Anatomy of an investment scam

In October 1998, 83-year-old Georgina Wilson* invested $50,000 in securities issued by Nelbar Financial Corporation. Even two years earlier, she wouldn’t have dreamed of making such a move. In fact, she’d been happily oblivious to the world of investments for most of her life. Then, after her husband of 33 years died, she found herself with a substantial inheritance—and with full responsibility for her finances. Like many married women of her generation, says daughter Catherine Parry*, Wilson deferred completely to her husband on financial matters. “It was one of those marriages where she didn’t know what was going on [financially].”

Both Parry and Wilson knew it was crucial to invest prudently since the regular income from her inheritance would help pay Wilson’s day-to-day living expenses. On her mother’s behalf, Parry spoke to her own financial adviser. “I said, ‘We don’t want long term. We want something that’s secure.’” Mother and daughter believed the “corporate investment certificates,” issued by Nelbar and promoted as safe deposit-like securities, were akin to guaranteeinvestment certificates (GICs)—albeit with better interest rates than the bank-sponsored versions. Parry saw them as a good way to ease a novice like her mother into the world of investments.

Growing sense of unease
Two years later, outside Nelbar’s posh offices in downtown Toronto, the air was muggy with a typical mid-August heat wave in Southern Ontario. Parry found herself one of a group of 14 people that grew increasingly agitated waiting for their financial adviser who had called this surprise Sunday meeting. For Parry, there was a growing sense of unease. What could be so important to warrant meeting now?

The horrible truth dawned after an agonizing hour-long wait. Nelson Allen, Nelbar’s charismatic owner, told the group that Nelbar was in deep trouble. Allen was there that day to plead with investors for more time to fulfill his financial obligations.

His appeals were meaningless. A few days later, the Financial Services Commission of Ontario officials shut down Nelbar. Not only was the company never registered to make loan transactions—the most obvious reason for provincial regulators to step in—on closer inspection, the company’s books showed irregularities, and auditors found no money to pay investors. Allen was charged with fraud.

Operating out of Toronto, the 30-something stockbroker ran what turned out to be a pyramid scheme. As each new wave of “investors” entered the scheme, their money was used to pay existing investors, the previous wave. There were no earnings, no profits, only a simple and classic case of robbing Peter to pay Paul—with sizeable payouts to Allen himself.

Next page: Blatant warnings missed

*Names have been changed to protect privacy

The investors in Parry’s group represented just part of a group of more than 100 investors who lost around $10 million in fraudulent securities issued by Nelbar between 1994 and 1999. Parry insists the fellow investors she met for the first time at Allen’s panicked Sunday meeting were far from easy marks for a con artist. “Everyone asked very intelligent questions,” says Parry. “These were top-of-the line people, business people.” She herself is a knowledgeable investor and, ironically, met the financial adviser who introduced her to Nelbar while attending a seminar on financial planning and retirement. She notes that this adviser himself lost money and is listed among the plaintiffs in a class action lawsuit against Nelbar.

Investments worked too well
Wilson’s first three investments with Nelbar worked well, paying back principal investments and promised interest. Indeed, in retrospect, they worked too well. Wilson’s first six-month investment with Nelbar in June 1997 paid interest of 7.5 per cent—15 per cent annualized; by comparison, the annual interest on a five-year GIC issued by trust companies at that time was around 4.8 per cent a year. The next two investments similarly earned interest well above the going rates. Reassured by the representation of these deposits as safe, GIC-like investments, neither Wilson nor Parry twigged to how extraordinary these high returns really were. 

Looking back, Parry says, they missed other blatant warnings. “It was always presented as a ‘window,’ and if you don’t take it, then you’re going to miss the chance.” As well, they were informed that no tax slips would be issued – it would be up to the investor to decide whether to declare investment earnings to Revenue Canada – another bold red flag. “Who ever heard of such a thing?” Parry asks now.

A plainspoken 63-year-old retiree who displays a lawyer’s precision in documenting her dozens of meetings with attorneys, regulators and police, Parry has done most of the work co-ordinating legal efforts and disseminating information to the other 13 investors who gathered on that Sunday afternoon in 1999.

Earlier this year, Allen was sentenced to a four-year penitentiary term after admitting to defrauding 39 investors. Parry is upset about her mother’s victimization but says her feelings of remorse are overshadowed by her indignation at Allen’s boldness. “He did the simplest scheme that’s existed since the beginning of time. That’s what makes you feel so stupid,” says Parry.

Next page: How to spot a fraudulent investment

As for Wilson, Parry says, her mother, at the age of 87, is resilient. “There’s absolutely nothing wrong with her physically, and she has an excellent brain,” says Parry. An inheritance from a relative, right around the time Nelbar debacle was unfolding, also helped lessen the sting for Wilson. But others in their group have been less lucky. “This has been very traumatic to these people. I cannot tell you how badly it has affected them.” In fact, according to Parry, many in the group of 14 have been devastated by their experiences with Nelbar; some have suffered nervous breakdowns, others have seen their families torn apart by this financial catastrophe.

Though she has no hopes of recovering the lost money, Parry says her goal now is to pursue every avenue that may lead to better investor protections. “I don’t believe in people complaining about crooks if they don’t take action—if they don’t go to court and follow up. Not that it’s going to make the crook honest … but it is my responsibility as a citizen to follow through.”

How to spot a fraudulent investment
Investment scams come in many varieties. While there are no hard and fast rules for identifying fraud, many cons follow similar principles. If you’re unsure about an investment or the person selling it, start by checking with your provincial securities regulator; all investment dealers and investments must be registered for sale. In addition, watch for these signs of a potential fraud.

• An official-sounding name that closely resembles the term for a legitimate investment. Nelbar’s “Corporate Investment Certificates” deliberately echoed the “Guaranteed Investment Certificates” that are known to most investors as safe, fixed-income financial instruments.
• A short-lived “window” of opportunity or other offer that denotes exclusivity and/or secrecy.
• An unusually high rate of return for a low level of risk. Investments that sound too good to be true usually are just that.
• Questionable reporting requirements. Nelbar depositors were told they could choose not to report their investment earnings for tax purposes. In reality, if they’re above board, investment earnings must be reported to Canada Customs and Revenue Agency.