Recognizing the Signs of an Investment Scam
The lure of a quick buck is all around us, and may
seem quite irresistible -- especially now. With money
tight and investment returns headed nowhere (if not
down), that alluring offer guaranteed to make you a
millionaire can paint a very pretty picture indeed.
However, in most cases, these pictures need some
serious reviewing, and investors should be extremely
wary.
In some cases, the pitches are simply gross
exaggerations. Money can indeed be made -- but it's
not as easy, or as quick, as promoters make it sound.
Other deals are nothing but scams, underwritten by con
artists intent on using your money to underwrite their
retirement.
An appeal to greed
So, how do you spot -- and avoid -- these
dangerous pitches? Here are some of the warning flags:
- Promised investment returns that are
substantially higher than average. Every percentage
point increase above the going Treasury bond rate
should be considered an increase in risk. When an
offer promises risk-free returns to 10 percent above
the Treasury rate, you shouldn't only be seeing flags,
you should be hearing sirens.
- "Now-or-never" sales pitches, or "limited-time
offers." Promoters give you this special opportunity
now, but can't guarantee they'll be able to "hold your
spot" -- even for an hour. Why? If you think about it
too long, you might come to your senses, so they want
your check or credit card number now.
- Solicitations (usually phone pitches) from
unlicensed companies. Before handing over your money,
you should know a lot about the company you're
investing with. Check it out with a federal or state
agency that registers or licenses businesses, like the
Department of Corporations, the Department of
Insurance, the Secretary of State or the Securities
Commission.
If you can't find the company through inquiries
there, how easily do you think you'll find your money
once it's gone
- Offshore companies. Unfortunately, the many
legitimate advantages offered through investing with
offshore banks or corporations have sometimes been
over-promoted by unscrupulous con artists, all too
ready to relieve you of your assets and then hide
behind the same blanket of financial privacy you wanted
to enjoy for yourself.
You should thoroughly investigate any agency or
organization offering assistance with offshore
investments.
Deal only with long-established firms of proven
reputation, and request references before entrusting
your hard-earned money to anyone who claims to be an
"expert" in the offshore investment field.
- Beware the glib response. You know the adage,
"if it sounds too good to be true, it probably is."
So ask, "If this is such a sure-fire deal, why are
you offering it to me? Why won't the banks touch it?"
Con artist response: "It's such a complex deal the
banks don't understand." This is one of the great lies
of investing. Banks understand only too well. It's
their job. If they won't touch it, you probably
shouldn't either.
Some precautions to take
Given those dangers, here are some steps you can
take to ensure you don't wind up the victim of a scam
artist:
- Don't invest with someone who just calls over
the phone. First ask yourself why the called you, and
where they got your name. Get a prospectus first,
which should provide a detailed analysis of the deal
and its risks. Never send money or give out a valid
credit card number without it.
- Check out the company and its officers. Know
who you're investing with and what their history is in
the business. Many scammers go from one con to the
next -- and they leave a legit trail behind them.
Check your wheeler-dealer out with governmental
agencies or the courts before handing over your cash.
- Don't let someone else do your reading for
you. You wouldn't walk blindfolded into a car
dealership and say, "Give me a good one for $20,000,"
so don't do it with your investments. Don't rely on a
friend to fill you in. Do the reading yourself -- and
talk to your accountant, financial planner, attorney or
other adviser before taking the plunge.
As long as there are investments, there will be
investment scams. However, with a little common sense
and a few precautions,you should be able to avoid
becoming the victim of one.
The Treasury Bond Scam
Just when you think that every gimmick to separate
you from your money has been exposed, a slew of new
ones appears. The sad truth about gimmicks is that
those who can least afford to lose money are the ones
who get hurt the most. Gimmicks come in many forms.
What we're talking about is blatant, shameless deceit
that's put forth under the guise of protecting you.
Each one has a different song and dance. Many of them
are obvious if you follow the rule of "if it sounds too
good to be true, it probably is."
But some of them are so good that they can sneak
by even a relatively sophisticated investor -- and this
one is so dangerous that it can take most of your life
savings before you know it's gone. And the realization
comes so many years later, that it's too late to act --
if the realization comes at all. This one is so good
that you can believe you lost your investment due to
"natural" causes.
The scam that calls for such strong words is the
guaranteed account scam. This scam is one of the most
effective tricks in the book, because it "guarantees"
that you won't lose a cent. The broker calls you up
and makes a pitch about a great investment idea that
guarantees you won't lose a dime in principal. That's
a guarantee that many people -- including many
reasonably sophisticated investors -- will jump on.
It's true, you will not lose any of your principal --
but you may lose thousands in purchasing power.
The scam involves U.S. Treasury zero-coupon bonds,
which are guaranteed by the government. These bonds
are long-term and issued at a discount from face value.
Their interest each period is simply the difference in
the market value at the beginning and end of the
period. For example, a zero-coupon bond may sell today
at $600 and after its maturity in five years you will
receive the face value, or $1,000. In the meantime you
will not receive any interest payments. However, you
must pay an "imputed tax" on the earnings every year,
meaning even though you're not receiving interest, you
pay tax on what you would receive. Then at maturity
when you collect, you pay no tax.
The broker will ask for, say $100,000, and promise
that if you invest it with him for 10 years, the worst
you'll do is get all of it back. No mention is made of
inflation. No mention is made of lost interest, or the
effects of comdollaring that interest for ten years.
What the broker intends to do is buy zero-coupon bonds
that mature in 10 years and that will then equal
$100,000. (In other words, if he invests only $60,000
of your $100,000 in zero-coupon bonds that are yielding
6%, he will have $100,000 in 10 years.) The rest of
your money is as good as in his pocket. That remaining
$40,000 will be churned in and out of investments, some
making money, some losing money, but each buy or sell
being a guaranteed commission for him. And at the end
of 10 years, you are guaranteed to get your principal
back ($100,000) -- which at just 4% inflation will only
be worth about $67,000 by then.
If you're offered any type of guaranteed return
that sounds too good to be true, it is in your best
interest to pass it up, but the real danger with this
one is that it doesn't really sound too good to be
true. It sounds very conservative, backed by Treasury
bonds, offered by apparently reputable brokers who have
been in business for decades -- not at all like the
normal get rich quick scheme that would have you
hanging up the phone. There are some mutual funds
offering this same deal today, and as it works,
variations on the scam will probably turn up in other
deals.
Caveat emptor.
