#2. The Investment Scam

Many scam artists attempt to get you to “invest” your money in their “deal” in order to more easily steal the money from you. Such scams include the “Ponzi” scheme, chain letters, pyramid schemes, and much more.

Elizabeth could hardly wait to call her friend Donna about a new investment opportunity. A few months ago one of the members of her church’s social committee had told her about a new high technology start-up company he was involved with. He showed her the projected return on investment from the first year of operation and said that for only a $5,000 investment she could make nearly 67% interest. Elizabeth quickly invested $10,000. She had already received $1,500 of interest in just the first two months. The interest was payable monthly and the initial investment was to be repaid at the end of the first two years. She couldn’t believe her good fortune. At that rate she calculated she would make well over the 67% goal. She was quite skeptical at first, but as the months passed and she regularly received her checks, she became less and less concerned.

Donna didn’t seem to be as interested as Elizabeth expected her to be. In fact, Donna asked a lot of really embarrassing questions that Elizabeth couldn’t answer. Questions such as “Who were the officers and directors of the company?” and “Where was the main office of the company located?” Although Elizabeth wondered about the questions Donna asked, she didn’t worry until six months later when her check failed to appear as scheduled. She called her friend and he assured her that there had been a small computer problem and the checks with be coming very soon. The check was approximately a week late. Two months later the check was late again. She waited a week before she called. Elizabeth dialed the number two times before she realized the number had really been disconnected. She was still not alarmed but she decided to call some of the other investors to see if she could find a new number for the company. Three weeks later she realized she had been scammed. Elizabeth was lucky‑she lost only $3,250. She was the victim of the classic “Ponzi” scheme.

Elements of the investment scam:

Promise of an unusually high return on an investment. The return is “guaranteed,” said to have little or no risk, or touted as practically foolproof.

A lack of detailed information about the details of the investment, including the principals, the type of business, and details concerning finances. Sometimes the scam artist says the information is unavailable because the investment opportunity is so new, but information will be provided “very soon.”

High pressure to invest quickly “before the deal goes away.” The investment is often portrayed as being available only for a very limited time.

Unsolicited contacts about investment opportunities.

In the “Ponzi” scheme, money collected from later investors is used to pay the interest or dividends to earlier investors. Interest is usually paid regularly in short time increments.

In pyramid schemes and chain letters, the “investors” are given an incentive to find more people to participate in the “investment.”

The “Ponzi” scheme takes its name from one of the first people to make huge sums of money using this common fraud. This scheme is similar to the chain letter or pyramid scheme. The scam artist represents that he or she has a “surefire” investment that will bring a very high return. Often returns in excess of 50% or more per year are promised. The scam artist pays the high return to earlier investors using money received from other “investors.” Of course, the first investors are extremely happy with their “investment” because they apparently get the promised high return. They often assist the scam artist in obtaining new “investors” because of their enthusiasm. The Ponzi Scheme differs from a pyramid scheme in that the participants are not offered any direct financial incentive for bringing in other participants. The scam artist plans to leave the country before the investors figure out they have been scammed. Unless the scam artist gets too greedy, he or she can disappear with many thousands of dollars of the “investors” money.

At one time or another nearly everyone has come in contact with the chain letter. Chain letters are illegal and a form of an “investment” scam. Commonly, the chain letter contains a list of names and the victim is asked to put his or her name at the bottom of the list, remove the top name and send, usually, a small amount of money to either the first person or first few people on the list. The victim is also asked to send the letter on to a number of his or her friends. The promise is made that when the victim’s name reaches the top of the list, they will receive a large sum of money in return. Often the letter contains warnings about what will happen to the victim if he or she “breaks” the chain. There are thousands of variations to the chain letter scam, many of them now on the Internet. However, they all are based on receiving an enormous return from a very small effort. The amount of money invested does not change the nature of the chain letter. Even though most people realize that chain letters are illegal, they see very little risk in participating. The victim always feels that there is a chance they will receive a large sum of money. The author has seen people who were desperate for money become involved in the scheme. Although in its simplest form, the chain letter seems relatively harmless, it is a scam nonetheless.

Pyramid schemes are almost universally illegal in the United States. The main difference between a pyramid scheme and the Ponzi scam is that the victims are called “dealers” and the dealers are enlisted to recruit other dealers. The scheme is highly beneficial to those who get into the deal early. The longer the scheme is run and the more “dealers” are enlisted in the organization, the less likely those further down in the pyramid will benefit. Pyramid schemes have been based upon investment opportunities, special product sales, product dealerships, and hundreds of other variations. The profits come from enlistment fees, training fees, and other charges. In a true pyramid scheme, there is no attempt made to appear like a legitimate business. Nothing is sold. The only point of the business is to acquire more dealerships. Pyramid schemes differ from multilevel marketing in that there is no bona fide product or service.

Multilevel marketing commonly refers to a business organization where commissions or payouts occur at two or more levels. Multilevel marketing organizations are generally legal unless they are conducted as illegal pyramid scheme. Network or consumer direct marketing describes a business where success depends on building a distributor network. Proponents of consumer direct marketing attempt to differentiate themselves from multilevel marketing by emphasizing that the distributors are also “consumers.” In California, all multilevel marketing businesses are referred to as “seller assisted marketing plans.” Whatever the terminology, if there is no product or service being sold, the business is probably illegal.

There are no risk-free investments. The higher the supposed return on the investment, the higher the risk. The scam artist relies on the greed of the victim and the assumption that very few investors will actually investigate before they invest.

Protect yourself by:

a. Always investigating before you invest.

b. Asking yourself, if this is such a great investment why isn’t the company getting its own financing and making all the profits itself?

c. Realizing that a legitimate company would allow you time to investigate and review the offer before investing.

d. Requiring all information to be in writing.

e. Investing only in businesses or areas you understand.

f. Identifying all of the people involved in the investment scheme.

g. Consulting with an attorney, an accountant, or other professional concerning the investment.

h. Requiring adequate collateral or other personal guarantees.

i. Requiring that all collateral be appraised by an independent appraiser.

j. Verifying that the company complies with all state and federal licensing requirements, including proper registration of any securities.

k. Requiring that any transfer properties, either real or personal, be handled by an independent escrow agent.

l. Understanding that nearly all Ponzi schemes, chain letters, and pyramid schemes are illegal.

m. Realizing that the size of the investment doesn’t make the scheme either legal or illegal: they are all illegal.

n. Understanding that if there is no worthwhile product or service being sold by the organization, it is probably a scam.

o. Suspecting all investment opportunities that don’t provide detailed information about the company.

p. Knowing that a good deal today will be a good deal tomorrow. Any investment requiring “immediate action” should be highly suspect.