Department of Financial Institutions
DFI Identifies Traps That Could Burn Investors

Press Release Date:  Thursday, July 03, 2008  
Contact Information:  Kelly May, Public Information Officer
502-573-3390, ext. 252
800-223-2579, ext. 252

   FRANKFORT, Ky. (July 3, 2008) – This summer, the Kentucky Department of Financial Institutions (DFI) warns that scam artists are using every trick under the sun to separate unsuspecting investors from their hard-earned dollars.

   Investors should screen themselves from hot energy-related tips, speculative real estate promotions, unsolicited invitations from new online “friends,” and complex investment products that fail to offer clear disclosures of risks and costs.

   “Criminals follow the news and promote schemes that tie in with high-concern issues in an effort to lend their schemes a cloak of legitimacy,” said DFI Commissioner Cordell Lawrence. “Investors today are facing enough challenges without having to worry about being swindled by get-rich-quick schemes.”

   Energy scams continue to be prevalent, especially since energy costs have skyrocketed.

   “Fraudulent oil and gas investments flowing from Kentucky continue to be a major problem,” said DFI Securities Division Director James Strode. “Oil and gas investments are highly risky and generally unsuitable for most investors regardless of the current price of oil, but now scam artists are using rising oil prices to fuel their fraudulent securities offerings.”

   Strode also warns investors to be wary of scams that promise new technologies to increase the efficiency of energy consumption or to extract energy from previously undeveloped sources.

   As the housing market continues to reel, schemes promising large returns from various types of real estate-related investments are increasing. Beware that some real estate alternatives may actually be worthless real estate investments that the promoter wishes to discard.

   In a new twist on affinity fraud – in which the con artist poses as a close member of a certain group in order to gain trust – social networking sites are providing an easy outlet for criminals to find victims. Investors should research before making an investment and not simply rely on “expert” advice given at a seminar or meeting. Even recommendations from close friends should be researched, because a trusted friend could have already been a victim of a scam.

   “Social networking Web sites create an environment ripe for affinity fraud,” said Strode. “Con artists can take advantage of how people freely share information with both their real and ‘virtual’ friends by posting it to their profile. And communication tools provided by some sites make it easy to advertise and promote investment scams to a wide audience for free.”

   State securities regulators have recently been investigating auction-rate securities. This attention from regulators reinforces that investors should remain cautious when they are pitched complex investment products without sufficient disclosures or when advised to concentrate all investments into one product.

   In addition to these trends, DFI continues to see suitability problems with variable annuities and similar products. Kentucky law requires a broker or investment adviser to be aware of the client’s risk tolerance, age and need for access to the money and must not recommend investments that do not appropriately match these factors. Seniors are often singled out to be switched into new and, in many cases, unsuitable investments.

   “The key to avoid getting burned by any investment is to make sure you understand the product and thoroughly check both the salesperson and the product with our office,” Lawrence said. “Remember, if it sounds too good to be true, it usually is.”

   Before investing, verify that the investment opportunity is registered and the seller is licensed using the online search at or by calling 800-223-2579.

   DFI is an agency in the Public Protection Cabinet.  It supervises the financial services industry by examining, chartering, licensing and registering various financial institutions, securities firms and professionals in Kentucky. DFI’s mission is to serve the public through effective and efficient regulation that promotes consumer confidence and economic growth.


Top Investor Traps of 2008 [PDF 88KB]