PERSONAL FINANCE : PREPARING YOURSELF : INVESTMENT TRAPS : How You Can Avoid Getting Stuck Along the Way
It sounded too good to pass up: Put your money in a chain of gift shops in tourist-rich Solvang, Calif., and get a 50% annual return.
About 40 investors in Los Angeles, Orange and Santa Barbara counties were convinced, pouring roughly $1.5 million into four gift shops in Solvang and one in Fountain Valley as suggested by Irvine tax preparer James Okura Jr.
Many refinanced their homes, taking on much larger mortgage payments. Certain investors actually received some money back and Okura made mortgage payments for some who found the burden too heavy.
But it all fell apart. The gift shops failed and investigators found that a substantial part of investors’ money went into Okura’s own pocket. They charged that some money from later investors was used to pay off earlier investors--an age-old scam known as a “Ponzi” scheme.
Okura was convicted in 1986 of selling securities without a license and selling securities by omitting important information. He was sentenced to nine years in state prison but is appealing the decision.
In all, investors were bilked of about $1.1 million and at least two lost their homes.
Those gift shop investors are not unique. In fact, they are fairly common.
The United States is suffering from a virtual epidemic of investment fraud, experts say. More and more people--from the simple to the most sophisticated--are being taken for more and more money. Many have lost their homes and life savings.
The North American Securities Administrators Assn., an organization of state securities regulators, estimates that investors lose $40 billion annually to investment scams, based on data compiled from various state and federal agencies. And that figure is on the rise, the association says.
“With the deregulation of the financial markets to some extent over the last seven or eight years, investments have gotten very complex and are baffling even to experts,” says Stephen Jones, vice president of law and policy for the Council of Better Business Bureaus. “It’s easy to disguise a fraudulent investment as legitimate because they all seem so queer.”
Compounding the problem was the October stock market crash, which drove many small investors away from Wall Street in search of new places to put their money, he says. “Since the market crash, they say nobody’s in the market but there’s a lot of cash out there.”
“We’re seeing a lot more of these big, big, big frauds, but there are plenty of little ones going on all the time,” says Peter S. Berman, head deputy of the Los Angeles County district attorney’s major fraud division.
Anything sold has potential for being the basis of a scam. Real estate, precious metals, gems and even rock concert tickets, vitamins and designer jeans have been the basis for schemes defrauding thousands of hapless investors.
Investment fraud can even include selling cures for AIDS to rolling back automobile odometers, experts say. Phony franchises, bogus financial planners and false business billings make regular appearances.
“Their inventiveness is amazing,” Jones says. “As crazy as some of these are, people can make them sound very legitimate and they can humiliate you into buying it or badger you into buying it.”
One of the hottest tools that con artists use to reach out and touch someone is the telephone. The proliferation of WATS lines has made telemarketing fraud, through so-called boiler room operations, a booming business.
“There are at least 2,000 telephone banks in Ventura, Los Angeles and Orange counties right now,” says Robert M. Youngdahl, a Los Angeles deputy district attorney. California and Florida have been particularly plagued by boiler rooms, in part because of less-strict laws and because scam artists enjoy those states’ warm climates.
“What people don’t understand is the caller is on commission and his job is to tell you whatever he needs to make a commission,” Youngdahl says. Using psychologically tailored scripts with answers to every common objection raised by investors, these con artists “are sitting behind a telephone with a pile of cigars and dandruff and you wouldn’t deal with them” if you saw them in person.
“People don’t know how to hang up,” he says. “If they hear a pitch, why not just hang up?”
A frequently used tactic is to tell the victim that he has won a prize, such as a boat or a truck, and that all he has to do to claim the prize is pay taxes, transportation and other fees, Youngdahl says. Invariably, the prize is worth a small fraction of the fees or never existed in the first place.
Many boiler room operators have produced beautiful brochures and convincing contracts and prospectuses, he says, but products they peddle don’t exist or some important information is missing, like 30% to 100% markups or the fact that the scheme could never make money under current market conditions.
“I’ve had many victims say, ‘Look, I really checked it out,’ ” Youngdahl says. But even checking it out may not be sufficient, he says. “A lot of these frauds have lovely paper work.”
One of the most common types of fraud is the Ponzi scheme, named after a successful early practitioner named Charles Ponzi. Ponzi began in 1919 to buy international postal reply coupons, which he redeemed for stamps in several countries, profiting on varying rates of exchange.
Early investors received 40% returns and more and more signed on, not realizing that new money was paying off initial investors. Some $10 million was lost, most of it by investors in the Boston area.
That time-honored scheme has been repeated again and again with new investments.
The California Department of Corporations currently is investigating a Reseda company called Missman Kaplan Associates that allegedly took in $12.5 million primarily from public school teachers during the 18 months ended March 1, 1987, to invest in promissory notes. The company was supposed to buy accounts receivable at a discount, but spent slightly less than $2 million in that way, a department audit found.
Out of nearly $10.7 million paid to investors in principal and interest, nearly $9.4 million was paid from new investor funds, according to court papers.
A close cousin of the Ponzi scam is the pyramid scheme, in which participants sell an investment to newcomers, much like the chain letter of school days.
One popular variation is the “airplane game.” Investors pay a fee to board a fictitious aircraft and slowly move up row by row to become pilot, who collects money from passengers. Such a scheme depends on recruiting a steady supply of new passengers, but the plane usually goes down in flames before most get out of coach and make any money.
Metals scams--involving coins, gold mine tailings, bullion and the like--are big money makers for swindlers.
One such scam was perpetrated by Edward Mazur, head of a defunct West Hollywood firm, Coinex International. He pleaded guilty in January to 28 counts of grand theft stemming from the operations of Coinex, which sold contracts for investments in coins and precious metals.
The coins were “grossly overvalued” and in most cases never delivered, investigators say. Investors also complained that they were not told about a 30% markup the firm charged.
More than $30 million was invested by 3,000 people nationwide, most of it lost, says Dorene B. Wolf, senior trial counsel for the Department of Corporations. Mazur has agreed to repay investors $2.7 million over five years. After the restitution is made, Mazur will be sentenced, Wolf says.
Most of the Coinex victims were lured by telephone pitches.
“I would caution people about ever buying anything over the telephone,” says Berman of the district attorney’s major fraud division. “And the old words of wisdom--if it looks too good to be true, the chances are it is not true.”
DR, PATRICIA MITCHELL / Los Angeles Times
