Since our current economic meltdown hit us, it seems as if almost daily a new financial scandal is uncovered. Swindles in progress are exposed because in times of financial crisis victims try to sell their investments to get cash. New frauds emerge as investment thieves exploit people trying to recoup earlier losses.
Recently, FINRA issued an investor alert warning investors of five re-emerging classic investment frauds. The first is the Pyramid scheme. In a Pyramid scheme, the swindler claims he can quickly turn a small investment into a large profit. The con artist wraps the scheme in what appears to be a legitimate, multi-level marketing plan. In truth, investors make money solely by finding new participants to invest in the program. Pyramid schemes eventually fall apart when it becomes impossible for the investor to recruit enough new investors to pay off their investor level.
The second re-emerging scam is the Ponzi scheme. Here, the thief takes in money from new investors and uses it to pay “promised” returns to earlier investors. He robs Peter to pay Paul. Ponzi schemes are like Pyramid schemes in that they require a steady flow of incoming cash to keep going. However, unlike Pyramid schemes, investors in Ponzi schemes usually do not have to bring in new investors to earn a share of the promised profits. Ponzi schemes tend to collapse when the thief can no longer attract new investors or when too many investors try to cash out. This often happens when we see hard economic times as now. For more on Ponzi schemes see my article in the February/March 2009 issue of Debits and Credits.
The next re-emerging scam is the Pump and Dump. Here, con artists, buy up the shares of a company with very low priced, thinly traded stock. They then use the internet, fax machines, text messages, and calls to wireless telephones to “pump up” interest in the stock. This interest creates buying demand that artificially raises the stock price. The con artists then “dump” the stock at a huge profit and leave everyone else with deflated shares when the stock returns to its true value.
The next scam cited is the Advance Fee Fraud. This scheme plays on an investor's hope that he will be able to reverse a previous investment loss. The fraud generally begins with an offer to pay the investor a high price for worthless or low valued stock the investor owns. However, in order to complete the transaction the investor must pay a service fee in advance of the stock purchase. Of course, the victim never sees the purchase of his shares or the return of his advance fee.
Finally, FINRA warns of Offshore Scams. These schemes come from foreign countries and target U.S. investors. Offshore swindles can take a variety of forms, including those listed above. Whatever form an offshore scam takes, it can be difficult for U.S. law enforcement agencies to investigate these frauds and prosecute the thieves because they are acting outside the United States.
The best way to protect yourself and your clients is to scrutinize the people selling the investment and check out the investment before it is bought. There are many ways to check out a salesperson's background. If he or she is a stockbroker use FINRA's broker check at www.finra.org/Investors/ToolsCalculators/BrokerCheck . If he is an investment adviser use the S.E.C.'s website at: www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_OrgSearch.aspx .
To check out an investment, first determine if it is registered and, if so, with which regulator. Most investors want to buy investments that are registered with the SEC or with state regulators. With a few exceptions, companies must register their securities before they can sell shares to the public. You can find out whether an investment is registered with the SEC by using the SEC's EDGAR database. If no information can be found on the investment it is a good indication that it is either high risk or fraudulent.