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Protecting Yourself Against Investment Fraud

Pigeon drop and bank examiner schemes are common scams. Each year hundreds of people are swindled out of their money--sometimes their life savings. This primer provides a basic overview of these fraud schemes and provides some tips to stop and avoid investment fraud.

Bank Examiner Scheme

In the bank examiner scheme, con artists pose as FBI agents, bank examiners, police officers, detectives or bank officials. These con artists contact you pretending to need your help to conduct an investigation. As a valued bank customer or upstanding citizen, you are asked to withdraw your money and hand it over. They promise to redeposit it or return the money to you after they have completed their investigation. Of course, you never see your money again.

Pigeon Drop Scam

In the pigeon drop scam, swindlers work in pairs or in teams. One befriends an unsuspecting consumer, the "pigeon," while the other approaches them with money or valuables he claims just to have found. After some rehearsed conversation, the con artists agree to split the money three ways with you and arrange to meet at a lawyer's office or somewhere else of their choosing. But can they trust you, they ask. To get your share, you'll need to put up some "good faith" money, which they will return to you after the goods are divided. To prove yourself trustworthy, you turn over a large sum of money to them and, later, go to meet them at the designated spot. Soon after arriving, you realize the pair is long gone -- and so is your money.

Bank Examiner & Pigeon Drop Schemes -- Tips To Avoid Scams

If the situation seems unusual or if you feel uncomfortable, just walk away.

No financial institution or government agency ever uses customers to conduct internal investigations. Many financial institutions request that their customers read and sign a form when they wish to withdraw a large amount of cash. The form alerts consumers to these scam and encourages them to talk to a bank or law enforcement officer if these conditions are present. This is not an attempt to keep your money or control how it's spent--it is an effort to protect you from fraud.

Trust only people you know. Do not trust someone because he or she has a friendly voice or appears to be an authoritative figure. Swindlers usually are friendly and have honest faces and pleasant personalities. That is how they gain your trust--and steal your money.

Talk to a law enforcement officer or your banker before withdrawing large sums of money at someone else's suggestion.

Credit Card Scams

Have you ever received a phone call or mail solicitation from someone telling you that you've won a prize or a trip?

If so, you probably know that to collect your prize they want your credit card number to verify your identity, or to bill your account for a deposit, shipping or membership fee or merchandise.

The most common complaints involve telephone solicitors who attempt to sell pens, travel packages, water purifiers or filters, vitamins or other health products using a sweepstakes to entice you to respond.

For some of the thousands of consumers who have given the credit card numbers to strangers over the phone, the results have been expensive and troublesome. Trips rarely, if ever, materialize. Products and prizes may be overvalued and ridden with extra charges that make them anything but free.

Giving your credit card number to someone is like handing over a signed, blank check. Unless you initiate the call and expect to be charged for something, don't give your credit card number to anyone for any reason.

If you suspect someone illegally has used your credit card number, send a letter to your credit card company within 60 days of receiving your first bill. Include your name, credit card number and disputed charge. The biller must investigate and correct the mistake or justify the charge within two billing cycles.

Get-Rich-Quick Pyramid Schemes

A pyramid is an investment scheme in which a participant primarily makes money by recruiting members who, in turn, make money primarily by enticing others to join. The focus is on recruiting participants, not on selling a product. Products that are sold are overpriced or nearly worthless.

If you are considering a product-selling investment, be cautious. If the opportunity for income is primarily derived by recruiting more investors or salespersons rather than by selling a product, the plan probably is illegal.

Claims that a promoter makes concerning the investment opportunity often are exaggerated and misleading. Since few products are sold, most of the money generated is through recruitment of members. When recruitment slows, the marketing system collapses, leaving most participants with losses.

Chain Letters

The chain letter, a common type of pyramid operation, involves sending letters to individuals, sometimes requesting a small sum of money. A promise is made to persons responding that they will receive many times their investment by following the same procedure.


Recruiting people to participate in a pyramid scheme is a felony in many states.

Check with your local legal aid office, state and country bar associations, city or county consumer agency administrator, county prosecutor's office of consumer affairs or state Attorney General's office for brochures and explanations of specific laws in your state on this issue.

Home Equity Loans

For many people, home equity is one of their primary financial assets. Scam operators are all too aware of this and are willing to do whatever it takes to steal this equity.

Techniques used in home equity schemes vary, but they typically involve the same key features. The first step is for the con artist to get the owner to sign a first, second or third mortgage.

Frequently this isn't difficult because all that's required is the homeowner's signature. The loan documents, including the mortgage, are written in fine print and many homeowners have no idea what they're signing.

The loan's terms are usually incredibly unfavorable to the consumer with enormous up-front costs and high interest rates (sometimes exceeding 50 percent). They frequently are coupled with a balloon payment a few years down the road.

With a loan like this the unscrupulous lender can't lose. If consumer pays off the note, the creditor makes a tremendous profit. If the consumer defaults, the lender forecloses and immediately recoups the loan amount plus points and fees paid up front, and gains the opportunity to buy the home at a fraction of its real value.

How To Stop Fraud

Be wary of any business that actively solicits you, particularly if the firm already seems to be aware of your financial plight.

Watch out for businesses that say they¹re not concerned with your ability to repay the loan. The ads may say, "No income or credit check. If you have equity, we'll guarantee the loan." These catch phrases may be a tip-off to an unfair scheme.

Look for discrepancies between the promised or stated interest rate and the annual percentage rate (APR) figure required in all consumer loan contract (Truth in Lending). If that figure is significantly higher than the rate state in the contract, the loan contains hidden interest charges.

Determine who the lender is. A lender could be nothing more than a few individuals in for a quick score. Does the agent have an office? Is the company old and established one with community ties?

Help for Fraud Victims

Any attempt to get out of a fraudulent loan contract must be done with an attorney's help. Also, because lenders quickly sell these loans to other financial institutions on the secondary market, speed is of the essence to retain your full legal rights.

Under the federal Truth in Lending Act, a homeowner is entitled to rescind a mortgage contract for three business days after receiving certain disclosures concerning the loan. If the disclosures are not properly made or if notice of the right to rescind is not given the debtor, the borrower can rescind the contract for up to three years.

Home Equity Loans--How to Avoid Scams

Have a financial adviser such as an attorney or accountant review all papers before signing anything. Paperwork involved in a loan contract is often technical and unclear.

Try first to resolve the matter directly with the original creditors if you need cash to pay off creditors. Most creditors are more interested in negotiating an affordable repayment schedule than in taking expensive legal action.

Don't assume you will be denied a traditional (non-mortgage) loan. Apply first and find out.

Check with your local legal aid office, state and country bar associations, city or county consumer agency administrator, county prosecutor's office of consumer affairs or state Attorney General's office for brochures and explanations of specific laws in your state on this issue.

Investment Scams and Brokerage Abuses

Promises of huge financial returns from securities investments such as stocks and bonds, oil and gas leases, or limited partnerships are often nothing more than that--empty promises. A growing number of consumers, primarily seniors, are targeted by fraudulent securities promoters and persuaded to invest their life savings.

Although most securities investments are not fraudulent, people should be leery when a promoter promises huge returns on an investment.

The Federal Trade Commission reports that Americans are losing $1,000,000,000 [one billion dollars] a year to investment swindlers and according to the Los Angeles Times, "California and New York have the most stock brokers but the weakest regulatory systems. In fact, California ceased to license brokers in 1980."

The North American Securities Administrators Association is concerned that "the retirement nest eggs of Americans are in danger of being scrambled today by an alarming surge in investment schemes" and the American Association of Retired Persons confirms: "while people over the age of 65 constitute only 12 percent of the population, they probably make up 30 percent of scam victims."

Clearly the federal Securities and Exchange Commission lacks the resources to fully investigate and prosecute every investment fraud case in the United States and under the law the overwhelming number of investment fraud cases are prosecuted by individuals, through private skilled attorneys, despite the efforts of market manipulators to deprecate the efforts of lawyers for consumers and small investors who seek to re-coup their losses as a result of corporate manipulation and artificially enhancement of stock prices through misrepresentation and fraud.

National Council of Individual Investors -- NCII is the nation's watchdog organization holding brokers and brokerage houses accountable in cases where class actions are ineffective because of prevailing individual issues involving an investor's account. If you've been ripped off, scammed, or misled in your investing efforts by brokers who either should have known better or were taking advantage of you, NCII is the place to turn. The Investor's Rights section guides you in solving your investment problems and offers an excellent overview of arbitration, which is mandated by most brokerage contracts. This is a substantial, worthwhile and extremely valuable site.

Tips to Avoid Scams

  • Don't invest unless you can afford what lose what you invest.
  • If it sounds too good to be true, it probably is. No legitimate promoter ever will claim to offer a risk-free investment--a commodities or securities investment is basically a form of speculation or risk-taking, solicitation that claims there is little or no risk is a dangerous "red flag."
  • Verify that the brokerage firm is registered with the Commissioner of Securities. In most instances, firms that trade commodities also are required to register with the Commodity Futures Trading Commission and are subject to its regulations. Be suspicious of firms that trade commodities and are not registered. However not all registered firms are honest ones. (You also should consider consulting with a trusted adviser.) Registration simply means that the CFRC will be able to tell you whether there are any past or present legal actions pending by the government against the company.
  • Make sure the broker's address and phone number match the company for which he claims to work.
  • Never give money to collector/messenger who comes to a consumer's home following up on a phone sale. Never write the broker's own name on a check as the payee; use the company's name.
  • Ask the firm to send a prospectus or other literature about the firm. Don't be swayed, however, by the glossy brochures con artists produce. Also, ask for a written proposal describing conditions of the contract and a form outlining the risks involved with the investment.
  • Ask a phone solicitor to explain the investment to your lawyer or accountant. Even if you don't have an attorney or accountant, ask anyway because the salesperson¹s response might be a tip-off to his real identity.
  • A legitimate broker will have no objections while a con artist will say something like, "Normally I'd be glad to, but there just isn¹t enough time for that," or "Those people give investment advice."
  • Arrange for a meeting at the broker¹s or your attorney¹s office. It is never a good idea to do business with a faceless person over the phone. Ask a third party to attend.

Investment Scams--How One Scam Works

Fraudulent securities brokers often run their business from a "boiler room"--a low budget office lined with telephones.

The class securities fraud involves an out-of-state promoter who contacts prospective buyers by phone. The promoter's sales pitch includes:

  • Claims that no risk is involved.
  • Guarantees of large and fast profits.
  • A requirement that money be paid immediately or the opportunity will be missed.

Under the scam, the consumer--convinced the promoter is making a legitimate offer--sends large sums of money to the promoter. The fraudulent promoter then disappears with the money.

Business Opportunities

Consumers sometimes may be attracted to a business opportunity that offers extra cash for a modest investment of time and money.

Such offers may include distributorships, work-at-home opportunities, franchises or other investment plans. Treat any such business opportunity with extreme caution, especially when you are promised a lot of profit for a small risk or little work.

Warning Signs

There are several warning signs of business opportunity fraud. These include:

  • Pressure to sign a contract quickly and pay a large sum of money before you can check out the offer.
  • Promises of a large return on the investment with low risk.
  • Evasive answers by sellers or an unwillingness to give disclosure documents required by law.

The FTC Rule

If you are considering buying a franchise or business, you should know about a Federal Trade Commission rule that requires people who sell franchise and business opportunities to provide certain information to potential investors.

Under the FTC rule, anyone who tries to sell a franchise or business opportunity must provide you with a detailed disclosure document at least ten (10) business days before you pay any money or legally commit yourself to a purchase. This document gives 20 important items of information about the business, including:

  • The names, addresses and telephone numbers of other purchasers.
  • A financial statement of the seller.
  • The background and experience of the business's key executives.
  • The cost required to start and maintain the business.
  • The responsibilities you and the seller will have to each other once you buy.

Prepared for Success

Be ready to fully research and prepare the groundwork for a new business so it can become success. Even a legitimate franchise opportunity can fail if you are unwilling to make these commitments.

Business Opportunities--Tips Before Investing Or Buying A Business

  • Study the disclosure documents and proposed contracts carefully.
  • Talk to the current owner if buying a business.
  • Investigate earnings claims.
  • Shop around.
  • Listen carefully to the sales presentation.
  • Be sure all of the seller¹s promises are in the contract or sales documents.
  • Check to see if the investment is registered with state and federal agencies.
  • Talk to a professional or someone you trust.
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