Common Investment Frauds

Ponzi schemes : These are a type of illegal pyramid schemes named after Charles Ponzi. In the 1920s, Mr. Ponzi convinced thousands of New England residents to invest in a postage stamp speculation scheme. He tried to take advantage of the differences between U.S and foreign currencies used to buy and sell international mail coupons. He told his investors that he could provide a 40% return in just 90 days, compared to a 5% return offered with bank savings accounts. Mr. Ponzi was overwhelmed with money from potential investors. During one 3-hour period, he took in $1,000,000…and this was in 1921! To make the scheme look legitimate, some of the earlier investors received payment. However, many people who invested later lost some or all of their money. An investigation showed that Mr. Ponzi had only purchased about $30 worth of mail coupons with the millions he received from investors. Decades later, the Ponzi scheme continues to work on the “rob-Peter-to-pay-Paul” principle. They still can be found today in scams where money from new investors is used to pay off earlier investors until the whole scheme collapses.

Prime Bank Notes schemes : In these scams, con artists tell investors they have access to “secret” trading programs. They say these programs are approved by agencies such as the Federal Reserve Bank, the Treasury Department, the World Bank, the International Chamber of Commerce, or the International Monetary Fund.

Investors are told only a few privileged people will be invited to take part in the trading of certain securities. The promoter will explain that this is a chance for small investors to pool their money, buy these securities at a discount price and sell them at a premium. In some variations of this scam, the investor is instructed to send money to a foreign bank, in an offshore banking territory. The money will later be transferred to an offshore account controlled by the con artist.

Investing Off Shore : Some con artists persuade investors to invest their money “off shore”. This involves sending money to a company operated by the con in some foreign country that does not have the same reporting standards as USA. The country, will be described as a “tax haven”. Investors are tempted by the prospect of not having to pay income tax or estate fees. The pitch usually appeals to the investor’s desire to leave as much money as possible to his or her loved ones. With some of these schemes, the off shore company may periodically send out a statement telling how much money is invested. In the case of very elderly investors, some companies will even pay interest. When the victim dies, the executor is left with a worthless piece of paper that lists an off shore post office box. The executor writes but never receives a reply. The con has disappeared with the victim’s money. Many people are interested in reducing their taxes. It can be risky if the temptation is so great that they put money into anything that claims to be a “tax shelter” without really investigating the merit of the claim. Complex tax shelters usually require the advice of an accountant, a lawyer, or both.

Obstacles such as conflicting time zones, different currencies, and the high cost of long distance phone calls and overnight mailings once made off shore schemes expensive and hard to carry out. Technology such as the Internet makes it much easier for these con artists to prey on foreign investors.

Investors should be very careful when considering investment opportunities that come from other countries. Many foreign countries do not offer investors the same protections as those available in Canada. It is practically impossible for Canadian law enforcement agencies to investigate and prosecute foreign investment frauds. Once these monies are lost it is almost impossible to find them again.

Investing On-Line : The Internet is a valuable tool for gathering information about potential investment opportunities. Con artists to advertise their illegal scams can also use it. Here are three ways the Internet is used to fool investors:

1. On-Line Investment Newsletters : Hundreds of investment newsletters can be found on the internet. Many offer unbiased investment advice, free of charge. Some even promote “stock picks of the month”. While legitimate newsletters offer valuable advice, investors should be on the lookout for those that provide false or misleading information. They may be part of a scam!
2. Bulletin Boards : Online bulletin boards are a popular way for investors to share information and tips. There are different kinds of bulletin boards such as newsgroups, Usenet, or web-based bulletin boards. They typically feature “threads” made up of numerous messages on different investment opportunities.
   You can never be sure with whom you are dealing with on these message boards or how credible they are. Some bulletin boards make it easy for users to hide their real identity behind multiple aliases. “Unbiased” observers could actually be company insiders, large shareholders, or even paid promoters.
   Some of these messages may be true, but some may be part of a scam. Con artists often promote a particular company or pretend to reveal “inside” information about upcoming announcements, new products, or profitable contracts. A single person could create the illusion of widespread interest in a questionable investment opportunity by writing many messages under several different names.
3. E-Mail Spam : “Spam”, or junk e-mail, is very easy and cheap to create. It is a popular tool with swindlers who use it to find investors for fraudulent schemes or to spread false information about a company. Spam e-mail allows con artists to target millions of Internet users at a time. This is a much bigger audience than they would get with cold-calling or mass mail-outs.
   

Affinity Frauds

Affinity frauds are investment scams that prey upon members of identifiable groups, such as religious, elderly, ethnic, or professional groups. The swindlers who promote these scams are group members, or they claim to be group members, or they convince respected leaders within the group to spread the word about an investment deal.

These scams exploit the trust and friendship that exist in a group of people who share something in common. It is often difficult for the police or regulators to detect affinity scams because these groups are often very close and tight-knit. Victims of such scams typically fail to notify authorities, but are more likely to try to work things out within the group.

Many affinity scams involve “Ponzi” or pyramid schemes where the money from new investors is used to make payments to earlier investors. This gives the false illusion that the investment is successful. The ploy is used to “trick” new investors into depositing money in the scheme and to make existing investors believe their investments are safe and secure. In reality, con artists almost always steal the money for their personal use. Both types of schemes depend on an unending supply of new investors. When the supply of investors dries up, the whole scheme collapses and investors lose most, if not all, of their money. In addition, con artists are increasingly using the Internet to target affinity groups with e-mail spams.