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Susan Tompor: Watch out for money traps with all-or-nothing bets

McClatchy-Tribune Information Services

November 16, 2015


Once you’ve come upon a bit of money — whether it be an inheritance, a union contract signing bonus or a lump-sum retirement payout — you need to cast a cautious eye on the so-called next big thing for investors.

What’s pitched as a hot investment easily could turn into another way to watch your money go up in smoke.

The North American Securities Administrators Association is warning that investors should be wary of three heavily pitched products — binary options, marijuana-related investments and chances to make money on digital currency. The issues are trendy and building buzz in online investment communities and elsewhere. Others express concern about crowdfunding hype, too.

Here are four areas that are ripe for scams and shenanigans:

––Did you just spot a Facebook posting offering a way to make a quick 50 percent on your money?

It can sound sort of simple. You take a yes-or-no bet on whether a stock or other investment will go up or down in a set time. Maybe, you’d use a binary option to bet that a specific stock will be trading above $9.75 a share at 3 p.m. on a given day.

"It’s a bet about whether a particular security will rise or fall in price," said Joseph Rotunda, director of enforcement for the Texas Securities Board and vice chair of enforcement for the North American Securities Administrators Association.

The big trouble spot: You’re either right or wrong, no in-between.

"They’re either going to win everything or lose everything," Rotunda said.

Binary options are sometimes known as Fixed Return Options, digital options and even "all-or-none options." Unlike other types of options, the binary option does not allow the investor the right to purchase or sell the underlying asset. It’s an "all-or-nothing" payout structure, according to a warning from the U.S. Commodity Futures Trading Commission.

Late in 2014, Texas state regulators took action against a company that used the name the "Top Money Earners Group," which was a marketing network pitching a binary trading options program. The program was available on websites and via Craigslist under the names Top Money Earners Group and the Joint Venture Group. Investors paid $20,000 upfront to become members and then had to deposit at least $5,000 to establish a trading account.

One false promise: Investors were told that they were guaranteed that their initial opening account deposit would double within 90 days.

In fact, the investment involved a high degree of risk. The Texas State Securities Board issued an emergency cease-and-desist order and, among other things, concluded that misleading statements were being made that were likely to deceive the public.

The binary options market operates mostly on Internet-based trading platforms, according to warnings by the Securities and Exchange Commission.

Another trick: Investors might kid themselves into thinking that they can do their research on these stocks, much like a fantasy football pick, and somehow outsmart the other gamers. Not so.

This so called easy path to riches is riddled with potholes, according to regulators including the Financial Industry Regulatory Authority. They said that some binary option scams even demand another fee when someone asks to get their investment returned.

––Did you just spot a headline on bitcoin or another digital currency?

Bitcoin maybe a trendy currency for the digital age. But regulators warn that scammers can cook up trouble.

Andrew Stoltmann, a Chicago-based attorney who typically represents investors who lost money, said bitcoin-related pitches represent another so-called deal that individuals should avoid at all costs.

"Whenever we see a type of investment in the headlines, like medical marijuana or bitcoin, fraudsters come out of the woodwork to pitch ‘investments’ related to these products," Stoltmann said.

"To call these high risk investments doesn’t even do it justice. No reputable financial adviser would recommend these sorts of products," Stoltmann said.

Among other risks, regulators note that the value of virtual currencies can rise and fall quickly and the investor can see substantial losses.

—Think medical marijuana is the ‘next big thing’ when it comes to investment options?

Regulators warn this idea is a dud, too.

"You have a new industry and it’s an industry that’s hungry for capital," said Texas regulator Rotunda.

The Securities and Exchange Commission has suspended trading in various penny stocks or microcap stocks with incomplete or misleading disclosures and claims to be involved in the medical marijuana industry.

The Securities and Exchange Commission has also warned about the lack of clear reporting when it comes to highly touted stocks in small companies that play up a medical marijuana angle.

Stoltman said he has been contacted by roughly 10 victims of medical marijuana scams in the past 12 months but he has had to turn them all down because of concerns that it would be impossible to collect any money from the bad operators.

––Tempted to take a huge bet investing in a local outfit?

Crowdfunding is the next new thing when it comes to investing, particularly after the Securities and Exchange Commission adopted some new rules.

But Mercer Bullard, an advocate for investors and professor of law at the University of Mississippi, warned that some startups are bound to fail.

Some scammers, no doubt, will try to take advantage of the crowdfunding buzz, too.

In general, Bullard said, investing in a startup should be viewed as "fun" money for everyday investors, not a substantial part of any investment portfolio.

"It is the last thing on your list of potential investments," Bullard said.