Investor warning: bank loan scam

Scandals and scams! Suddenly the staid world of money management is rocked by them. First there’s the RT Capital mess, which securities regulators believe was just the tip of that particular iceberg. No one in the business, absolutely no one, thinks that high closings were an idea dreamed up by the folks over at RT and that nobody else was doing it.

Whether any other cases will come to light remains to be seen. But one thing is sure – any managers and traders who were doing a bit of this type of manipulation are hunkering down. They know that if anyone is caught going forward, the penalties are going to be a lot tougher than they were in the RT case.

Then we had the news earlier this month when Transamerica Life revealed some serious hanky-panky with units of an international fund they had recently acquired from ING. Seems that some employees were taking advantage of the time difference between the pricing of fund units (it’s based in Luxembourg) and the closing prices on NASDAQ to line their own pockets at the expense of unitholders. Firings and reprimands all around.

Immoral, but not illegal

Interestingly, no one is yet sure that what the emploes were doing was illegal. Immoral certainly. But whether they technically broke any laws is another matter. This doesn’t seem to fall under the definition of insider trading.

The nature of the fund, the NASDAQ closings, the daily unit pricing, all these were public information. Theoretically, anybody who studied the fund’s make-up carefully could have done the same thing – and maybe they did. The real fault appears to be in the flawed structure of the fund itself. And there are others set up in a similar way that will undoubtedly be the subject of intense scrutiny in the coming days.

While we’re on the subject of scams, the biggest one going on these days has received virtually no publicity. It’s been running for at least a couple of years and is well known to securities regulators. But there has hardly been a word about it in the media.

Bank scam
It’s the Big Bank Scam and it works something like this. You’re approached by what appears to be a credible businessperson and told about an international loan fund operated by the world’s major banks. Private investors aren’t allowed. This is institutional business, and the price of admission is $250 million. The money is used to provide short-term financing for top-grade companies or clients who need cash to close deals, as surety, or whatever. As a result, the money can be put out at high rates of interest and is always repaid within a short period of time.

The story goes that a syndicate has been formed to participate in this pool and that you’re being given an opportunity to take part. You have to put up a substantial amount of money – the sum is tailored to your perceived worth. Your payback will be about 18%-20% annualized. Because of the nature of this financial pool, your money is absolutely safe.

(There are variations which promise returns up to 100%, but most people with the kind of wealth that’s being sought here would tend to become suspicious at that. An 18%-20% return seems much more plausible.)

How it works

You’ll receive a package containing all kinds of very official looking papers and a contract to sign. This is quite a sophisticated scam. Once you’ve paid your money, you may even receive interest cheques for a time. That’s because the whole thing is a Ponzi scheme. More people are brought in and some of their money is used to make payments to the early investors to keep them content for a while. Then, when the promoters feel they have milked this particular venture for everything they can get, they, and the rest of the money, simply vanish.

As I said, the provincial securities commissions are well aware of this racket and regard it as the number one financial fraud that’s operating right now. But they don’t seem to have caught anyone yet. So beware. Remember the old adage: “If it sounds too good to be true, it probably is.”

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