Be Wary of Investment Fraud

On Wednesday, Karen Wheeler the Director of the Compliance Division for the Wyoming Secretary of State's office spoke about the types of fraud and scams that are being perpetuated in Wyoming. I wish I had a transcript of all the information she provided to share with you, but unfortunately I don't. I do however, have the next best thing. AARP Wyoming has given me permission to print the following article by Karen Mockler that was printed in the February 2006 edition of The Wyoming Sage. I hope you find it as informative as I did. If you have any questions about the validity of investments you have either made or have been offered, be sure to call the Secretary of State's office at (307) 777-7370. They are more than happy to help.

By Karen Mockler

The Wyoming Secretary of State’s Web site identifies 11 types of fraud, including the case of high-tech fraud described below.

Broadcast
“Satellite Broadcasting Corporation, from Irvine, California, was selling an investment in direct TV to Wyoming citizens by phone. The promoters claimed they had agreements and support from Direct TV© and were applying to be a member of the National Rural Telecommunications Cooperative, which are real companies who provide satellite television to subscribers using a "dish antenna." Both claims were false. Upon investigation, it was discovered that the company did not have an exclusive broadcast area as claimed and the California company could not engage in the business for which it was collecting money.”

This scam was shut down by a joint state-federal action, but new scams pop up every year. One of the most common is the pyramid scheme, where money is received not by selling a real product or useful service, but by recruiting new participants. A current incarnation of the pyramid scheme is the “airplane” pyramid, in which “passengers” pay to ride, in hopes of eventually becoming “pilots.” People who start pyramid schemes are often the only ones who receive money. Ponzi schemes also use the money of new recruits to pay off earlier investors.

Metals
Gold, silver, and other precious metals have always been popular operating areas for con artists and shady dealers. The private or skeptical nature of many individuals who buy precious metal investments is a benefit to the crooks. Promoters typically claim that the precious metal they are selling is sure to go up in value due to increased demand, world conflict, or some other economic or political factor. Purchasers usually receive a receipt as evidence of ownership, but not the metal itself.

Oil
When it comes to oil wells, potential investors should be particularly cautious if they hear any claims emphasizing oil shortages, fears of anticipated OPEC actions, or blockades. Scams often stress the urgency to act now. If people do invest, they should verify with the county clerk that their ownership is actually recorded in the county land records.

In order to avoid fraud, a potential investor has to know when an offer is too good to accept. According to the Wyoming Secretary of State’s Web site, “There are usually three characteristics typical of every fraud or scam: a promise of higher than normal returns, a promise or guarantee that you can't lose money, and pressure to act quickly. If you sense any of these warning signs, lock up your checkbook! Get more information and really check out the offer before you go any further!”

The Better Business Bureau’s Web site also offers six “resolutions” for 2006 to help avoid fraud:
1) Look before you leap. “Don’t sign anything without reading and understanding what you’re doing. If you sign a contract, it is legally binding and probably cannot be broken. If the paperwork doesn’t say the same thing told to you verbally, trust only what is written. Verbal promises are very hard to prove!”

2) Listen carefully to what’s said--and not said. “Understand the terms. If you don’t, ask again. Some cons glide over pertinent facts in such a glib way that you cannot charge them for misrepresentation. They told you; you just didn’t understand.”


3) Keep private information private. Never give it to anyone who contacts you. “Too many callers tell the BBB after they have given out credit card or bank account numbers or other private information that can be used for fraud. It doesn’t do any good to shut the gate after the horse is out.”

4) Investigate before you invest. Do your homework with official agencies – not just Aunt Martha.

5) Learn financial basics like contracts, mortgages and interest payments. Recognize you’ll never get something for nothing, so don’t send money to collect “your millions.”

6) If you have a financial dispute that needs resolution, consider a mediator. Talk to the BBB to find out more.

Finally, Tom Cowan, the Secretary of State’s director of securities, offers some additional red flags for securities investors to watch out for:

1) If you call a broker and he is never there, if she doesn’t return your phone calls, if he makes a lot of chit-chat but never answers your question, beware.

While the Secretary of State’s office doesn’t give advice on investments, it can answer specific questions about a specific stockbroker. Staff can look up anyone in the United States and find their record, how long they’ve worked, or whether they’re even registered. If they’re not, Cowan says, what they’re offering an investor may not be legal.

2) “In no circumstance does a securities agent issue his own statement to the clients… those statements go out at a minimum on the company’s letterhead or a monthly statement as required by law.”

Investors can also contact the broker’s manager – most statements now have a 1-800 number, and they should feel free to call.

3) “If it’s too complicated to understand,” Cowan says, “they shouldn’t invest in it. Stock is pretty straightforward. It goes up or down in price. Plain vanilla.”

That doesn’t mean legitimate investments are without risk, he adds. You can buy a legitimate stock and still lose. But at least the game’s not rigged.

“The best advice I can give right now is if you can read about it in the Wall Street Journal or Barrons or Money Magazine, it’s probably real. If you can’t, it probably isn’t real.”

In the end, Cowan says, investors have to know themselves and their limitations.

“If I’m the average person without a lot of money, why go into a complex financial strategy? Not every person in the world is destined to buy commodities contracts. If I’m retired from civil service, I wouldn’t know about that kind of thing and what makes me think I can beat the big boys? Maybe my money is better kept in a bond or CD. What do I know about gold mining or oil and gas? But as a civil servant, I know the state of Wyoming is always issuing good quality bonds. I know the state is good for it. The state isn’t going to rip somebody off. Maybe that’s a better place for me to invest.”

Cowan says the biggest problem he sees in investments is not actually fraud but suitability – that is, the sale of investments to people which are much too risky for them, for perfectly legitimate reasons. For instance, a woman in her 70s or 80s buying long-term securities or very complex commodities simply may not live long enough to see her investment pay.

“These people aren’t sophisticated investors who’ve worked in the finance industry. They’re in over their head. They bought based simply on a purported rate of return – they see they can make 20 percent in a year, but oftentimes those people are the ones who lose their money.”