Securities and Charities | Securities

Con artists spend lots of energy to extort money from their victims.  The following is a list of the more familiar scams.  Many scams are a combination of techniques.  By knowing this information, we hope you'll be equipped to detect falsehoods in investment recommendations.  Remember to trust your initial reaction.   It's always best to ask clarifying questions than to remain silent and come to regret it.

ONLINE WORK-AT-HOME SCHEMES
Want to make fast cash while working from your home?  Click a few keys and follow the instructions on your computer screen!  Work-at-home schemes are nothing new, but now fraud artists who once touted scams through newspapers, U.S. mail and telemarketing are now using computers to reach potential victims.  They can sit at their keyboard and reach hundreds of thousands of people, pretty much for free, in a short period of time.   Getting a phony ad or message out is now cheap and easy.

Online users need to be careful while browsing the Internet and responding to unsolicited offers.  If an ad seems too good to be true, it probably is.  Talented individuals can use a web page to create a company that looks very legitimate, but just because an ad looks legitimate on the computer screen is no reason to assume it is.

Many questionable work-at-home offers are perpetuated through classified advertising.   No matter where you find classified ads online, you are likely to find some false and misleading claims.  Traditional work-at-home schemes, such as making handcrafts or stuffing envelopes, have been replaced by offers to use your home PC to make money fast in your spare time.

To evaluate tempting, online solicitations which offer a chance to earn money by working at home, follow the same signals that tip you off to potential frauds in printed and other media.  The Better Business Bureau offers some warning signs to questionable online advertising:

  • Overstated claims of product effectiveness.  Use of hype titles and frequent use of the word "hot" to describe an investment opportunity can indicate a scam.
  • Exaggerated claims of potential earnings, profits, or part-time earnings.
  • Claims of "inside" information.
  • Requires money for instructions or merchandise before telling you how the plan operates and tells you that no experience is necessary.

Check on the reliability of the business offering of the work-at-home opportunity before sending any money.  Anyone victimized by work-at-home offers over the Internet can file a complaint online or offline with their Better Business Bureau (www.bbb.org) or with the Mississippi Attorney General's Office.  Consumers who remain silent allow others to be swindled by these fraudulent operators.  Always remember to investigate before you invest.  Call the Secretary of State's Business Regulations & Enforcement Division or your Better Business Bureau to check out the reputation of any company, in cyberspace or the traditional marketplace.

NIGERIAN LETTERS
Do not be tempted by fraudulent letters from Nigeria that offer get-rich-quick schemes.   These recent and persistent scams are nationwide; even Better Business Bureaus have received letters offering quick profits, sometimes in the millions.

The scam, which has been perpetuated world-wide, targets small businesses, churches and other non-profit organizations.  A letter marked "urgent" or "confidential" arrives from Nigeria via mail or fax.  The sender claims to be an official of a company or government ministry or has an official-sounding name such as doctor, chief, lawyer or prince.  Some letters are written on "government" stationary.

Although each letter may contain a slightly different appeal, the "official" asks for assistance in transferring millions of dollars of excess money out of Nigeria.   The person proposes depositing the money in a trustworthy U.S. bank account, in exchange for which the account-holder will receive 30% or more of the transferred funds.   To participate in the deal, the business or organization must provide its bank account number and the name. address, phone and fax numbers of the bank.  Sometimes the person requests copies of signed, but otherwise blank, company letterhead and pro-forma invoices.

In a related scenario, a business may receive notification that it has been named as a beneficiary in the will of a wealthy Nigerian.  The business then is asked to send necessary "proofs of identity" to secure the supposed gift.

Using the provided information, the con artists can then plunder the victim's bank account.  Or they may try to get money directly by requesting exorbitant payments to cover transfer fees, travel expenses, taxes, or necessary bribes before the transaction can occur.  Once the money has been wired, the scammers typically disappear and are hard to trace.  Needless to say, no one has ever received the promised funds, and losses from participating in illegal foreign business deals are nearly impossible to recover.

Anyone receiving such a letter should not respond.  Send the letter to the Business Regulation & Enforcement Division of the Secretary of State's Office, your local Better Business Bureau or to the U.S. Secret Service, which is currently investigating the scam.

BOILER ROOMS
Often the source of the call you receive in the evening that offers immediate investments in "get-rich-quick" schemes is from a "boiler room."  It earns its name from the "heat" and high pressure generated by the callers as they try to convince you to part with your money.

"Boiler rooms" often are just a short-term rented apartment or office with multiple phone lines and an impressive sounding address, many times in another state.   In many cases, either the company or the product doesn't really exist or operate as represented.  Phone pitches are read from prepared scripts with the answers to the most common objections.  Your phone number may have been obtained from phone directories, purchased lists and newspaper articles.

PYRAMID SCHEMES
Pyramid promotions focus on the quick profits to be earned from recruiting other investors, who will then recruit others, and so on.  Little attention or emphasis is placed on the product or service to be sold.  The fraud derives from the ever-decreasing number of potential investors in a given area.  The common elements of a pyramid scheme involve the following:

  • An invitation from a friend, neighbor or co-worker to attend an "opportunity meeting" to learn how to earn lots of money;

  • At the meeting, a well-rehearsed presentation will downplay the traditional methods of acquiring money and will offer instead an exciting shortcut to wealth and adventure;

  • Investors pay large fees for courses or the right to recruit others and profit from their participation;

  • An emphasis on getting others to invest.

Pyramid schemes are illegal in Mississippi, but are difficult to prosecute.  These differ from a legal multi-level-marketing (MLM) business such as Amway, Beauti-Control, etc.  In a pyramid scheme, victims' money is filtered up through the pyramid and lost.

ADVANCE-FEE LOANS
These loans usually are offered to desperate borrowers who have exhausted all of the traditional approaches to financing.  Loans are arranged and promised only upon payment of an "up-front" or "advance" fee.  It's common for the promoter to represent the source of funds as foreign investors or an off-shore bank.   Loan amounts are typically very large ($5 - $100 million), and offer long repayment terms at below-market rates of interest.  Minimal qualifications, other than the advance-fee payment, are not required.  The promoter takes the advance fee and never delivers the loan.

PONZI SCHEMES
Promoters offer high rates of return on various impressive sounding investments.   However, instead of using the money as promised, new investor's money may be used to pay the monthly "interest" or "return" to earlier investors.   These "satisfied investors" then report the high returns to their friends, who in turn invest in hopes of achieving the same above-average returns.

In a ponzi scheme, there is no underlying business.  Early investors are simply being paid with funds received from later investors.  The scheme can continue only as long as new investors provide additional funds.  When the scheme collapses (as it always does), current investors lose their money and the promoters walk away rich.

LOAN ROLL PROGRAM/PRIME BANK NOTES
These investments are similar in many respects to the advance-fee loan schemes described previously.  Promoters offer the "little guy" a chance to pool money with other investors to buy bank notes internationally, often touting a large offshore bank as instrumental in the deal.

Investments range from a few thousand dollars to a hundred dollars or more.  Returns of fantastic wealth are promised, often in the $100 million range.  Details about how the program works are either unavailable or, when examined closely, nonsensical.   Recently, these schemes have been common in Mississippi.  Investors' money is rarely recovered.

OIL WELLS
By acquiring interests in a "proven" oil field, or in the immediate vicinity of other proven oil fields, investors are promised "can't-miss opportunities" for great wealth.  These investments are frequently sold to people who live far away from the oil company's headquarters, which may be nothing more than a rented trailer. 

As with gold and silver mines, promoters frequently offer new and secret methods for reclaiming missed oil reserves on previously drilled fields.

GOLD AND SILVER MINES
These speculative investments typically offer new or secret methods for reclaiming mineral reserves from untested or abandoned mines, or even the recovery of microscopic traces of valuable minerals from soil in your geographic area "where no one else would think to look!"  These are classic frauds.  Often, the promoter will base a mining forecast on an unknown expert's geological report or prediction, or will offer part of a valid report out of context.

Promoters exaggerate the quality and quantity of the minerals to be extracted, while downplaying the expense or likelihood of recovering them.

AGRICULTURE AND LIVESTOCK
Another recent scheme involves ostriches and emus.  For a fee, you can invest in a pair of live animals for breeding, with a goal of profiting from the selling of the eggs or offspring to zoos or other ranchers or farmers.

Typically, the fee is assessed on a monthly or yearly basis for the boarding and care of the animals.  The problem occurs when the predictions don't match reality or the investment doesn't exist at all.  These investments may be accompanied by a "buy-back" or repurchase agreement from the promoter, making it appear that the investment is guaranteed against loss.

Read the fine print: many of these people will have used your funds for fees and operating costs and have nothing with which to "buy back."  In most cases, the money was never to be used for any such venture.  It's just gone.

COINS AND PRECIOUS METALS
Promoters offer "investment grade" gold and silver coins, claiming their present value can be independently verified, and promising tremendous future profits, usually based on some current or political event.

For the cost of your investment and a nominal storage fee, the promoter will purchase the coins or bullion for you and have them delivered to and stored in a large, well-known bank, nearly always outside of your geographical area.  Often, these promoters offer the opportunity to "leverage" your purchase.  Leveraging, in theory, is like buying on a margin, in that you only make a down payment towards the total cost of the metal you wish to buy.  The rest of the money is advanced or loaned to you, with the precious metal serving as collateral.

For instance, for $10,000, you might purchase 22 ounces of gold at $450 an ounce.  By leveraging your purchase at 20% down, you could purchase 5 times as many ounces, or 110 ounces.  The problems with a leveraged purchase occurs when the value of this precious metal goes down.  As the buyer, you're responsible for covering the downturn by putting in more money to cover your 20% cash down value.  If you fail to cover the downturn, your precious metal is sold (often at a discount), and you're liable for the difference.  Leveraging is extremely risky and is not recommended for the casual investor.

Some schemes charge extremely high commissions that must achieve a great increase in the value of the coins or metals before you could see a profit.  Other schemes don't even bother to purchase the coins or metals.  The promoters just take your money and move on to the next town.

If you want to purchase precious metals, talk with local merchants with reputations to protect.

WIRELESS CABLE FRAUD
Wireless cable television uses microwave technology to transmit video programming to rooftop antennas of subscribers.  You may have seen commercials, program-length "infomercials" or newspaper ads touting the high profits to be made from investing in wireless cable television systems. 

Some companies promote wireless cable "buildouts," which refer to the sale of partnerships or shares to raise capital to build wireless cable systems.  Some of these companies, however, have neither the licenses nor the expertise to develop the systems.  The following explains how wireless cable scams operate and how investors can avoid them:

  • The basics of wireless cable rely on "line-of-sight transmission."  This means that if anything stands between the transmission source and the rooftop antenna -- like hills, tall buildings, or foliage -- interference will result.  Always take this into consideration for the area where the "buildout" is to occur.

  • Wireless cable television has a maximum of 33 channels available for programming in a given area.  Licenses for these 33 channels are awarded by the Federal Communications Commission (FCC), and as many as 12 different entities can be awarded licenses in each market.  Each license can include either one or four channels.  Several of these licenses are needed to establish an economically-viable wireless cable system.

The scams operate in this manner: potential wireless cable television investors are targeted through cold-calling, telemarketing, mail offerings and "infomercials."   Cable promoters often represent that they have the necessary FCC licenses and are selling shares in a partnership or other venture to develop a wireless cable system.

Promoters may, however, misrepresent the actual number of licenses they hold, the number of channels needed for a commercially-viable system, or the amount of investment capital needed to fully develop a wireless cable system.  It can cost hundreds of thousands of dollars to build even a small system with only four channels and limited programming choices.  Costs will easily exceed a million dollars for a larger system with additional channels.

It also may be necessary for the promoter to register the partnership units as securities with the federal and state securities regulators.  Don't accept a general disclaimer that the offering you're looking at doesn't need to be registered.


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