INVESTMENT OUTLOOK: HOW TO GET AHEAD : ASSESSING 1988 : YEAR OF THE FLIMFLAM : Discount Gold Mines, Telemarketing and Credit ‘Repair’ Frauds Top List of Investment Scams
The guy rides in a leased limousine, spends most of his time talking on a car telephone and wears more gold than Sammy Davis Jr. And he’s going to make you rich.
You can double your money investing in his jojoba futures, he tells you. What’s more, the investment is safe because it’s backed by something in the Netherlands Antilles he calls a bank that the rest of us would call a post office box.
It seems more likely that you’ll cross paths with Elvis in the next week than make money with this guy, but you chance it anyway. And before you can say Charles Ponzi, he’s skipped town with your cash.
How do you fend off the investment shark? It’s not easy these days. The scam artist is on the prowl, more so than ever this year, according to federal, state and local investigators.
1988 was a bull market year for investment scams. Securities regulators estimate investors were bilked of at least $40 billion.
Why? The stock market crash of 1987 frightened the small investor. Wall Street scandals convinced him that the game is rigged. So he looked elsewhere for places to put his money, and the crooks were waiting.
“The disposable income people might have spent on the stock market was available to the con artist to be put into the phony deal. The con artists aren’t stupid. They knew that,” said G. William McDonald, chief of enforcement for the California Department of Corporations.
Of the hundreds of scams and alleged scams that surfaced in 1988, here is a subjective list of the top five categories:
Gold Fraud
Pannos Mining in Costa Mesa claimed it had a mother lode of gold and silver in a mine near Wickenburg, Ariz. So rich was the mine, the company allegedly told prospective investors, that proven reserves were worth $826 million.
For a $5,000 investment, Pannos allegedly promised gold or silver bars from the mine that would be delivered at roughly half the current market price. A low-risk investment, investors say they were told.
The Federal Trade Commission disagreed. So it sued Pannos in October, charging the company and its officers with operating a bogus investment scheme that bilked investors out of at least $2.4 million. The FTC says six soil samples taken from the mine contained little more than dirt. The case is still pending, but the agency got a court order in November freezing the company’s assets.
No scheme was more popular in 1988 than gold-related scams. The North American Securities Administrators Assn. dubbed it the “Fool’s Gold Rush of 1988.”
In a typical pitch, telephone solicitors offer to sell 100 tons of dirt--purportedly extracted from a mine--for $5,000, guaranteeing that it will have 20 ounces of gold in it. If true, that would work out to $250 an ounce, a little more than half the market price this year. The only problem is that the pile of dirt investors buy is almost always nothing more than just that. Whatever gold does exist can usually be seen only with a microscope.
Since early 1987, the number of gold investments under investigation by state and federal authorities soared from eight to more than 50. Overall, the securities administrators’ group estimated that investors in gold scams were swindled for more than $250 million this year.
Telemarketing Scams
The salesmen promised genuine Salvador Dali prints at bargain prices--$900 to $3,500--to prospective customers over the phone, authorities said. Low-risk investments that easily could be sold for at least the amount of money they were bought for, and probably more.
But FTC officials discovered the prints were fake, worth no more than the $25 to $50 posters often found in museum gift shops. So it sued the now-defunct gallery that offered them, Federal Sterling Galleries in Scottsdale, Ariz. In September, the FTC won a court judgment against the gallery, and the agency is trying to recover some $4.6 million that investors spent on the bogus Dali art.
Fake art prints are only one of a number of bogus investments sold to people over the phone each year through “telemarketing,” the con artist’s favorite way of reaching victims these days.
Telemarketing is the 1980s way to describe telephone sales. There’s nothing illegal about telemarketing, which accounts for $20 billion a year in business nationwide.
But as much as 5% of it may be bogus. Authorities estimate that investors could lose as much as $1 billion a year in investments sold to them through telemarketing scams, many based in Orange County.
In a telemarketing scam, investors are solicited by high-pressure salespeople who work in “boiler rooms” crammed with banks of telephones. Typically, salespeople call prospective customers from out of state because they want to stay out of reach of local authorities.
Pink Sheets and Penny Stocks
The brokers called themselves the “Hole-in-the-Wall Gang” after Butch Cassidy’s outlaws. For investors, they may have been more like the hole-in-the-wallet gang.
According to the Oklahoma Department of Securities, the 11 brokers in Tulsa, Okla., were anything but straight shooters. In October, they were charged with manipulating penny stocks, especially shares of a company in Florida called GoldCor that claimed it gets millions of dollars in revenue by using a secret, 4,000-year-old formula to change black volcanic beach sand in Costa Rica into gold.
Authorities said the company was a scam. Securities regulators estimate investors nationwide may have lost as much as $300 million investing in GoldCor.
There are more than 11,000 obscure stocks on the “pink sheet” price lists published daily by the National Quotation Bureau. In large part, issues listed are “penny stocks,” the highly speculative shares that often sell for pocket change.
Concerned about fraud in penny stocks, the Securities and Exchange Commission has formed a task force to study problems in the business and tighten regulation. Anyone investing in penny stocks should be warned that they are risky and easily manipulated.
Credit ‘Repair’
Credit-Rite promised consumers that for $500 to $700 it could clear up credit problems they had in the past, such as paying off a credit card or department store bill. With a cleaned-up credit history, customers were told, they would be eligible for new credit.
The FTC said the New Jersey company couldn’t do what it promised it could do and that it also failed to honor its money-back guarantees to customers. The FTC sued the company, and federal authorities prosecuted three of its officers, who later pleaded guilty to criminal charges.
The now-defunct company was found to have defrauded some $2 million from 9,000 people, frequently the elderly and poor, in 13 states. Two executives were sentenced to prison, with a third receiving a suspended sentence.
Authorities argue that what credit repair agencies fail to tell you is that they have no power to remove correct information from your credit record. So if you had a problem paying a department store bill, the “repair” outfit can’t do anything about it.
You can get information about your credit record yourself without going through a credit repair agency, which often charges you a large fee. You can send for a copy from credit bureaus such as TRW for a small fee. If you are turned down for credit, you are allowed to review your record for free. Any inaccurate information you discover can be challenged under the federal Fair Credit Reporting Act.
Unscrupulous Financial Planners
Four years ago, a Forbes magazine cover showed a chimpanzee in a three-piece suit, standing in front of a blackboard as if he was lecturing a class. The caption: “These days, everyone’s a financial planner.”
Forbes’ point was that just about anyone who calls himself a financial planner is a financial planner, regardless of qualifications. It’s more true than ever today.
The loose regulation of the industry has opened the door to all sorts of fraud. A study released in July by the North American Securities Administrators Assn. found that some 22,000 investors lost nearly $40 million over the past two years, thanks to crooked financial planners.
This isn’t to say that all financial planners are unscrupulous. Many are working to clean up the business through professional associations such as the International Assn. for Financial Planning and the Institute of Certified Financial Planners.
So what should a consumer to do when dealing with a financial planner? For one thing, find out if the planner has a potential conflict of interest that could influence what products he wants to sell you. Ask the planner how he makes money on your plan and if he earns a hefty commission for selling you a particular product.
There is nothing necessarily wrong with a planner getting a commission rather than a fixed fee, but it is something you should know ahead of time. Regulators say they often find that clients aren’t sold the financial products they need, but instead the ones that generate the most lucrative commissions for the planner.
Consumers also should check out a planner’s background, references and past work. For guidance, the International Assn. for Financial Planning offers consumers a free “Consumer Financial Planning Bill of Rights” pamphlet with suggestions on how to choose a good financial planner and ways to check a planner’s credentials. The information is available by writing the International Assn. for Financial Planning, Suite 800, 2 Concourse Parkway, Atlanta, Ga., 30328.
