More investment scams

October 8, 2004

Con artists are more resourceful than ever. Here’s how they might target you.

Last year, we told you about five popular schemes that criminals were using to try to defraud you and other hard-working professionals (see "Investment scams," June 6, 2003, http://www.memag.com/memag/article/articleDetail.jsp?id=111418). Unfortunately, the con artists who create these dodges come up with new ones all the time.

"Sadly, many of the old scams still work, too," says Ralph Lambiase, director of Connecticut's securities division and president of the North American Securities Administrators Association.

What can you do to make sure you don't get taken? The same thing you'd do before crossing train tracks: Stop, look, and listen. "Education and awareness are an investor's first line of defense against investment fraud," says Lambiase.

Online scams. Personal computers are a criminal's best friend. From anywhere in the world, a crook can quickly and inexpensively lure thousands of people into a scam. In response to the growing number of Internet-related fraud complaints, the federal government launched "Operation Cyber Sweep" last October. Since then, the ongoing investigation has found 125,000 victims who have lost an estimated total of more than $100 million.

What sort of online deceptions do the crooks engage in? If you use e-mail a lot, you've probably received an offer from a kindly official of an African government who wants help in depositing gobs of money into overseas bank accounts. All he needs is your account number, so he can wire the money to you. If you comply, the crooks-many of whom are based in Nigeria-will then ask you for money to cover their transaction costs and other "miscellaneous expenses."

Another popular online scam involves fake e-mail messages supposedly sent by companies you do business with. In Virginia, a woman was recently accused of sending bogus messages to AOL customers, asking them to update their credit card and personal information, to maintain their accounts.

The lesson? Never provide sensitive data, including Social Security numbers and driver's license numbers, unless you've initiated the contact.

Prime bank schemes. Also known as high-yield investment frauds, prime bank schemes are old favorites of crooks, who promise extremely high or "guaranteed" investment returns through their alleged contacts with heavy hitters in international banking. (One con artist said he'd deliver 15 to 20 percent returns every 35 to 70 days, with no risk to the principal.) According to the FBI, these setups typically contain "formats purportedly approved and/or sanctioned by the Federal Reserve, the International Chamber of Commerce, the World Bank, the International Monetary Fund, or other well known international organizations."

Investors are sworn to secrecy and may be asked to sign a nondisclosure agreement. The prime bank scam then essentially becomes a Ponzi scheme in which the crooks pay early investors with some of the monies collected from later ones. The folks on the bottom rung lose everything when the criminals vanish.

In one prime bank scheme that the Feds cracked last year, a 62-year-old Baptist minister from Ohio lost $1 million-his entire retirement savings. In March 2003, the FBI announced it had targeted 100 people involved in prime bank schemes that bilked investors out of about $500 million.

While the government says it remains committed to prosecuting white-collar crime, it warns that prime bank and high-yield frauds continue to proliferate in the US and abroad, especially when the stock market is flat or down. "People want to believe that there are secret ways to make fabulous amounts of money," says Irving Faught, administrator of the Oklahoma Department of Securities.