Investment Swindles: How They Work and How to Avoid Them Including 16 questions that can turn off an investment crook

How Investment Swindlers Find (or Attract) Their Victims

Bearing in mind that investigate before you invest is good advice no matter how you are approached, these are some of the methods con men commonly employ to contact their victims-to-be.

• Telephone
  So-called telephone boiler-rooms remain a favorite way for swindlers and their sales squads to quickly contact large numbers of potential investors. Even if a swindler has to make 100 or 200 phone calls to find a mooch (one of the terms swindlers use for their victims), he figures that the opportunity to pocket thousands of dollars of someone's savings is still good pay for the time and cost involved.
• Mail
  Some sellers of fraudulent investment deals buy bona fide mailing lists--names and addresses of persons who, for example, subscribe to a particular investment-related publication, who have responded to previous direct mail offers, or who have other characteristics that swindlers look for. In the hope of avoiding notice by postal authorities, mail order swindlers may not make a direct or immediate pitch for your money. Rather, they often seek to entice you to write or phone for more information. Then comes a call from the salesperson or the person who closes the deal. Some may phone even if you didn't respond to the mailing.
• Advertisements
  A newspaper or magazine ad may offer (or at least hint at)profit opportunities far more attractive than available through conventional investments. Once you've taken the bait, the swindler will then attempt to "set the hook." Even though investment crooks know that regulatory agencies regularly monitor ads in major publications, some nevertheless use such publications in the hope of being able to hit-and-run before an investigator shows up. Others advertise in narrowly circulated publications they think regulators may be less likely to see.
• Referrals
  One of the oldest schemes going involves paying fast, large profits to initial investors (actually from their own or other peoples' investments) knowing that they are likely to recommend the investment to their friends. And these friends will tell their friends. Soon, the swindler no longer needs to find new victims; they will find him. (See page 16.)
• The "Reputable" Business
  Some swindlers go first class. Using profits from previous swindles, they rent plush offices, hire an interior decorator and professional-sounding receptionist and open what has the appearance--but not the reality of a reputable investment firm. You may even have to phone for an appointment, and once there don't be surprised to be kept waiting (that's intended to make you all the more eager). This kind of swindler's success depends on how long he can keep his victims from knowing they are being cheated. Investors are assured that their large profits are being reinvested to earn even larger profits. Such a swindler may join local civic groups, contribute to charities, and generally play the role of solid citizen.

Techniques Investment Swindlers Use

But swindlers have a decided advantage: They don't have to make good on their promises. In the absence of this responsibility, they have no reluctance to promise whatever it takes to persuade you to part with your money. These are some of their techniques:

• Expectation of Large Profits The profits a swindler talks about are generally large enough to make you interested and eager to invest--but not so large as to make you overly skeptical. Or he may mention a profit figure he thinks you will consider believable and then, as a further enticement, suggest that the potential profit is actually far greater than that. The latter figure, of course, is the one he hopes you will focus on. Generally speaking, if an investment proposal sounds too good to be true, it probably is.
• Low Risk
  Some are so blatant as to suggest there's no risk--that the investment is a sure money maker. Obviously, the last thing a swindler wants you to think about is the possibility of losing your money. (If you ask how you can be certain your money is safe, you can count on a plausible-sounding answer. Besides, at this point, he figures you will believe what you want to believe.)

  To make his pitch more credible, a swindler may acknowledge that there could be some risk--then quickly assure you it's minimal in relation to the profits you will almost certainly make. A con man may become impatient or even aggressive if the question of risk is raised--perhaps suggesting that he has better things to do than waste time with people who lack the courage and foresight needed to make money! With this kind of put down, he hopes you won't bring up the subject again.

• Urgency
  There's usually some compelling reason why it's essential for you to invest right now. Perhaps because the investment opportunity can "be offered to only a limited number of people." Or because delaying the investment could mean missing out on a large profit (after all, once the information he has confided to you becomes generally known, the price is sure to go up, right?).

  Urgency is important to a swindler. For one thing, he wants your money as quickly as possible with a minimum of effort on his part. And he doesn't want you to have time to think it over, discuss it with someone who might suggest you become suspicious, or check him or his proposal out with a regulatory agency. Besides, he may not plan on remaining in town very long.

• Confidence
  They don't call them con men for nothing! They sound confident about the money you are going to make so that you will become confident enough to let go of your savings. Their message is that they are doing you a favor by offering the investment opportunity. A swindler may even threaten (pleasantly or otherwise) to end the discussion by suggesting that if you are not really interested there are many other people who will be. Once you protest that you are interested, he figures your savings are practically in his pocket.

Several Investment Swindles and How They Worked

The Old-Fashioned Ponzi Scheme

Within a short period of time, he approached and sold the scheme to still other investors--then promptly used a portion of the money invested by these persons to pay large profits to the original group of investors. As word spread of Frank's genius for making money and paying profits, even more would-be investors anxiously put up even larger sums of money. Some of it was used to recycle the fictitious profit payments and, like a pebble in the water, the word of fast and fabulous rewards produced an ever-widening circle of eager investors. And more money poured in.

And Frank C. left town a wealthy man.

The Infallible Forecaster

Jim would phone someone we'll call Mrs. Smith and quickly assure her that, "No," he didn't want her to invest a single cent. "Never invest with someone you don't know," he preached. But he said he would like to demonstrate his firm's "research skill" by sharing with her the forecast that so-and-so a commodity was about to experience a significant price increase. Sure enough, the price soon went up.

A second phone call didn't solicit an investment either. Jim simply wanted to share with Mrs. Smith a prediction that the price of so-and-so a commodity was about to go down. "Our forecasts will help you decide whether ours is the kind of firm you might someday want to invest with," he added. As predicted, the price of the commodity subsequently declined. By the time Mrs. Smith received a third call, she was a believer. She not only wanted to invest but insisted on it--with a big enough investment to make up for the opportunities she had already missed out on.

What Mrs. Smith had no way of knowing was that Jim had begun with a calling list of 200 persons. In the first call, he told 100 that the price of so-and-so a commodity would go up and the other 100 were told it would go down. When it went up, he made a second call to the 100 who had been given the "correct forecast." Of these, 50 were told the next price move would be up and 50 were told it would be down.

The end result: Once the predicted price decline occurred, Jim had a list of 50 persons eager to invest. After all, how could they go wrong with someone so obviously infallible in forecasting prices?

But go wrong they did, the moment they decided to send Jim a half million dollars from their collective savings accounts.

All That Glitters

The company provided storage vaults where investors could view the wall-to-wall stacks of glittering bullion. By the time authorities caught wind of the scheme's suspicious smell and looked for themselves, it turned out the only thing gold was the color of the paint on the cardboard used to construct look-alike bars of bullion.

The counterfeit gold, however, proved far easier to find than the millions of dollars of investors' money. Most of that is still missing.