A Guide to Consumer Scams continued...

INVESTMENT FRAUD

A common type of investment fraud is the "shell game." Essentially, criminals acquire a new company that is close to bankruptcy, but who have registered with the SEC to have their stock publicly traded. They reduce the equity of the shareholders of the original corporations, often through a reverse stock split that allows them to issue new shares.

Using appropriate telephone pitches, the fraud artists are able to increase the investor base and raise the price of the stock through trading. When the prices hit a high point, the stock held by the fraudulent backers is liquidated, and the price plummets, leaving investors with a huge loss and a worthless stock. Most often the con artists abscond with a fortune, spend all the money, or wind up in prison. Another typical investment fraud deals with fast-buck commodities futures. In futures, relatively few investment dollars can control sizable sums. By their very nature, futures exercise an almost irresistible appeal to to the greedy, get-rich-quick investor. What the average investor doesn't know is that futures trading is a real sucker's bet, with the likelihood of turning a profit well below 10 percent.

Land fraud is perhaps the oldest and most enduring form of investment fraud in America. The concept is very simple- the swindlers purchase rights to a piece of junk property at a rock-bottom price. They convince investors that there is some desirable resource attached to the property, such as coal , oil, uranium, etc. In land schemes, a "shill" is often used. A shill is an "investor just like you" who is really a paid accomplice of the fraud artists. The shill is introduced as a satisfied customer who says something along the lines of "This is a really reputable company. They doubled my money, and they have been totally honest with me since day one." Of course, the "resource" is just a scam. The oil or mineral rights are useless and the organizers pocket the money. Possibly the most effective investment scam is the "ponzi" scheme. Essentially, the operation requires investors to place their funds in the care of the operators. Within a few months, or even days, the investors get back "interest" on their money. The interest checks keep coming. They get excited and invest more money! They tell their friends, who, in turn, invest. Their friends make money, too. Then one day, the checks stop coming, and the investors never see their initial capital again.

What the investors didn't know is that the "interest" they were getting was really just a portion of their original investment money, or someone else's. Some of the first investors may even make more interest back than their initial principal. The problem is that eventually, the operators take most of the money and leave town, or they run out of cash after they stop getting new investors.

The problem with ponzi schemes is that they can start out as valid business operations! They can even be making PART of the "interest" through legitimate investments or business. It can be very difficult to spot a ponzi scheme until it's too late. Here are some tips for avoiding investment scams:

• If an investment sounds like an incredible deal, it is probably a scam; do some research before making any commitment.
• Never make any commitment to an unknown broker or brokerage who calls you on the phone - it is likely to be a boiler room operation.
• When opening any investment account, request evidence that the broker and the firm are licensed. Obtain the firm's recent financial statements, and be cautious of doing business with those that have net capitalization under $1 million.
• Be skeptical of substantial stock discounts and "urgent" deals that require you to invest money "immediately". catalogs.