Inside Five of the Most Pervasive Investment Scams
How these frauds work, the bait that's used, and the red flags to watch for.
In this scam, fraudsters offer high yields in short time frames, saying they have access to "bank guarantees" that they can purchase at a discount and sell at a premium. Supposedly by reselling these "guarantees" a number of times, they can produce extraordinary returns on your investment. In reality, unsuspecting investors send money to a foreign bank where it's eventually transferred to an offshore account belonging to the con artist. An estimated $10 billion has been lost in this particular gambit.
In 2008, Jack A. Calvin was sentenced to 16 years in prison and ordered to pay restitution of $2,083,736.41 for operating a "prime bank" scheme that bilked approximately 115 investors out of more than $2.8 million. Calvin sold securities in a fictitious trading program called Growth Benefit Systems (GBS), soliciting investors by promising to pool funds to purchase "prime bank" instruments that would be traded by top banks and generate returns as high as 20% per month.
The Hook: Investors are not only lured by the promise of 20-200% monthly returns, but are credulous of the jargon that's used because it's derived from actual terms. "Bank guarantees," for example, are real instruments used by foreign banks, but they're never traded or sold on any kind of market. The term "prime banks" generally refers to the top 50 banks in the world; victims don't realize it's being used to describe a scammer's personal bank account.
Red Flags: Be suspicious of fictitious financial instruments, variations on the terms above, "roll programs" (which is what the scams are often called), excessive guaranteed returns, extreme secrecy, "exclusive opportunities," and vague, complex claims. As the FBI's website points out, "Legal documents associated with such schemes often require the victim to enter into nondisclosure and noncircumvention agreements, offer returns on investment in 'a year and a day,' and claim to use forms required by the International Chamber of Commerce (ICC)."
Conflicting time zones, the high cost of international calls, and varying currencies once made it challenging for international hoaxers to go after North American residents, but the Internet has paved a clear path for them along with the elimination of many restrictions on moving money around. Offshore scams can take different forms, including those already discussed, but a great deal of them involve "Regulation S." This is a rule that exempts US companies from registering securities with the SEC that are sold exclusively outside the US to foreign investors. Scammers manipulate this kind of offering by reselling Regulation S stock to US investors in violation of the rule.
In February 2009, Texas billionaire R. Allen Stanford was charged with perpetrating an $8 billion investment fraud. Mr. Stanford, as the Los Angeles Times reported "cast himself as offshore investment guru to the transatlantic jet set and benefactor to the Caribbean islands' poor through multimillion-dollar promotions of their beloved sport of cricket." He was arrested by the FBI four months later.
The Hook: Impressive websites, lavish brochures, and "educational" seminars are some methods used to convince victims to put money in disreputable or non-existent organizations in foreign countries. The come-on is usually in the form of high, tax-free returns with no risk. Victims fail to consider that if they take a total loss of their investment, they do so without the protection of US law since law-enforcement agencies can't investigate easily outside America.
Red Flags: Sophisticated scams use complex terminology such as "bank debentures" or "standby letters of credit," complicated-sounding concepts like "offshore fund leasing," and mysterious instruments like "interbank trading" and "seasoned notes." Seminars are often held in exciting locations and cost thousands of dollars to attend; promoters tout "connections" and a guarantee of "no taxes" on your investment.
The SEC and the Financial Industry Regulatory Authority (FINRA) are the industry's watchdogs, but they're sometimes caught sleeping on the job. Visit their websites to get the details on these and other scams and the warning signs to watch for, but remember that your best defense is your own common sense.
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