Investment Swindles: How They Work and How to Avoid Them
Including 16 questions that can
turn off an investment crook
National Futures Association
Prepared as service to the
investing public by:
National Future Association
200 West Madison Street, Suite 1600
Chicago, Illinois 60606-3447
Toll-free: 800.621.3570
In IL: 800.572.9400
National Futures Association is the Congressionally authorized
self-regulatory organization of the futures industry and is entirely
financed by the futures industry. No person or firm may engage in any
business which involves buying or selling futures contracts for the
public without being an NFA Member.
The purpose of NFA is to assure high standards of professional and
business conduct by its Members and to protect the public interest.
While the vast majority of persons in the futures industry and other
sectors of the investment community serve the investing public
conscientiously and ethically, there are inevitably those few who seek
to exploit the trust which others have labored so hard to earn.
This booklet has been prepared as a part of NFA's continuing public
education efforts to assist you in recognizing and avoiding such
individuals.
Contents
The Multi-Billion Dollar Business of Investment Fraud
Who are the Investment Swindlers?
Who are the Victims of Investment Fraud?
How Investment Swindlers Find (or Attract) Their Victims
Techniques Investment Swindlers Use
Several Investment Swindles and How They Worked
Questions That Can Turn Off an Investment Swindler
Before You Invest, Investigate
Finally, Don't Lose Touch with Your Money
The Multi-Billion Dollar Business of Investment Fraud
Americans are investors. We purchase stocks and bonds, contribute to
savings programs, own real estate, participate in futures and options
markets, acquire collectibles, provide start-up capital for new business
ventures, buy franchises, and the list goes on. The strength of our
economy is in large measure the product of our combined investments.
Perhaps more so than any people in the world, we enjoy an ever-expanding
variety of investments to choose from, coupled with the freedom to make
our own investment decisions. It's our money and we can invest it as we
wish.
Unfortunately, some unscrupulous promoters abuse our freedom to choose
by concocting investment schemes that have zero possibility of making
money for anyone other than themselves. Such persons promise investment
rewards they cannot possibly deliver and have no intention of
delivering.
They are swindlers.
Many of them are very good at it. Their annual take through lying and
deceit is in the billions of dollars. If one estimate of $10 billion a
year lost to investment fraud is accurate, that's more money than the
combined annual profits of the nation's three major automakers! Some say
even that estimate may be too low.
Successful investment swindlers use every trick in the book, and some
that aren't even recorded, to convince you that none of the descriptions
and precautions in the following pages apply to them. After all, they
are offering you a once-in-a-lifetime opportunity to make a lot of money
quickly and you do trust them, don't you? As will be seen, some of their
methods of gaining your trust are truly ingenious.
Who are the Investment Swindlers?
They are a faceless voice on a telephone. Or a friend of a friend. They
may perform surgery on their victims' savings from a dingy back office
or boiler-room or from an opulent suite in the new bank building. They
may wear three-piece suits or they may wear hard hats. They may have no
apparent connection to the investment business or they may have an
alphabet-soup of impressive letters following their names. They may be
glib and fast-talking or so seemingly shy and soft-spoken that you feel
almost compelled to force your money on them.
The first rule of protecting yourself from an investment swindle is thus
to rid yourself of any notions you might have as to what an investment
swindler looks like or sounds like. Indeed, some swindlers don't start
out to be swindlers. There are case histories in which individuals who
held positions of trust and esteem-accountants, attorneys, bona fide
investment brokers and even doctors-have sacrificed their ethics for the
fast buck of running an investment scam.
In still other cases, investment programs that began with legitimate
intentions went sour through happenstance or poor management--leading
the promoter to mishandle or abscond with investors' capital. Whether an
investment is planned as a scam or simply becomes one, the result is the
same.
This is why, as we will discuss, protecting your savings against fraud
involves at least three steps: Carefully check out the person and firm
you would be dealing with; take a close and cautious look at the
investment offer itself; and continue to monitor any investment that you
decide to make. No one of these precautions alone may be sufficient.
Who are the Victims of Investment Fraud?
If you are absolutely certain it could never be you, the investment
swindler starts with a big advantage. Investment fraud generally happens
to people who think it couldn't happen to them.
Just as there is no typical profile for swindlers, neither is there one
for their victims. While some scams target persons who are known or
thought to have deep pockets, most swindlers take the attitude that
everyone's money spends the same. It simply takes more small investors
to fund a large fraud. In fact, some swindlers deliberately seek out
families that may have limited means or financial difficulties--figuring
such persons may be particularly receptive to a proposal that offers
fast and large profits. A favorite pitch is that small investors can
become rich only if they learn and employ the investment strategies used
by wealthy persons. Naturally, the swindler will teach them!
Although victims of investment fraud can differ from one another in many
ways, they do, unfortunately, have one trait in common: Greed that
exceeds their caution. Plus a willingness to believe what they want to
believe. Movie actors and athletes, professional persons and successful
business executives, political leaders and internationally famous
economists have all fallen victim to investment fraud. So have hundreds
of thousands of others, including widows, retirees and working
people--people who made their money the hard way and lost it the fast
way.
How Investment Swindlers Find (or Attract) Their Victims
Swindlers attempt to mimic the sales approaches of legitimate investment
firms and salespersons. Thus, the fact that someone may contact you in a
particular way--by phone, mail, or even through a referral--should not
in itself be viewed as an indication that the investment is or isn't
shady. Many totally reputable firms also use the same methods to
effectively and economically identify individuals who may have an
interest in their investment products and services.
Bearing in mind that investigate before you invest is good advice no
matter how you are approached, these are some of the methods con men
commonly employ to contact their victims-to-be.
* Telephone
So-called telephone boiler-rooms remain a favorite way for swindlers and
their sales squads to quickly contact large numbers of potential
investors. Even if a swindler has to make 100 or 200 phone calls to find
a mooch (one of the terms swindlers use for their victims), he figures
that the opportunity to pocket thousands of dollars of someone's savings
is still good pay for the time and cost involved.
* Mail
Some sellers of fraudulent investment deals buy bona fide mailing
lists--names and addresses of persons who, for example, subscribe to a
particular investment-related publication, who have responded to
previous direct mail offers, or who have other characteristics that
swindlers look for. In the hope of avoiding notice by postal
authorities, mail order swindlers may not make a direct or immediate
pitch for your money. Rather, they often seek to entice you to write or
phone for more information. Then comes a call from the salesperson or
the person who closes the deal. Some may phone even if you didn't
respond to the mailing.
* Advertisements
A newspaper or magazine ad may offer (or at least hint at)profit
opportunities far more attractive than available through conventional
investments. Once you've taken the bait, the swindler will then attempt
to "set the hook." Even though investment crooks know that regulatory
agencies regularly monitor ads in major publications, some nevertheless
use such publications in the hope of being able to hit-and-run before an
investigator shows up. Others advertise in narrowly circulated
publications they think regulators may be less likely to see.
* Referrals
One of the oldest schemes going involves paying fast, large profits to
initial investors (actually from their own or other peoples'
investments) knowing that they are likely to recommend the investment to
their friends. And these friends will tell their friends. Soon, the
swindler no longer needs to find new victims; they will find him. (See
page 16.)
* The "Reputable" Business
Some swindlers go first class. Using profits from previous swindles,
they rent plush offices, hire an interior decorator and
professional-sounding receptionist and open what has the appearance--but
not the reality of a reputable investment firm. You may even have to
phone for an appointment, and once there don't be surprised to be kept
waiting (that's intended to make you all the more eager). This kind of
swindler's success depends on how long he can keep his victims from
knowing they are being cheated. Investors are assured that their large
profits are being reinvested to earn even larger profits. Such a
swindler may join local civic groups, contribute to charities, and
generally play the role of solid citizen.
Techniques Investment Swindlers Use
Their techniques are as varied as their methods of establishing contact.
If there is a common denominator, however, it is their ability to be
convincing. The skills that make them successful are essentially the
same skills that enable any good salesperson to be successful.
But swindlers have a decided advantage: They don't have to make good on
their promises. In the absence of this responsibility, they have no
reluctance to promise whatever it takes to persuade you to part with
your money. These are some of their techniques:
* Expectation of Large Profits
The profits a swindler talks about are generally large enough to make
you interested and eager to invest--but not so large as to make you
overly skeptical. Or he may mention a profit figure he thinks you will
consider believable and then, as a further enticement, suggest that the
potential profit is actually far greater than that. The latter figure,
of course, is the one he hopes you will focus on. Generally speaking, if
an investment proposal sounds too good to be true, it probably is.
* Low Risk
Some are so blatant as to suggest there's no risk--that the investment
is a sure money maker. Obviously, the last thing a swindler wants you to
think about is the possibility of losing your money. (If you ask how you
can be certain your money is safe, you can count on a plausible-sounding
answer. Besides, at this point, he figures you will believe what you
want to believe.)
To make his pitch more credible, a swindler may acknowledge that there
could be some risk--then quickly assure you it's minimal in relation to
the profits you will almost certainly make. A con man may become
impatient or even aggressive if the question of risk is raised--perhaps
suggesting that he has better things to do than waste time with people
who lack the courage and foresight needed to make money! With this kind
of put down, he hopes you won't bring up the subject again.
* Urgency
There's usually some compelling reason why it's essential for you to
invest right now. Perhaps because the investment opportunity can "be
offered to only a limited number of people." Or because delaying the
investment could mean missing out on a large profit (after all, once the
information he has confided to you becomes generally known, the price is
sure to go up, right?).
Urgency is important to a swindler. For one thing, he wants your money
as quickly as possible with a minimum of effort on his part. And he
doesn't want you to have time to think it over, discuss it with someone
who might suggest you become suspicious, or check him or his proposal
out with a regulatory agency. Besides, he may not plan on remaining in
town very long.
* Confidence
They don't call them con men for nothing! They sound confident about the
money you are going to make so that you will become confident enough to
let go of your savings. Their message is that they are doing you a favor
by offering the investment opportunity. A swindler may even threaten
(pleasantly or otherwise) to end the discussion by suggesting that if
you are not really interested there are many other people who will be.
Once you protest that you are interested, he figures your savings are
practically in his pocket.
Although you can't necessarily spot a con man by the way he talks, most
are strong-willed, articulate individuals who will dominate the
conversation-even if they do it in a low-key, friendly sort of way. The
more they talk, the less chance you have to ask questions.
Several Investment Swindles and How They Worked
There's a saying among swindlers that it's not the scam that counts,
it's the sell. Judging from the number of arcane and often outlandish
schemes that have been employed to separate otherwise prudent people
from their money, the saying would seem to reflect reality. The evidence
is that if people can be made believers, they can be sold practically
anything. Consider several of the ways in which hustlers of phony
investments have won the confidence of persons whom they planned to
victimize.
The Old-Fashioned Ponzi Scheme
It's become one of the oldest and most often employed investment schemes
because it's proven to be one of the most lucrative. While there are
innumerable variations, here is how a person we will call Frank C.
practiced it. At the outset, Frank approached a relatively small number
of influential persons in the community and offered them the opportunity
to invest--with a guaranteed high return--in a computer-generated
program of arbitrage in foreign currency fluctuations. To be sure, it
sounded high tech and sophisticated but Frank had his eye on
sophisticated and well-heeled victims.
Within a short period of time, he approached and sold the scheme to
still other investors--then promptly used a portion of the money
invested by these persons to pay large profits to the original group of
investors. As word spread of Frank's genius for making money and paying
profits, even more would-be investors anxiously put up even larger sums
of money. Some of it was used to recycle the fictitious profit payments
and, like a pebble in the water, the word of fast and fabulous rewards
produced an ever-widening circle of eager investors. And more money
poured in.
And Frank C. left town a wealthy man.
The Infallible Forecaster
Jim L. (among his many aliases) had a full-time job in the daytime, but
with assets that consisted only of a phone, patience and an easy way of
talking he managed to parlay a nighttime sideline into an ill-gotten
fortune. The routine went like this.
Jim would phone someone we'll call Mrs. Smith and quickly assure her
that, "No," he didn't want her to invest a single cent. "Never invest
with someone you don't know," he preached. But he said he would like to
demonstrate his firm's "research skill" by sharing with her the forecast
that so-and-so a commodity was about to experience a significant price
increase. Sure enough, the price soon went up.
A second phone call didn't solicit an investment either. Jim simply
wanted to share with Mrs. Smith a prediction that the price of so-and-so
a commodity was about to go down. "Our forecasts will help you decide
whether ours is the kind of firm you might someday want to invest with,"
he added. As predicted, the price of the commodity subsequently
declined.
By the time Mrs. Smith received a third call, she was a believer. She
not only wanted to invest but insisted on it--with a big enough
investment to make up for the opportunities she had already missed out
on.
What Mrs. Smith had no way of knowing was that Jim had begun with a
calling list of 200 persons. In the first call, he told 100 that the
price of so-and-so a commodity would go up and the other 100 were told
it would go down. When it went up, he made a second call to the 100 who
had been given the "correct forecast." Of these, 50 were told the next
price move would be up and 50 were told it would be down.
The end result: Once the predicted price decline occurred, Jim had a
list of 50 persons eager to invest. After all, how could they go wrong
with someone so obviously infallible in forecasting prices?
But go wrong they did, the moment they decided to send Jim a half
million dollars from their collective savings accounts.
All That Glitters
Not only did the two brothers have a fancy office building with their
own company name on it, but the investment offer seemed sound and
straightforward: "Instead of buying gold outright and holding it for
appreciation, make a small downpayment that the firm could use to secure
financing that would permit much larger quantities of gold to be bought
and held for the investor's account." That way, when the price of gold
rose--as was "sure to happen"--investors stood to realize highly
leveraged profits.
The company provided storage vaults where investors could view the
wall-to-wall stacks of glittering bullion. By the time authorities
caught wind of the scheme's suspicious smell and looked for themselves,
it turned out the only thing gold was the color of the paint on the
cardboard used to construct look-alike bars of bullion.
The counterfeit gold, however, proved far easier to find than the
millions of dollars of investors' money. Most of that is still missing.
16 Questions That Can Turn Off an Investment Swindler
The first line of defense against investment fraud is your inalienable
right to ask questions and--until you get the right answers--to say
"No." And mean no. Not surprisingly, this is usually an investment
swindler's first point of attack. To keep you from asking questions, he
asks them! Invariably, the questions have "yes" answers, such as "You
would at least be interested in hearing about such a fantastic
investment opportunity, wouldn't you?" or "You would like to make a
large amount of money in a short period of time with little or no risk,
right?"
One difference between a reputable investment firm and a swindler is
that reputable firms encourage you to ask questions, to obtain as much
information as possible, to clearly understand the risks involved, and
to be entirely comfortable with any investment decision you make. The
only thing a swindler wants is your money These are some of the
questions that swindlers don't like to hear:
1. Where did you get my name?
If the response is that you were chosen from a "select list of
intelligent and prudent investors," that select list may be the
telephone directory, or a purchased list of persons who've bought
certain types of books, subscribed to particular magazines, or
responded to newspaper ads. If you have made ill-advised
investments in the past, you can be pretty sure your name is on
someone's alumni list. It's the list swindlers prize most: Easy
preys who are eager to recoup (but are doomed to repeat) their
earlier losses.
2. What risks are involved in the proposed investment?
Except for obligations of the U.S. Treasury, which are considered
risk-free, all investments involve some degree of risk. And some
investments, by their nature, involve greater risks than others.
Keep in mind that if the salesman had knowledge of a sure-thing,
big-profit investment opportunity, he wouldn't be on the phone
talking with you.
3. Can you send me a written explanation of your investment so I can
consider it at my leisure?
For someone peddling fraudulent investments, that can be a double
turnoff. For one thing, most crooks are reluctant to put anything
in writing that might cause them to run afoul of postal authorities
or provide material that, at some point, might become evidence in a
fraud trial. Secondly, swindlers don't want you to do anything at
your leisure. They want your money now.
Accordingly, it's a good rule of thumb that any investment which
"absolutely has to be made immediately" shouldn't be made at all.
You may not always be right, but you are less likely to be sorry.
4. Would you mind explaining your investment proposal to some third
party, such as my attorney, accountant, investment advisor or
banker?
If the answer goes something along the lines of "normally, I'd be
glad to, but there isn't time for that," or if the salesman snaps
back by asking "can't you make your own investment decisions."
these are virtually certain clues that your final answer should be
an emphatic "No."
5. Can you give me the names of your firm's principals and officers?
Although some persons who establish and operate dishonest firms
change their own names as often as they change their firms' names,
even the hint that you are the kind of investor who checks into
things like that can be a fast turn-off for a swindler.
6. Can you provide references?
Not just another list of other investors who supposedly became
fabulously wealthy (the names you get may be the salesman's boss or
someone sitting at the next phone), but reputable and reliable
recommendations such as a bank or well-known brokerage firm that
you can easily contact.
7. Do you have any documents such as a prospectus or risk disclosure
statement that you can provide?
This may not be available in connection with all types of
investments but in many investment areas--such as securities,
futures and options trading--it's required. And there can be
requirements that you be provided with this information and
acknowledge in writing that you have read and understood it.
Obviously, it's not the sort of information a swindler is likely to
distribute.
8. Are the investments you are offering traded on a regulated
exchange, such as a securities or futures exchange?
Some bona fide investments are and some aren't, but fraudulent
investments never are. Exchanges have strict rules designed to
assure fair dealing and competitive price determination. There are
also in-place mechanisms to provide for rule enforcement and to
impose severe sanctions against those who fail to observe the
rules.
9. What governmental or industry regulatory supervision is your firm
subject to?
If the salesman rattles off a list that ranges from the FBI to the
Boy Scouts, tell him you'd like to check the firm's good standing
before making an important investment decision. Then verify the
response. Few things discourage a swindler faster than the thought
that his first visitor the next morning may be from a regulatory
agency.
If, on the other hand, you are told his particular area of
investment isn't subject to regulation (perhaps because everyone in
his business is an ethical, upstanding citizen), take that
explanation for whatever you think it's worth. At the very least,
keep in mind that any ongoing supervision which isn't being
provided by a regulatory organization or agency will have to be
provided by you.
10. How long has your company been in business?
In any kind of business activity, there can be advantages to
dealing with a known, established company. This isn't to say that
new businesses aren't starting up all the time or that the vast
majority aren't perfectly reputable. But if you find yourself
talking with someone who doesn't seem to have a past, it can be
worthwhile to find out why. Many swindlers have been running scams
for years but understandably aren't anxious to talk about it.
11. What has your track record been?
Before you accept a salesman's assurance that he can make money for
you, you have the right to know what his performance has been in
making money for others. And ask to have the information (if there
is any) in writing. Boasting over the phone is one thing; putting
it down on paper is quite another. In any case, even if you are
able to obtain a documented performance record, don't lose sight of
the fact that past performance in itself provides no assurance of
future performance.
12. When and where can I meet with you or with another representative
of your firm?
Chances are a crooked operator--particularly if he is operating out
of a telephone boiler-room--isn't going to take the time to visit
with you and even more certainly doesn't want you to see his place
of business.
13. Where, exactly, will my money be? And what type of regular
accounting statements do you provide?
In many investment areas, such as futures trading, firms are
required to maintain their customers' funds in segregated accounts
at all times. Any mingling of investors' funds with those of the
firm or its principals is prohibited. You might also want to find
out what, if any, routine outside audits the firm's account records
are subject to.
14. How much of my money would go for commissions, management fees and
the like?
And ask whether there will be other costs such as interest or
storage charges, or whether the investment agreement involves any
type of profit sharing arrangement in which the firms' principals
participate. Insist on specific answers, not glib and evasive
responses such as "that's not important" or "what's really
important is how much money you are going to make." And, again, get
it in writing, just as you would any other type of contract.
15. How can I liquidate (i.e. sell the item I'd be investing in) if and
when I decide I want my money?
If you find that the investment is illiquid, or there would be
substantial costs if liquidated, or that you are unable to get
straight and solid answers, these are all things to consider in
deciding whether you want to invest.
16. If disputes should arise, how can they be resolved?
Short of having to go to court to sue someone, does the company or
regulatory organization provide a mechanism for resolving disputes
equitably and inexpensively through arbitration, mediation, or a
reparations procedure? Aside from seeking important information,
you may be able to detect whether the salesperson is uncomfortable
or impatient with this line of questioning. Swindlers generally
will be.
Before You Invest, Investigate
Asking some or even all of the questions just suggested isn't likely to
produce straight answers from a crooked investment promoter but, as
indicated, the very fact that you are asking such questions can be a
turn-off. Bear in mind, however, that no matter how persistently or
skillfully you pose the questions, experienced con men are at least
equally skilled in evading them, in providing downright dishonest
answers, and in refocusing the conversation on your "tremendous profit
opportunity."
Bear in mind also that, while separating you from your money is the
swindler's primary goal, the very last thing he wants you to do is check
him out. That could cause you not to invest or, worse still, alert
regulators that someone they know well has set up shop in a new area or
is running a new scam.
For this reason, most con men deliberately make themselves difficult to
investigate: By tailoring their schemes to operate in regulatory cracks
where federal or national regulatory organizations may lack clear-cut
jurisdiction; by operating in states or communities where authorities
are known to be short-staffed or occupied with more pressing criminal
activities; by changing their names or modus operandi, by stressing the
urgency of the investment so you won't have time to investigate; and by
targeting victims who may not know how or where to check them out.
Moreover, as described in swindle scenarios on pages 8, 9, and 10 of
this booklet, con men have numerous and ingenious ways of seeking to
convince you there is no need to investigate. For example, your friends,
neighbors or business associates invested and they made money, right?
That, of course, is why ever-popular Ponzi schemes (named after the
first person to perfect the referral technique) are so prevalent--and
why you should never make investments based on tips, no matter how
trustworthy the source.
While there is no way to know for certain whether a particular
investment will make money or lose money, there is one thing you can be
certain of: Any money you hand over to an investment swindler is lost
the moment you part with it. The question is, how do you check out
someone who is offering what sounds like an irresistible investment
offer? Here are some of the ways:
* Find out whether the local police department or Better Business
Bureau has complaints on file.
If so, you can make your investment decision accordingly. But be
aware that the absence of local complaints doesn't necessarily mean
a firm or individual is on the up-and-up. It may simply mean that
investors haven't yet become aware that they've been bilked. Or it
may mean you will have the distinction of becoming the first victim
in town. It could also mean that other victims have been too
embarrassed to report their losses. Regrettably, that's not
uncommon.
* Make a phone call to the financial editor of your local newspaper.
Although newspapers don't give endorsements or make investment
recommendations, they may be aware of a swindler who is working a
scam in the area--and may even have published a warning article
that you happened to miss. Then too, if readers are being pitched
with suspicious-sounding investment offers, that's something an
investigative reporter might want to look into.
* If the investment offer isn't local, don't be reluctant to make a
long distance phone call or two.
It could be that the police, Better Business Bureau or newspaper in
the community where the offer is coming from will be able to
provide information. Again, however, even the absence of such
complaints doesn't necessarily mean the firm is legitimate. Some
swindlers--particularly telephone boiler-room operators--try to
maintain a low profile in their local areas. That lessens the
likelihood of their coming to the attention of local authorities;
it prevents prospects from dropping by to see their operations; and
it makes it more difficult for out-of-towners to discover what they
are up to.
* Check to see if your city or state has a consumer protection
agency.
Many do. If so, there may be information there about the person or
firm that's offering the investment you are interested in. In any
case, the agency should be able to provide names, addresses and
phone numbers of other places you can check.
* Contact regulators.
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