaimed Angelorum choir from Yavapai College that has performed in Europe as well as across the US and Mexico, is being rebuilt by YC’s new Choral Director, Chris Eubank.  Lots of good entertainment to come from these ladies, I’m hoping.

Mental Floss

Tip O’ The Day

Rubbing a walnut over scratches in your furniture
will disguise dings and scrapes.

They say “Game Changer”, I say Flawed

By Bryan Jarman, CFA

Several prominent individuals in the investment world have referred to recently enacted policies in Europe as “game changers”.  Some have likened the refinancing policy in Europe to the 2008 Troubled Asset Relief Program (TARP) of 2008 which pulled our banking system back from the brink of collapse.

Last week the lead news from Europe was about an “orderly, structured renegotiation of Greek debt”.  To me, a default is a default, orderly or otherwise.   Dramatic efforts by central banks throughout the world, including the US Federal Reserve, to flood the economy with money have tried to create the appearance of stability through higher asset prices which are propped up with all the new money being created.  The intended outcome is for us to feel wealthier – known as “the wealth effect” – which is supposed to spur growth through consumer spending.

I don’t know how you feel, but in a world where we can’t have a high school valedictorian, everybody gets a participation ribbon for each activity and asset prices are artificially inflated, something seems flawed to me. A real “game changer” would be having our leaders do what will provide true growth and stability, not provide just smoke and mirrors intended to win elections.

How’s the Market Doing

The stock markets have been remarkably smooth for the last month (this is written on January 29th), despite just about everyone’s expectation of another year of wild swings in the market.  Of course the average trend last year was measured in days and weeks, not months, so another turnaround could be right around the corner.

Even more surprising is that the international markets have been stronger than the U.S. markets.  Whether this will last when we get the next bad news out of Europe is yet to be seen, but we are watching this change closely.

Even the gold market, while still well below recent highs is showing its first signs of breaking out of its downtrend, so we are watching that also.

Got Statements?

It is important to your financial security that you receive regular statements from an independent custodian, such as National Financial, beyond any information we provide you directly.

The custodian of your accounts should be sending you statements every month or at least every quarter.  If you are not receiving statements either in the mail or electronically on the custodian’s website, please call the office at 778-4000 so we can amend this problem for you.

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What’s Going On In Your Portfolio?

We have had little change recently in our Flexible Income* portfolios with investments made over the past few months still performing and making money slowly.  Those holdings include high quality and high yield corporate bonds, municipal bonds and floating rate bonds.  We currently hold no currencies and no precious metals in the Flexible Income* model.

Our Shock Absorber Growth* strategy has now been integrated into portfolios which include growth, including Adaptive Balance*, Careful Growth* and Equity*.    We are excited about this strategy which appears well suited for markets that go wildly up and down like we have seen for the past year and a half. 

The Shock Absorber Growth* strategy uses an advanced hedging technique and holds investments that go up and down at different times so the movement of one offsets the movement of the other. This dampens wild swings in overall portfolio value when the market goes sharply up or down. 

I am recording a short video explanation of the Shock Absorber* strategy that will be available on our website.  You will be notified of the link as soon as it is posted.

And, we haven’t forgotten.  We are still working on a system to list your strategies in each newsletter, so that these discussions will be more meaningful to you.  We had hoped to have it included this week, but it is “not yet ready for prime time.”  Hopefully next issue  . . .

Our Spotlight Strategy

Traditional Income

This new offering uses our basic “bond rotation” strategy that has been the main ingredient of our Flexible Income* strategy for almost 11 years now.  While both strategies avoid the use of growth stocks, the difference in the Traditional* and Flexible Income* strategies is that Traditional Income* uses only bond funds, no precious metals or currencies.

*    The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed.   Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account.  Not all trades are profitable.  It should not be assumed that current or future holdings will be profitable.   A list of all trades in these accounts for the past 12 months will be provided upon written request.

**  The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market.  Investors cannot invest directly in the S&P 500 Index.

Traditional Income
Flexible Income
Adaptive Balance
Adaptive Growth
Shock Absorber Growth

This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy.  Please discuss any legal or tax matters with your advisors in those areas.  Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.