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:
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.
- 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.
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 compounding 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.
About the Author
For twenty years Adam Starchild has been writing books about these subjects, and they are published by a variety of publishers.
For more information on asset protection, see Asset Protection & Becoming Judgment Proof.
Copyright © 1995 by Adam Starchild
The Investor's Library has reprinted this copyrighted article with the permission of the author.