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Important Update: Changes in FDIC Deposit Insurance Coverage

The FDIC deposit insurance rules have undergone a series of changes starting in the fall of 2008. As a result, certain previously published information related to FDIC insurance coverage may not reflect the current rules. For details about the changes, visit Changes in FDIC Deposit Insurance Coverage. For more information about FDIC insurance, go to www.fdic.gov/deposit/deposits/index.html or call toll-free 1-877-ASK-FDIC (1-877-275-3342). For the hearing-impaired, the number is 1-800-925-4618.

Spring 2007

Don't Get Burned by Hot Investments

Beware of unsolicited offers and "guaranteed" sky-high returns. Deals aren't always as they appear and may misuse the FDIC's name.

Everyone wants to earn top dollar on their investments. That's why offers claiming to be far more lucrative than bank accounts can be very tempting. But while many investments may be attractive and appropriate for your financial situation, others may be of questionable value or, in the worst cases, frauds. FDIC Consumer News offers these tips on how to spot a potentially bad deal or a scam.

1. Be wary of unsolicited investment offers. In particular, never divulge your Social Security Number, bank account numbers and other personal information in response to an unsolicited offer over the Internet, in the mail or by telephone, no matter how official or legitimate it may appear, until you have had an opportunity to verify it.

"Unsolicited offers should always be viewed skeptically because many of them are from scam artists attempting to gather personal information they can use to tap into bank or credit card accounts or otherwise steal your identity," said Richard Schwartz, an FDIC attorney who specializes in consumer protection issues. "That's why you should never assume that every scam involves a request to send money. Financial crimes today are just as likely to start with requests to fill out an application that has space for your Social Security Number, credit card number or bank account information."

Be suspicious of an unsolicited offer that promises "guaranteed" returns that far exceed what's available in the marketplace – for example, an annual profit of 50 percent or more when similar investments typically pay 10 percent or less. "Basically, if someone contacts you out of the blue with an offer that's too good to be true, it's probably a scam of some sort," added Schwartz.

Another warning sign is pressure to quickly say "yes" to an offer – before you have a chance to receive supporting documentation and research the investment and the company and the person offering it. Also be cautious if you get an investment offer originating from outside the United States. Frauds from abroad are common, and if an investment does turn out to be a scam, sometimes it can be difficult to find and prosecute criminals in other countries. (See examples of "classic cons" in the box below.)

2. Try to deal only with businesses and salespeople you already know or that have been recommended. If you're tempted to send money or personal information to an unfamiliar company or person, do your research first. This includes finding out if the company or sales person is licensed to do business by the state or federal government or has a history of disciplinary or other problems.

Fraud artists use deceptive advertising and Web sites to falsely claim to be legitimate banks, brokers or other financial firms offering a variety of products, including deposits they want you to believe are FDIC-insured. They also work under official-sounding corporate identities, often mimicking the names, logos and Web sites of well-known institutions. For that reason, don't trust the phone number provided in an unsolicited offer. Instead use a company's phone number that's listed in your phone book or another directory.

For guidance on whether a bank is legitimate, you can call the FDIC toll-free at 1-877-ASK-FDIC(1-877-275-3342) or use the FDIC's online directory of insured institutions, Bank Find, at www2.fdic.gov/idasp/main_bankfind.asp. To check on a deposit broker or a nonbanking firm, start with your state consumer protection office, which will be listed in the blue pages of your phone book and other directories. It may direct you to another state or federal government agency, such as the Federal Trade Commission, for more information.

3. Get key details in writing and independently research the investment. Before investing in anything, you should obtain a copy of important terms and conditions, which may include sales literature and a contract. These documents should spell out what you are required to pay or do and what you are promised in return. "Read this paperwork carefully," cautioned Schwartz. "If you don't understand the investment or if it appears too risky, the investment may not be right for you. Also don't be afraid to confirm or challenge information that, based on your own analysis of the situation, appears to be questionable or unusual."

It's also smart to do comparison shopping with at least two or three reputable companies in your community or online. With major investments in particular, get another opinion from a knowledgeable third party, perhaps a financial advisor or attorney.

FDIC officials stress the importance of knowing if a particular investment is "suitable" for you. "If the sales representative doesn't ask you about your investment goals, financial situation and tolerance for risk, that's a sure sign that person is much more interested in the company's bottom line than in yours, and you should walk away from the offer," said Howard Herman, an FDIC Consumer Affairs Specialist. Also, remember that investments such as mutual funds, annuities, stocks and bonds are not deposits and therefore are not protected against loss in the event of an institution failure by the FDIC. In fact, among the actions required before an FDIC-insured bank completes an investment sale is to have the customer sign a statement recognizing that he or she understands that the investment carries risks and is not backed by FDIC insurance.

Questions to Ask Before Agreeing to an Investment

You should never invest in a product you donít understand. Here are suggested questions to ask before you commit to anything.

Would this investment be suitable for my needs?

Could I lose money with this investment? What is the most money I could lose?

What if I later change my mind and want my money back? Are there deadlines or other restrictions? What are the potential fees and penalties?

Have you given me copies of all the disclosures, contracts or other documentation I need to understand my rights and responsibilities?

When considering the pros and cons of FDIC-insured deposits versus non-deposit investments (such as mutual funds, annuities, stocks and bonds), "be aware that some investment advisors are promoting wildly inaccurate claims about FDIC deposit insurance and how it would protect you if your bank were to fail," according to Kathleen Nagle, chief of the Deposit Insurance Section in the FDIC's Division of Supervision and Consumer Protection. "These include entirely false statements that the FDIC could take up to 99 years to pay insured depositors after a bank fails, and that FDIC insurance only pays a percentage of a depositor's insured funds."

Federal law requires the FDIC to pay the insured deposits "as soon as possible" after an insured bank fails. Usually that happens the next business day. Also, the law requires the FDIC to pay 100 percent of the insured deposits up to the federal limit – including principal and interest. For more misconceptions and facts about FDIC insurance, see the Spring 2006 FDIC Consumer News at www.fdic.gov/consumers/consumer/news/cnspr06. You can also call the FDIC for accurate information on what is insured, what isn't, and how FDIC protection works. And for a list of questions to ask an investment advisor before buying a product, see the box on the right.

4. Alert the proper authorities about a possible investment scam. Let your state consumer protection office, financial regulatory agencies or other authorities know if you've seen an advertisement or other unsolicited offer that you believe is suspicious or fraudulent. When it comes to a matter involving a bank or an entity claiming to be a bank, you can start by calling the FDIC toll-free at 1-877-275-3342. "Often it is consumers who bring deceptive or fraudulent investment offers to the attention of government authorities," explained Herman. "In doing so, they may be preventing other consumers from falling victim to a scam."

If you think you've already been victimized, first contact the police department or your state consumer protection office. "Provide as much information as possible, request a copy of any reports filed and ask to be kept informed about the investigation," said Tom Parzinger, a bank examiner for the FDIC. "Sadly, you may or may not be able to recover much or all of your investment, depending upon the circumstances. But by bringing unethical or fraudulent companies to the attention of the proper authorities, that may help prevent others from being taken in."

Classic Cons Continue to Target Trusting Investors

The age-old "Ponzi" or "pyramid" scheme is still netting big profits for con artists. In these frauds, criminals maintain the illusion of legitimacy by using money arriving from new investors to continue making dividend or other payments to the earlier investors. Eventually the crooks flee, leaving the remaining investors with worthless pieces of paper and losses often reaching into the millions of dollars.

Federal authorities report that recent examples of such scams involve con artists advertising on the Internet or in newspapers pretending to be banks or brokers promising high returns on stocks, bonds, certificates of deposit (CDs) or other financial instruments. One variation is the "affinity fraud," which the Securities and Exchange Commission has described as an investment scam targeting a specific group – perhaps a religious or ethnic community, the elderly or certain professionals – by someone who is or pretends to be part of that group.

Separately, some con artists attempt to misuse the FDIC's name, logo, abbreviation or other information to suggest that non-deposit investments are fully insured by the FDIC. An example is a Web site that includes references to the FDIC and buries the fact that the non-deposit investment products being offered are not insured by the FDIC. "These sorts of schemes prey on trusting consumers – often the elderly – who invest their life savings thinking the investment is safe and FDIC-insured when, in fact, this is not the case," said Sara Gibson, the FDIC's Assistant Inspector General for Investigations.

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Last Updated 05/08/2007

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