True stories of money, deceit and gullibility
Welcome to the Gull Awards, brought to you by the Australian Securities & Investments Commission. Every day people lose lots of money to scams and swindlers. By drawing attention to the gullibility and the unfortunate fate of those people who were the victims of fraud and dishonesty, we hope to make people more aware of the dangers lurking out there. Once you've read the stories, why not take some time to look around our website. You'll find plenty of tips and advice to help you avoid becoming a victim. And why not bookmark this page as we'll be updating it each month with new stories. We sincerely hope you never win a Gull.
ASIC will publish Gulls only about areas we cover directly: consumer protection for investments, investment advice, superannuation, insurance and deposit taking. (We do not cover credit or lending.)
We will publish Gulls if we have taken action, if regulators overseas have acted, if claims are obviously absurd or excessive, or as a warning to tread carefully, especially if facts are not fully known and if readers have told us they are concerned. We will tell you which is which in each Gull.
Sales offers and promotions about consumer goods and services are covered in Australia by state and territory Offices of Fair Trading or Offices of Consumer Affairs and by the Australian Competition and Consumer Commission. You can contact one of these organisations for complaints that fall under these areas.
Gull in flight
Looking to break into the "high-tech" market? Here's an offer for you - why not swap four of your shares in an established industrial company for 1.5 shares in a new internet company. Sounds good? Well, perhaps you'd better read the prospectus first. Normally, we give the Gull of the Month to an outrageous scheme run by an apparent scamster. This Month's Gull is for those investors who might rush into an investment without really understanding the details.
It's all about prospectuses - those (often) thick, glossy documents which can be long and difficult to read, but which contain important information about an investment. People who took the time to wade through the details of this offer's prospectus would have come across some warning signals about the value of the shares being offered:
first, this company isn't listed on any stock exchange
second, the company's prospectus admits that losses will probably increase for the foreseeable future and profits may never occur
and on page 73 - a long way in - the prospectus says people taking up the offer will suffer "immediate and substantial dilution in net tangible book value per share". (In plain English, this means an immediate loss in the value of their shares.)
The net outcome for investors? They end up swapping their "old economy" shares worth approximately US $8 for "new economy" shares that the directors of the internet company got for just one US cent.
ASIC has grounded this offer - not because it was a "good" or "bad" investment, but because the prospectus failed to spell out the risks and returns in enough detail for shareholders to reasonably assess the company's prospects. Avoid this common mistake - make sure you read and understand all the information - or turn to a licensed adviser for help. See Getting good advice for tips on choosing an investment adviser. For more information read our media release.
New Gulls
High yield or high risk?
You might have heard us talk about "HYPEs" or "high yield promotional enterprises". One HYPE that has surfaced again lately involves "Bank debentures" or "Prime bank instruments". Investors are persuaded to put their money (usually a minimum of $50,000) into US dollar accounts with Australian banks. They are told that their money is at "zero risk" and that they can expect returns ranging from 50% to 100%. Usually the promotional material claims that governments and major banks have access to these investments, but because they are such a secret (and so successful), bankers will deny their existence! The promoters of course can get investors into the scheme because they have the "right connections".
The schemes sometimes falsely claim to be endorsed by the US Federal Reserve, the World Bank or the International Monetary Fund. We have received advice from the Reserve Bank of Australia and overseas banks that these investment products do not exist. Investors' funds are usually transferred to overseas bank accounts and can be difficult to retrieve. As always, be wary of promises of high returns and claims that an investment is "secret". If you have any doubt about a scheme, use our internet checks to see if the person promoting the scheme is licensed. Resist the HYPE!
False front
It's always important to know who you're really dealing with on the Internet, as this report from the Bureau of National Affairs in Washington D.C. shows.
Law enforcement officials in New Jersey, USA, have filed a lawsuit against three men and two firms for allegedly impersonating MLC Ltd, a well known Australian financial services company, in a cyberspace scam that bilked online investors of $750,000. The group enticed investors to send them money and fraudulently traded securities through an E*Trade account on the Internet. Investors were told that MLC was a "leading force in global financial markets for more than 30 years." A principal of one of the companies allegedly told investigators that he had been in business for less than four months. State officials said some of the money raised paid for tropical vacations, designer clothing, and access to sexually explicit websites. ASIC, the Financial Services Authority of Britain and MLC Ltd assisted in the investigation.
Don't get PINned
Our September 1999 Gull of the Month Award involved a scam on bank customers which was operating in the UK. We hoped it wouldn't find its way to Australia, but unfortunately it did - with devastating results. According to the Adelaide Advertiser, some thieves broke into people's homes in South Australia just before Christmas and stole their credit cards. Posing as bank officials, the thieves phoned the victims saying they needed to know personal identification numbers (PINs) for the cards because of "Y2K problems". Five people - mostly elderly victims - gave their numbers and lost about $2000 each when the thieves used the cards to withdraw money. Other victims immediately contacted their banks after the credit cards were stolen, and were wise to the thieves when they phoned asking for PINs. As a detective on the case said, "There is no reason the banking sector needs to have a person's PIN number. We advise people to never disclose their PIN number to others."
Nigerian letter scam
Yes, this scam is doing the rounds again. The emails or letters are usually variations on a theme, but in this case our readers received an "Urgent Business Proposal" from a Sir Marthins Ike of Nigeria. Sir Ike and his friends at the Nigerian National Petroleum Corporation claim to have been awarded a foreign contract of US $150 million for the supply of some equipment. As part of the contract-awarding committee, they "over-invoiced" the contract with the intention of sharing a balance of $50 million among themselves. BUT... they have to transfer the money out of the country first and of course, they need someone outside Nigeria to act on their behalf for a 25% share of the profit. The email includes a request for bank account details to ensure a "hitch free transfer into your account." We've warned people not to give their bank account or other personal details to the operators of this scam. For more information, see a paper recently published by the Australian Institute of Criminology.
Tax tempters
Some Australian investors make the mistake of trying to evade tax or hide assets by investing in questionable schemes. As well as risking penalty tax, a fine or going to gaol, you may be setting yourself up to be swindled by an unscrupulous adviser. Most schemes aimed at evading tax give your adviser a large degree of power over your money. This means there may be no paper trail to link you to the assets or income if you want to claim them as your own. Sometimes the schemes themselves will fail through poor management, although it will be a number of years before you find out that the investment decision was a mistake. To help you spot possible "Gulls", read our consumer alert Investing to reduce your tax? Watch out! .
Geeps going cheap
In 1998 a series of advertisements appeared in newspapers across the country offering returns of up to 50% in new investment opportunities. Readers were invited to "Minimise tax!" and "Maximise profits!" by investing in Bluebottle Farms where, thanks to breakthrough medical research, the normally painful bluebottle poisons were being used in a "whole range of medicinal products". Or you could "Secure your future with Geeps!" by participating in a new Angora goat/sheep cross breeding program which was "turning the Australian wool industry on its head!" What potential investors didn't know was that the ads were part of ASIC's "High Returns - High Risks" educational campaign. Amazingly, more than 700 people called our toll free number for more information about the schemes. The exercise showed how easily people could be tempted to take dangerous risks with their money, especially when tax incentives were involved. See our consumer alerts Three out of four rural schemes destined to fail and Agricultural investment schemes.
Slow earner
This true story comes from the Securities and Exchange Commission in the United States. The Iowa Securities Bureau reported that it had taken action against a company called U.S. Snail. The company was promoting an unregistered business opportunity which involved selling breeding snails for snail ranching. According to the company's sales literature, "Helliculture (snail ranching) has become one of the newest and fastest growing business fields in the United States", a "financially rewarding experience" for housewives, retired people, the unemployed, or business people. Advantages are that "snails are easy to breed, easy to handle and multiply rapidly".
Pyramid or Ponzi?
Almost every week, we receive a Gull Awards entry which involves a pyramid-type scheme. Most are sales-type promotions which don't fall into our area, but are dealt with by state and territory Offices of Fair Trading and by the Australian Competition and Consumer Commission. In a typical pyramid scheme, a potential member pays to join. The only way to advance is to recruit others who also pay to join. If enough new members join, the pyramid grows, but for everyone to profit there must be an endless supply of newcomers. In reality, each new participant has less chance of recruiting others and a greater chance of losing money. Another type of scheme with similar features is the "Ponzi" scheme. Like a pyramid scheme, a Ponzi scheme relies on a steady stream of newcomers to keep it going, and eventually it collapses. But unlike a pyramid scheme, it's the operator of the Ponzi scheme who has to keep generating new clients to "balance the books". The victims believe they've put their money into a genuine investment scheme, and don't realise the operator is really using money from new clients to pay other clients back. Our most famous Ponzi story involves...
The "trust account" that was anything but...
Over a 15-year period, this audacious scamster cheated several hundred clients out of over $40 million. His vehicle was a special "trust account" which, he said, would give investors a high rate of return - tax free - and had no management fees. Initially clients received generous "dividends" and this, along with the adviser's helpful and friendly manner, enticed them to put even more money into the scheme and to recommend it to other people. What they didn't know was that their money was never invested. Instead he deposited it into an account of a company he owned and from there it was just a short step into his own pocket. He would use part of the money or money from new clients to pay "dividends". The rest he spent maintaining an extravagant lifestyle. As with most Ponzi schemes, this swindler became greedy and spent too much of the money too quickly. He couldn't keep up payments to clients and some started to ask for their money back. Unfortunately by the time the scam was uncovered, there was no money left to pay investors and they lost everything.
Scams and swindlers
How would you like to learn from other people's investment mistakes and save yourself the heartache of losing your hard-earned savings? We can help you with our book called Scams and Swindlers. The Ponzi scam is just one of the ten real stories taken directly from our files. The victims were ordinary people, small investors, retirees and other people looking for financial security, who lost their savings and retirement nest eggs because they didn't know their rights. They thought it could never happen to them, but it did - Scams and Swindlers makes sure it doesn't happen to you. Click here for more information about the book and to read a sample chapter. |
