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As Economic Suffering Spreads, So Do Financial Scams

As Economic Suffering Spreads, So Do Financial Scams

By Tony Pugh | McClatchy Newspapers

WASHINGTON — Researchers say people are more susceptible to investment scams such as Ponzi and pyramid schemes after going through adverse life events — a job loss, foreclosure or some other financial hardship.

So it’s not surprising that many experts think the nation’s deepening economic crisis is creating a whole new universe of potential scam victims every day. In fact, it makes perfect sense.

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An estimated $6 trillion in wealth has been lost since the housing bubble burst. Mutual funds suffered $191 billion in losses in January alone, according to the Investment Company Institute.

And the average 401(k) account fell 27 percent from about $65,000 to about $48,000 in the year ending in December 2008, according to the Employment Benefit Research Institute.

As more consumers look to shore up these and other dwindling assets, regulators and watchdog groups are warning them to look out for foreclosure rescue schemes, shady debt settlement firms and investment scams touting profits that seem too good to be true.

“Nothing concerns me more than the cold hard reality that hardworking Americans are being swindled,” Sen. Jay Rockefeller, D-W.Va., said last week at a consumer protection hearing of the Senate Committee on Commerce, Science and Transportation. “The more people in distress, (the) more people want to take advantage of people in distress. It’s really quite stunning.”

High-profile investment schemes have received national attention recently due to the fraud charges against financiers Bernard Madoff and R. Allen Stanford, who are both accused of running multibillion-dollar Ponzi schemes disguised as legitimate investment firms.

Ponzi schemes, using promises of quick profits, collect money from new investors to pay supposed returns to other investors. Pyramid schemes focus on recruiting new investors to make money. After paying an “enrollment fee,” the new member earns money by getting a cut of the enrollment fees paid by people they’ve recruited, who must in turn find new participants to pay the fee.

Both schemes play on investors’ greed and trust. And older people, who’ve amassed more savings, are the typical victims of choice.

However, people who’ve cashed in their stocks and 401(k)s due to recent market losses also are vulnerable, said Fred Joseph, the president of the North American Securities Administrators Association.

“Two or three months later they’ll decide, ‘Now I need to do something with this pot of money I have.’ That’s when they’re most at risk because that 8 percent, 10 percent, 20 percent (return on investment) sounds really good and they’re very susceptible to getting conned into something,” Joseph said.

Joseph, who’s also Colorado’s securities commissioner, said that fraud investigations are up 10 to 15 percent this year in that state, where the scams seem to follow the headlines.

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