Lesson 6

UNIT OBJECTIVES

• Discuss ways to distinguish a legitimate telemarketing call from that of a swindler
• Examine various types of investment fraud.
• Analyze fraudulent sales techniques and appropriate consumer actions.
• Suggest ways to protect yourself from investment fraud.

SCAMS, SCHEMES AND SWINDLES

Americans lose billions of dollars every year to fraudulent investment schemes that promise a no-risk way to increase their money in a hurry. Rip-off artists appeal to greed.

Swindlers also exploit fear, the concern about whether or not you will have enough money to meet future living expenses and medical needs. Fear is a particularly powerful motivator for con artists during times of economic downturn in America.

It can be difficult to check out investments. There are no tires to kick and you can’t take an investment on a test drive. Further, the terms of the investment deal may be difficult to understand. Key facts may be left out and false statements are often part of sales presentation. To make matters worse, con artists rush investors into giving up their money before they have time to think about whether or not the deal makes sense.

A successful con artist will sound and look like a reputable business person. The swindler’s promotional materials may be very slick and professional. This very slickness is what makes people become victims of fraud.

Does the average person stand a chance with a swindler? Yes, but only if he or she allows critical thinking to guide the decision-making process. When greed or fear are the deciding factors, financial disaster is likely to follow.

The weapon of choice for most con artists is the telephone. A phone scammer can use the telephone to contact 100 or more potential victims in a single day. These swindlers use the phone as a weapon in much the same way that a mugger uses a handgun. Computers are used to generate special lists of people who may be more likely than others to fall into the trap of a particular investment scam.

HOW TELEMARKETING FRAUD WORKS

How can you tell a legitimate telemarketing call from the seductive sales pitch of a swindler? The following facts about phone fraud are drawn from Swindlers Are Calling, a publication prepared and distributed by National Futures Association, the industry-wide self-regulatory organization for the futures industry.

1. Most telephone sales calls are made by honest businesses offering legitimate products or services.
2. But phone fraud is a multi-billion-dollar "growth industry" that involves selling bogus investments. Everyone who has a phone is a prospect; whether you become a victim is largely up to you.
3. There is no way to determine whether a sales call is honest simply by talking with someone on the phone.
4. No matter what questions you ask or how many you ask, skilled swindlers have ready answers. That’s why sales calls from persons who you don’t know should always be checked out before you actually invest.
5. Phone swindlers are likely to know more about you than you know about them.
6. They may know your age and income, health and hobbies, occupation and marital status, education, the home you live in, what magazines you read, and whether you’ve bought by phone in the past. They assume that you want more income, that you’re receptive to a bargain, and that you are reluctant to be discourteous to someone on the phone.
7. Fraudulent sales callers have one thing in common: They are skilled liars and experts at deceit.
8. Their success depends on it. Many are coached to say whatever it takes to get the victim’s money. The callers make hundreds of repetitious calls, hour after hour.
9. Phone swindlers are extremely good at sounding as though they represent legitimate businesses.
10. They offer investments, describe employment opportunities and the list goes on. Never assume you’ll know a phone scam when you hear one. Innovative swindlers constantly devise new schemes.
11. The motto of the phone swindlers is "just give us a few good mooches."
12. "Mooch" is the term telemarketing scammers use to describe the victim. Most victims are otherwise intelligent and prudent people. Sadly, some families lose savings they worked years to accumulate through a 15- minute phone conversation.
13. The person who initiates the phone call may be you.
14. It’s common for phone crooks to use direct mailings and advertise in reputable publications to encourage prospects to make the initial contact. Just because you phoned for additional information about an investment doesn’t mean you should be less cautious about buying by phone from someone you don’t know.
15. Victims of phone fraud seldom get their money back.

Despite efforts of law enforcement and regulatory agencies to provide what help they can to victims, swindlers generally take the money and run. Your best protection is to hang up on strangers who offer something that sounds to good to be true.

INSIDE BOILER ROOMS

What is a "boiler room"? These are the rooms that contain the furnaces that building operators use to turn up the heat. The term "boiler room" also is used to describe the rented office space in which con artists work to turn up the heat on their potential victims. Characteristics of investment scam boiler rooms are:

• Call people in other cities and states. This tactic can hinder local and state prosecution, which often require victims to be in the immediate area.

• Identify potential investors through mooch lists. These lists are compiled on the basis of such things as magazine subscriptions and mail-order purchases and being another con artist’s victim earlier. Con artists trade among themselves the lists of hot prospects. (Once you’re a victim, you’re more likely to be a victim again.)
• Train salespeople to counter every possible objection. They are taught to say and do whatever it takes to get the Mooches money.
• Offer sales pitches with slick talk about little or no risk secret tips, and a high rate of return. The rate is usually much greater than that from more traditional investment opportunities.
• Demand immediate action. The last thing a phone swindler wants is for a potential victim to have time to reflect upon the phony investment, or even worse, seek the advice of a knowledgeable third party, such as an accountant, broker or banker. Swindlers often push victims to send money immediately or offer to pick it up by courier or delivery service.
• Refuse to disclose the street address of the boiler room operation. Instead, con artists frequently will provide the address of a mail drop. This decreases the chances of being caught by local law enforcement officials.
• Avoid the U.S. mails. Many con artists fear that federal mail fraud statutes will be invoked against them as a result of their schemes. They commonly resort to alternate delivery methods, including overnight delivery services and couriers sent to the home of the investors to pick up the money.
• Stall suspicious investors who suspect that they have been defrauded. This process may involve lull letters, in which the promoter of the scam blames the temporary delay in the promised high returns on various factors; including weather, union problems, delayed equipment delivery, labor problems, government red tape and so on. Such excuses may provide the con artist with valuable additional weeks or months in which to swindle hundreds of additional victims.
• Pull a disappearing act. When the heat is on, telephone con artists move on to the next city. Very often, this will also involve a switch in scams, so someone who is a precious metals salesperson today may be selling $99 round trips to Hawaii next week.

TYPES OF INVESTMENT SCAMS

Investment con artists are clever and creative. They base their scams on the latest political and scientific developments in the news. For example, a popular investment scam sells stock in a company that is just about to announce a cure for AIDS.

Some swindlers focus on specific groups, such as church groups, African Americans, Hispanics, doctors, the elderly, and offer pitches tailor-made to the needs and concerns of these audiences. Still, other scams take advantage of economic downturns and employment uncertainty with glowing reports on the earnings of those who buy a franchise of business opportunity.

Among the types of investment scams consumers are likely to encounter are:

• Pyramid schemes
• Precious metal frauds
• International investing
• Franchise and business opportunities
• Stock swindles

PYRAMID SCHEMES

Pyramid schemes operate on the principle that each member of a group will receive a profit or a cut for recruiting others to join the scheme. Danger signs of pyramid scams include:

• Promise of sky-high profits for a small amount of effort
• Payment of a membership fee to participate in the scheme
• Products have a high price compared with similar products
• Unrealistic claims about product quality or performance
• Sellers and buyers are expected to recruit new sellers and buyers to keep the pyramid growing

• Coin swindles. Swindlers may sell consumers coins that are said to be graded at a higher quality than is actually the case. Often, these coins are delivered in poor condition or are never sent at all.
• Gold mining schemes. How does gold, silver or platinum at dirt-cheap prices sound? That is the promise of swindlers who claim to be able to sell precious metals directly from mines. Claims are made that a new technology will be used to recover microscopic gold that other firms have not been able to retrieve. Regulators sometimes refer to these schemes as "dirt pile" swindles involving promises of "no-see-em" gold, since investors never see the promised precious metals. All they get for their money is dirt.

STOCK SWINDLERS

Stock swindlers pose a major threat to consumers. In the late 1980s, small investors lost $2 billion in scams involving penny stock, so-named because the shares sell for less than $3. A stock swindler may claim that a company has developed a cure for AIDS or is about to announce a huge business deal that will cause its stock to double or triple in value.

A penny stock example: con artists convince investors to put millions of dollars into a company that claimed to have developed a breakthrough technology; a self-chilling beverage can that would eliminate the need to store soda and other liquids in a refrigerator. When this deal failed, small investors saw their money go down the drain.

INSIDERS ONLY

Beware of a broker who tells you that he or she has a secret to share that will make it impossible for you to lose your money. If this were such a hot tip, why would a complete stranger call you? Trading on the basis of inside information is against the law. From an ethical standpoint, insider trading jeopardizes the free market where prices move up and down based on information available to all parties.

INTERNATIONAL INVESTING

International investing is a fast-growing area of interest for U.S. investors, and con artists are not far behind. With the rapid pace of political and economic changes overseas and the strong performance of many foreign stock markets, many American consumers are investing some of their funds abroad. Con artists have responded by offering scams with an international flair. In on recent case, a Washington State con artist fleeced 400 investors out of $7 million by promising 30-40 percent returns on CDs and other investments through a bank in the Marshall Islands. After the swindler fled the United States, investigators found that the bank existed only on paper and that its sole officer was a Marshall Islands gasoline station attendant who was instructed to go to the post office, pick up investors’ checks and then re-mail them to the con artist back in Washington.

FRANCHISE AND BUSINESS OPPORTUNITIES

Franchise and business opportunities address the dream of many Americans to be their own boss. In fact, legitimate franchise operations may soon account for a majority of all retail sales made in the U.S. Unfortunately, con artists realize that the desire of many Americans to own their own businesses may make these investors less cautious when it comes to evaluating franchises and business opportunity deals. Such investments may promote on the basis of the fear of losing a job or general uneasiness about the economic situation.

HOW TO VICTIM PROOF YOURSELF

Most people find it hard to believe that they could end up as a victim of investment fraud. "I would spot a scam immediately," they say, or "I am too smart to be cheated out of my hard-earned savings." But never underestimate the ingenuity of people who make their living by fast-talking other people out of their money. Career investment swindlers are very good at their work and know how to snare even the most reluctant mooch. Con artists take delight in pulling the wool over the eyes of an investor who is 100 percent confident that he or she could not possibly be hoodwinked. The savvy consumer stays alert to the possibility of fraud and recognizes his or her susceptibility that appeals to the emotions of fear and greed.

Anyone who has the emotions of fear and greed—and that is nearly everyone—can be the victim of an investment swindle. Victims of fraud come from all walks of life. They can be rich or poor, young or old. Professional people can be swindled along as those who are less educated. People who are especially vulnerable are those who are known to have money to invest and are on fraudulent operators’ mooch lists. Older people living alone are likely to own their own home outright or have substantial equity in it. Many people are at the risk simply because they lack information about investment choices and are unaware of how to spot and avoid common investment scams.

STEPS TO TAKE TO PROTECT YOURSELF

• Take a breather. Never invest merely on the basis of a sales pitch. Get the written information and evaluate it.
• Remember that the person on the other end of the phone is a sales person. Even if he or she is a broker or financial counselor or had some other impressive title. The first priority of people who sell investments is not your financial future, but rather to make money for themselves and their employers. This does not mean that all people who promote investments are dishonest, just that their goals may not be the same as your own.
• Know the deal. Read the material. Seek the counsel of someone who knows more than you about investing, such as a broker, accountant, banker or a friend who had enjoyed some success in investing.
• Check out the salesperson and firm. For securities investments, you can get the information from the Maine Securities Division at 877-624-8551. For the future investing, call the National Futures Association’s Disciplinary Information Access Line. This NFA public service may be accessed at no cost by calling 1-800-676-4NFA.
• Stick with investments you understand; particularly when it comes to their potential risks or rewards. Do not get caught in the trap of trusting a sales person who claims to understand it all and promises to take care of you.
• Do not sign papers you have not read or do not understand. Do not sign forms that have not been completely filled out. Have a lawyer or another knowledgeable person look at any agreement about which you have questions.
• Be skeptical. Ask questions about the nature of the investment. Where exactly is your money going? How much will the salesperson get in fees and/or commissions if you invest? What is the track record of the investment? Don’t sit still for mumbo-jumbo or double-talk. When it comes to your life savings, the only dumb questions are the ones that you do not ask.

Ethics and Fraud. Ethical views reflect beliefs about right and wrong. These broad standards of behavior help shape the rules we use to live together in society. Fairness and freedom are two ethical views that are violated when investment fraud occurs.

Investment fraud deceives a person by misrepresenting truth. It is lying. It is unfair. It is theft. It restricts the freedom of fraud victims as it robs them of their money. Fraud operates in an environment of dishonesty, greed and laziness. When we allow fraud to exist, we live in a world that is less fair, and less free than it would be otherwise.

BUYER BEWARE

Although many regulations and institutions have been established to protect consumers in their investment activities, the principle of caveat emptor- let the buyer beware- remains the investor’s best protection. Legal protections are limited, fraudulent activities flourish, and once money is invested in a fraudulent scheme, the chances of getting it back are extremely small.

Awareness of the possibility of fraud is your first line of defense. Recognize that the emotions of fear and greed can be exploited so that you might be tempted to give your hard-earned savings to a swindler.

REVIEW

FRAUDULENT SALES CALLERS HAVE ONE THING IN COMMON—THEY ARE SKILLED LIARS!

BOILER ROOM FRAUD—

• HIGH-PRESSURE SALES BY PHONE
• TEMPORARY OFFICE LOCATION
• SALES PEOPLE TRAINED TO LIE AND DECEIVE
• HIGH PAY-OFFS PROMISED
• CON ARTIST TAKES MONEY AND RUNS
• INVESTOR NEVER SEES MONEY AGAIN

PRECIOUS METALS AND DIRT PILE SCAMS

• PROMOTERS BAMBOOZLE INVESTORS WITH MUMBO-JUMBO ABOUT SECRET METHODS FOR REFINING PRECIOUS METALS
• INVESTORS PUT MONEY IN NON-EXISTENT OR LOW-PRODUCING MINES
• ALL THEY GET FOR THEIR MONEY IS DIRT

INSIDER TRADING

• SECRET INFORMATION TO HELP YOU MAKE A LOT OF MONEY.
• TRADING BASED ON INSIDE INFORMATION IS AGAINST THE LAW.

BUSINESS OPPORTUNITY SCHEMES

• APPEAL TO BEING YOUR OWN BOSS
• PROMISE HIGH INCOME
• REQUIRES HIGH START-UP COSTS
• ONLY THE SWINDLERS MAKE MONEY
• UNEMPLOYED PEOPLE ARE OFTEN VICTIMS

HIGH-PRESSURE SALES TACTICS

• SALES PERSON DOES NOT RESPECT YOUR RIGHT TO SAY NO
• MAKES YOU FEEL STUPID IF YOU ARE NOT INTERESTED IN THE OFFER

CONSUMER ACTION: HANG UP!

SWINDLERS OFTEN INSIST THAT YOU MAKE YOUR DECISION RIGHT NOW! THEY PUT PRESSURE ON YOU TO BUY NOW AND SAY TOMORROW WILL BE TOO LATE.

CONSUMER ACTION: REFUSE TO BE PRESSURED. CHECK IT OUT. DO NOT MAKE INPULSE PURCHASES.

SOUNDS TO GOOD TO BE TRUE

• CALLER MIXES BELIEVABLE STATEMENTS WITH FALSE PROMISES

CONSUMER ACTION: ASK TO HAVE ALL CLAIMS ON PAPER. GET THE ADVICE OF EXPERTS.

RISK-FREE INVESTMENT

• ALL INVESTMENTS HAVE RISK
• ONLY SAVINGS ACCOUNTS IN INSURED FINANCIAL INSTITUTIONS AND GOVERNMENT SECURITIES ARE INSURED

CONSUMER ACTION: HANG UP. THE PROMISE OF RISK-FREE INVESTMENT IS A RED –FLAG WARNING OF FRAUD.

NO WRITTEN INFORMATION

• SELLER SAYS THERE ISN’T TIME, OR PRINTED MATERIAL ISN’T AVAILABLE YET

CONSUMER ACTION: INSIST ON WRITTEN INFORMATION. CHECK WITH EXPERTS. EVEN SLICK BROCHURES CAN BE FILLED WITH LIES AND DISTORTION.

WE NEED YOUR CREDIT CARD OR CHECKING ACCOUNT NUMBER

• CALLER NEEDS YOUR NUMBER AS AN "EXPRESSION OF GOOD FAITH" OR TO VERIFY THAT YOU ARE A REPUTABLE CONSUMER

CONSUMER ACTION: HANG UP. REFUSE TO GIVE CREDIT CARD OR CHECKING ACCOUNT NUMBERS OVER THE PHONE OTHER THAN TO LEGITIMATE BUSINESSES WHOM YOU KNOW AND TRUST.

WE PICK UP THE MONEY AT YOUR HOME

• THE CALLER WANTS YOUR MONEY BEFORE YOU CHANGE YOUR MIND
• AVOIDS PROSECUTION UNDER MAIL FRAUD LAWS

CONSUMER ACTION: HANG UP. GET PROMOTIONAL MATERIALS IN WRITING AND CHECK IT OUT.

YOU HAVE WON A FREE GIFT

• EVERYONE LIKES TO GET SOMETHING FREE
• YOU HAVE TO SEND MONEY BEFORE YOU GET THE FREE GIFT
• THE GIFT IS USUALLY WORTHLESS

CONSUMER ACTION: HANG UP. DO NOT SEND MONEY.

TRUST ME. THIS IS A GREAT OPPORTUNITY

• WE WOULD NOT CHEAT YOU
• WE HAVE YOUR INTERESTS IN MIND
• DO NOT MISS THIS CHANCE TO MAKE MONEY

CONSUMER ACTION: DO NOT ACT ON TRUST, GREED OR FEAR.

PLEASE LOOK AT THE FOLLOWING PYRAMID SCHEMES AND REALIZE THAT THEY ARE A FRAUD AND ARE ILLEGAL.

PLEASE CONTINUE TO WORK ON YOUR INVESTMENT PORTFOLIO. ALSO CONTINUE TO WATCH THE INVESTMENT PROGRAMS ON TV AND TO READ THE FINANCIAL PAGES OF THE NEWSPAPERS.