In today's complex financial world, there are many
opportunities awaiting you. As
an investor, your task is to sort out those investments that have the
greatest potential in order to meet your personal goals. As a potential investor, you may well find yourself solicited
by telephone calls, mailings, door-to-door salespersons, as well as
companies on the Internet. The
sales pitch will change with the times depending on what scammers think
investors will buy.
The primary goal of the Securities Division of the
Office of the Attorney General is to protect South Carolina investors from
fraud and misrepresentation and ensure as fair a market place as possible
for the trading of securities in our state.
Before you send money to anyone, you should investigate the company
making the recommendation, the salesperson, and the investment opportunity
by asking questions and checking references.
Begin by contacting the appropriate regulatory agencies, such as
the Securities Division, the SEC, or NASD.
(See list at end.)
The following is a list of the more familiar scams.
Many scams are a combination of techniques.
Be prepared to deal with investment scam artists.
PONZI SCHEMES
Promoters offer high rates of return on various
impressive-sound investments. However,
instead of using the money as promised, new investors' money may be used
to pay the monthly "interest", "return" or "dividends" to
earlier investors. These
"satisfied investors" then report the high returns to their friends,
who in turn invest in hopes of achieving the same above-average returns.
In a Ponzi scheme, there's no real underlying
business, and investors are asked to buy shares in a business, or sign an
"investment contract." Then,
early investors are simply paid with funds received from later investors. In some variations, there may be an underlying business used
as a "front" to make the scheme seem more legitimate. These schemes can continue only as long as new investors
provide additional funds. When
the scheme collapses (as it always does), current investors lose their
money and the promoters walk away rich.
PYRAMID PROMOTIONS
Similar to the Ponzi scheme, pyramid promotions focus
on the quick profits to be earned from recruiting other investors, who
then will recruit others, and so on.
Little mention or emphasis is placed on the product or service to
be sold. The fraud derives
from the ever-decreasing number of potential investors in a given area.
The common elements of a pyramid scheme involve the following:
An invitation from a friend, neighbor, or co-worker
to attend an "opportunity meeting" to learn how to earn lots of money;
At the meeting, a well-rehearsed presentation will
downplay the traditional methods of acquiring money and will offer instead
an exciting shortcut to wealth and adventure;
Investors pay large fees for products, courses, etc.,
or the right to recruit others and profit from their participation;
An emphasis on getting others to invest.
Pyramid schemes are illegal in South Carolina, but are difficult to
prosecute. Victims' money
is often filtered up through the pyramid and lost.
PRIME BANK NOTES/LOAN ROLL PROGRAMS
In these investments, promoters offer the "little
guy" a chance to pool money with other investors to buy bank notes
internationally, often touting a large offshore bank as instrumental in
the deal. Investments range
from a few thousand dollars to a hundred thousand dollars or more.
Returns of fantastic wealth are promised, often in the $100 million
range. Details about how the
program works are either unavailable, or when examined closely,
nonsensical. Investors'
money is rarely recovered. There
are no such securities as "Prime Bank Notes."
INTERNET/CYBERSPACE
An estimated five million U.S. households that
already have access to the major online services are being exposed to
hundreds of fraudulent and abusive investment schemes, including stock
manipulations, pyramid scams and Ponzi schemes.
While some experienced persons are now aware of some of the major
rip-off techniques now in use, the investment fraud problem could reach
epidemic levels over the next few years as several million newcomers crowd
onto the information superhighway. Don't
let it be your highway to financial ruin!
Promoters are using the Internet to hawk
"risk-free" investment opportunities which are often exotic-sounding
investments including eel farms, wireless cable television, prime bank
securities, and even fictitious plantations in South America.
The "Pump and Dump" scam urges readers to buy a stock quickly
that is poised for rapid growth or tells you to sell before it goes down.
Often the writer or caller claims to have "inside" information
about an impending development, or will claim to use an "infallible"
combination of economic and stock market data to pick stocks.
In reality, the promoter may be an insider who stands to gain by
selling shares after the stock price is pumped up by gullible investors,
or a short seller who stands to gain if the price goes down.
This ploy may be used with little-known stocks.
CONSIDER ALL OFFERS WITH SKEPTICISM.
BOGUS "IRS APPROVED" INVESTMENT SCHEMES
The retirement nest eggs of Americans are in danger
of being scrambled by investment schemes falsely promoted as "IRS
Approved" or otherwise endorsed by the Internal Revenue Service (IRS). State investment watchdog agencies estimate that tens of
thousands of unwary Americans have invested hundreds of millions of
dollars of their savings for old age through individual retirement
accounts (IRAs), 401(k)s and other tax-deferred retirement savings
vehicles that will end up being largely or entirely worthless.
In reality, the IRS does NOT endorse any specific investments.
Typical schemes promise sky-high returns of 200% to
800% that will supposedly put investors on "Easy Street" with a
bonanza of retirement income. The
"IRS Approved" investment schemes range from the latest in high-tech
(including wireless cable television and specialized mobile radio) to
exotic livestock (such as emu and ostrich farming) to real estate
investment "pools." These new investment schemes have been promoted through slick
television and radio ads. Those
who respond by calling a toll-free "800" number get a package of
materials, followed by high-pressure telephone sales pitches.
Fraud investigators speculate that getting victims to call first
makes the work of the schemer much easier, since the potential investor
has already "bought into" the scheme by taking the first step.
AGRICULTURE AND LIVESTOCK
The latest schemes in this area involve ostriches and
emus. For a fee, you can
invest in a pair of live animals for breeding, with the goal of profiting
from the selling of the eggs or offspring to zoos or other ranchers.
Typically, a management fee is also assessed on a monthly or yearly
basis for the boarding and care of the animals. The problem occurs when the predictions don't match reality
or the investment doesn't exist at all.
These investments may be accompanied by a "buy-back" or
repurchase agreement from the promoter, making it appear that the
investment is guaranteed against loss.
Read the fine print: many
of these people will have used your funds for fees and operating costs and
have no money left to "buy-back" your investment.
In most cases your money was never to be used for any such venture.
It's just gone.
COINS AND PRECIOUS METAL SCHEMES
Promoters offer "investment grade" gold and
silver coins, claiming their present value can be independently verified,
and promising tremendous future profits, usually based on some current or
future political event. For
the cost of your investment and a nominal storage fee, the promoter will
purchase the coins or bullion for you and have them delivered to and
stored in a large, well-known bank, nearly always outside of your
geographical area. Often,
these promoters promise the opportunity to "leverage" your purchase.
Leveraging, in theory, is like buying on margin, in that you only
make a down payment toward the total cost of the metal you wish to buy.
The rest of the money is advanced or loaned to you, with the
precious metal serving as collateral.
The problem with a leveraged purchase occurs when the
value of this precious metal goes down.
As the buyer, you're responsible to cover the downturn in value
by putting more money to cover your 20 percent cash down value. If you fail to cover the downturn, your precious metal is
sold (often at a discount), and you're liable for the difference.
Leveraging is extremely risky, and not recommended for the small or
casual investor.
Some schemes charge extremely high commissions that
must achieve a great increase in the value of the coins or metals before
you could see a profit. Other
schemes don't even bother to purchase the coins or metals.
The promoters just take your money and move on to the next town.
If you want to purchase precious metals, talk with local merchants
who will deliver the goods to you and who have local reputations to
protect.
GOLD AND SILVER MINES
These speculative investments typically offer new or
secret methods for reclaiming mineral reserves from untested or abandoned
mines, or even the recovery of microscopic traces of valuable minerals
from soil in your geographic area "where no one else would think to
look!" These are classic
frauds. Often the promoter
will base a mining forecast on an unknown expert's geological report or
prediction, or will offer part of a valid report out of context.
Promoters exaggerate the quality and quantity of the minerals to be
extracted, while downplaying the expense or likelihood of recovering them.
Canadian investors lost hundreds of millions of dollars in such a
scam last year.
OIL WELLS & DRILLING EQUIPMENT LEASES
By acquiring interests in a "proven" oil field,
or in the immediate vicinity of other proven oil fields, investors are
promised "can't-miss opportunities" for great wealth.
These investments are frequently sold to people who live far from
the oil company's headquarters, which may be nothing more than a rented
trailer. As with gold and
silver mines, promoters frequently offer new and secret methods for
reclaiming missed oil reserves on previously drilled oil fields.
WIRELESS CABLE TELEVISION
Wireless cable television used microwave technology
to transmit video programming to rooftop antennas of subscribers.
You may have seen commercials or newspaper ads touting the high
profits to be made from investing in wireless cable television systems.
Regulators estimate that investor losses now approach $1 billon.
Investors are targeted through cold-calling,
telemarketing, mail offerings, and infomercials.
Cable promoters often represent that they have the necessary FCC
licenses and are selling shares in a partnership or other venture to
develop a wireless cable system. Promoters
may, however, misrepresent the actual number of licenses they hold, the
number of channels needed for a commercially viable system, or the amount
of investment capital needed to fully develop a wireless cable system. It can cost hundreds of thousands of dollars to build even a
small system with only four channels and limited programming choices, and
costs will easily exceed a million dollars for a larger system with
additional channels. It also
may be necessary for the promoter to register the partnership units as
securities with federal and state securities regulators.
LETTER WRITERS/PUBLIC RELATIONS FIRMS
Letter writers are public relations firms who are
paid by stock issuers to promote public awareness of their stock.
This creates interest and buying, which increases price.
There are several approaches to generate interest in
particular issues. First, and
simplest, is the mass mailing of glossy flyers with a return card
attached. If the recipient
desires more information, they fill out the card and send it in.
The card is almost a sure sale, and the public relations firms give
the free leads to sales reps. The second approach is to use the Internet,
and the third way is a "boiler room" with high-pressure "sales
representatives" using "sucker lists" that the public relations firm
has used time and time again. The
reps rely on these PR firms to pump up the stock because they know prices
will rise. Additionally, most
promoters who seek out these PR firms often pay reps 15 to 50 percent
under the table in cash and the PR firms make large profits.
ADVANCE-FEE LOANS
These loans usually are offered to desperate
borrowers who have exhausted all of the traditional approaches to
financing. Loans are arranged
and promised only upon payment of an "up-front" or "advance" fee.
It's common for the promoter to represent the source of funds as
foreign investors or an offshore bank.
Loan amounts are typically very large ($5 - $100 million), and
offer long repayment terms at below-market rates of interest.
Minimal qualifications, other than the advance fee payment, are not
required. The promoter takes
the advance fee and never delivers the loan.
BLIND POOL INVESTMENT OFFERINGS
During prosperous times, potential investors tend to
become less cautious in considering investment alternatives, a course of
action that can have disastrous results.
One type of investment instrument that lures unwary investors is
the "blind pool" offering. Blind
pools are investment vehicles that raise capital by selling securities to
the public without telling investors what the specific use of the proceeds
will be. A common form of
blind pool is the "blank check" offering.
While the blind pool will usually provide at least some indication
of what general industry the funds will be invested in, blank check
offerings do not identify any proposed investment intent whatsoever.
They are literally "blank checks" that the promoter can use at
his whim.
Sometimes, however, the promoter knows exactly what
he intends to do with the money raised at the time he offers blind pool
shares to the public, but chooses not to disclose his intentions for fear
that prospective investors might shy away if they "knew too much."
In these cases, it is only the investor who is truly blind to the
use of his or her money. Strangely
enough, investors let greed cloud their good judgment, and readily agree
to commit funds for totally unspecified purposes and with no assurance or
commitments.
Blind pool offerings are typically characterized by
undercapitalization – having virtually no assets other than the other
money obtained through the offering itself.
The primary purpose of many blind pools is to raise funds to
acquire a private firm that wants to go public without going through the
usual regulatory steps; stocks are usually offered at low prices, often
under five dollars a share. They
are frequently sold by brokers specializing in selling micro-cap stocks
(penny stocks).
LOSS RECLAMATION SCHEMES
(Also known as "Reload Schemes")
One of the meanest type of scams is promoted by
companies who offer, for a fee, to recover the money you lost from a
previous scam. Of course,
these companies use the same "sucker lists" as previous scam artists
so they are guaranteed that everyone solicited will have lost money in a
prior scam. Don't throw good money after bad—hang up the phone!
U.S. Securities and Exchange Commission (SEC)
Consumer Information Line
450 Fifth Street, N.W.
Washington, DC 20549
(800) 732-0330
