For the second consecutive year, Ponzi schemes lead the list of the “Top Five Investment Scams” prepared by the Ohio Department of Commerce’s Division of Securities.

Director of Commerce Kimberly Zurz today released the list as part of April’s observance of National Financial Literacy Month. She urged Ohioans to be vigilant in guarding against investment fraud.

Ponzi schemes are named for Charles Ponzi, a con artist who in the early 1900s promised high returns on short-term investments. Under his scheme, nearly 40,000 people invested approximately $15 million, with only one-third of that amount returned to the investors. Ponzi used money from later investors to pay returns to earlier investors.

“In the wake of the Bernard Madoff scandal, Ponzi schemes are front and center as an example of investment fraud,” Director Zurz said. “Ohioans should always be on guard against investment promoters who pitch their ability to guarantee high returns with little or no risk to the investor.”

The Division of Securities warns the public of the following investment scams:

1. Ponzi schemes. A Ponzi scheme promises high returns to investors and uses money from new investors to pay earlier investors. These schemes eventually collapse with the later investors losing their entire investment. Many of these schemes include unregistered and even fictitious securities.
2. Investments involving real estate. These schemes target investors with pitches that can include the buying, rehabbing, selling and leasing of real estate. Investors should be particularly leery of these investments in the aftermath of the subprime mortgage crisis and the record number of foreclosures.
3. Investment adviser fraud. The term investment adviser describes a broad range of people who are in the business of giving advice about securities. Many investors give their investment advisers discretionary authority over their investments. This means that the investment adviser can manage the investor’s money without obtaining prior approval for changes. Investment Adviser fraud occurs when the advisers take advantage of the investor’s confidence in them and allows them to have too much control over their money. The Division suggests maintaining control over your investments, and not granting discretionary authority over all of your funds.
4. Affinity fraud. Affinity fraud occurs when an investment promoter takes advantage of people’s tendency to trust those who share similarities with them, such as attending the same place of worship, being a member of the same race or ethnic group, or sharing common friends or hobbies. Investors should be especially wary of testimonials from family, friends and acquaintances who express enthusiasm for their investment’s success.
5. Oil and gas. These scams often follow the headlines. Not all oil and gas deals are fraudulent, but with unstable oil prices, con artists pitch schemes that promise quick profits in oil and gas ventures. Like many fraudulent schemes, oil and gas scams may also be unregistered securities sold by unlicensed individuals.

Before investing, Director Zurz urges investors to call the Division’s Investor Protection Hotline at 1-800-788-1194 to ask:

• Is the brokerage firm and salesperson licensed to sell securities in Ohio?
• Have any enforcement actions been taken against them?
• Has the security been properly registered with the Division of Securities?