Top ten investment scams

You’ve heard this one before — a lady in her 80s living alone gets a call from a kind salesperson who takes the time to talk to her. After a few days, maybe even months, of phone calls, she decides to buy into whatever it is this nice salesperson is offering – after all, this investment opportunity will help her stay financially independent for years and allow her to leave her children and grandchildren with a nice chunk of money when she’s gone. And she now knows this nice gentleman so well, it’s not like giving money to a stranger.

So she dips into her life savings and hands over a large amount of cash. All of a sudden the phone stops ringing, no return on investment is ever seen and, very quickly, panic sets in. It’s usually around this time that the lady — or her family — calls for help. Bob Whitelaw, president and CEO of the Canadian Council of Better Business Bureaus in Ottawa hears this story — and hundreds more like it — every day. And it’s not just the elderly who are being swindled. “When you total it up, $5 billion is leaving the real Canadian economy every year and going into the less than ethical economy. That≈#217;s about $14,000 for every Canadian,” says Whitelaw. And he says the $5 billion estimate is considered conservative by other watchdog groups.

Well thought out schemes
A good investment scheme is well thought out, with prime targets already identified and a script full of dialogue designed to get you to open your wallet. “One reason fraudsters like investment scams is that the people who are taken don’t even know they’ve been taken until much, much later,” explains Brian Butler, manager of investigations for the Ontario Securities Commission (OSC), an agency whose goal is to ensure efficient and effective capital markets operate with integrity. “By the time the OSC is made aware of the investment scam, the money is often long gone – never to be seen again,” says Butler.

Who makes a good target?
People over the age of 50 have a number of the characteristics that make great marks. They may be more trusting, having grown up in an era when people shook hands and meant it. Fraudsters will tap into a 50-something person who is concerned about having enough to live comfortably in retirement, is frustrated with current interest rates and who generally has a large sum of money tucked away for retirement. A lonely older person with all of these attributes is the best possible scenario. “In some of the larger frauds — where it’s done face to face and a relationship is developed — the fraudster will go shopping for the elderly person, take them to doctor’s appointments at the same time they are draining their bank accounts,” explains Butler.

According to experts such as Whitelaw and Butler, the first line of defence in preventing scams is to be educated about them. Know what to look out for. Whether the fraud is done by phone, e-mail or in person, here are the 10 most common.

1. Internet and telemarketing scams
Any number of the frauds listed on any top 10 list will have one thing in common these days: the initial contact is usually made either over the Internet or by phone. “There is a myth out there about the elderly not being up on technology. We know the Internet is a major tool for the elderly,” says Butler. It’s also a major tool for those trolling for investment scam targets. Victims are approached about everything from investing with an unlicenced securities broker who “cold-calls” (industry jargon for a sales tactic of prospecting a list of people, usually strangers to the salesperson) about a non-existent deal of a lifetime to promoting stocks and pyramid schemes through personal e-mails to “select” clients. “You’ve got to ask yourself why a person would offer you the deal of a lifetime if they don’t even know you,” says Butler.

Next page: Prime bank schemes and more

2. Prime bank schemes
Victims are invited to participate in a confidential trading program involving a major bank’s investment portfolio. The perpetrators claim to be affiliated with well-known financial institutions. Investors are promised huge rates of return with almost no risk attached. Documents sent to enforce the scam are often filled with technical jargon or a confidentiality clause that needs to be signed so that the investor will never talk about it. After handing over a large amount of money to be invested, the victim is sent a cheque for a substantial amount of money. “But it’s not an investment return,” says Butler. “It’s actually a return of their capital just to make it look like an interest payment.” Eventually, the investor stops receiving money, and when she tries to contact the investment group, it’s gone – and so is the money.

3. Pyramid schemes
A pyramid scheme can take many forms but the basic premise is that a participant profits by recruiting new members to join the pyramid. No product or service is being sold, just the temptation of making some major money. It works like this: at the time they’re recruited, new investors hand over a set fee to the person who is bringing them into the scheme, and to the person whose name appears at the top of the pyramid. Then, the “new investor” becomes the recruiter and waits to receive money from his or her new recruits, and from the people they, in turn, recruit. And so it goes, on and on. Unfortunately, because a scheme like this would need a continuous stream of investors, the only people making money in this type of arrangement are those who started it or got in at the beginning. Eventually, the pyramid collapses because recruitment cannot keep up with demand, and those who buy in generally end up losing their initial investment and have been part of perpetrating this illegal investment scheme.

4. Affinity fraud
Seniors are frequent—though not exclusive–targets in this type of fraud. A church, ethnic community or other organized group is often the mark. By hooking one person affiliated with the group into a bogus investment opportunity, con artists ensure good word-of-mouth references, enticing others in the group to invest. To make the opportunity look good, the initial investor will begin to receive great paydays from their investment to encourage them to confide in others and persuade them to get a piece of the action. An affinity fraud is often combined with another type of fraud, such as a prime bank scheme.

5. West African letter scams
This scam has been around for a long time, and the method of delivery has progressed from mail to the fax machine and, finally, to e-mail, which has seen the targets of the scheme multiply enormously because the information can be sent to thousands of people at no cost. Victims receive a letter purported to be from a government official or a relative of a high-ranking government official of a faraway country (traditionally, the nation is African). The writer claims a large sum of money, usually in the tens of millions of dollars, is being held in a bank account, and they can’t access it. Most often, they claim the money was obtained illegally, and they need your help to get the money out of the country. For your trouble, you receive a percentage of the funds, usually 10 to 20 per cent, and all you need to do is keep the matter quiet and help them deposit the cash to your account. The victim is asked for a processing fee and/or their bank information so that the money can be deposited. Once this information has been shared, the victim’s account is drained. “People who are susceptible to this type of scam are those who know a little about what’s going on in the world these days,” says the OSC’s Butler. “If you are watching the news and you see all the wealth of someone like Saddam Hussein, it might seem plausible to you. In about two years, we may start seeing Iraqi letter fraud. The bad guys take what’s current and convert it to their use.”

6. Pump and dump stock scams
A new twist on this fake stock scam sees the victim being suckered twice. The first part of the fraud involves a “securities broker” approaching the investor with a great deal on a stock that is going to be the investment of a lifetime. Usually, the stock is positioned as coming from a U.S.-based company. The brokerage house promotes the stock heavily, sending the price up. Once enough people buy the stock, the brokerage drops the stock, and the price plummets. When the investor tries to sell the stock, she finds the “brokerage” has closed up shop.

The second part to this scam is sometimes referred to as a “boomerang.” The investor is approached weeks or months later by someone claiming to represent a group of clients who want to swap some of their blue-chip stock for some worthless stock in order to get a tax break. The only thing an investor has to do now, says the scammer, is pay the difference between the value of blue-chip stock and the price he or she paid for the now worthless stock. In some cases, victims have paid more than $10,000 to make up the difference. But there is no blue-chip stock and the investor has been swindled once again.

Next page: Locked-in RRSP scams


7. Locked-in RRSP scams
Classified ads promising access to your locked-in retirement account (LIRA), locked-in RRSP or locked-in retirement fund (LRIF) without paying income tax are another way scammers are parting people from their now-restricted retirement plans. These monies usually originate from employer pension plans, and there are rules governing how and when funds can be withdrawn. According to the OSC, the phony deals are usually presented as RRSP loans that take advantage of a tax law loophole. The fund holder is told to liquidate her LIRA or LRIF holdings to purchase shares in a start-up company. The fraudster then promises to pay 60 to 70 per cent of the value of the investment, keeping the rest as a fee for this service.

Such supposed deals are enticing to victims frustrated by being unable to access their pension money. Not only are they promised immediate access to their cash, they’re also told there’s no tax penalty, and they will be holding a promising investment. However, in reality, the stocks are worthless, you receive no cash and you have to pay tax on the de-registered money.

8. Advanced fee schemes
Need money? Got a bad credit rating? Don’t worry — call this number. These are classic lines for fraudsters looking to lure prospective victims into advanced fee schemes. Once you call, you’re asked for your driver’s licence number, social insurance number and bank account statements. When you send in the information, you’re sent application forms for the loan and are required to pay a fee of anywhere from $700 to $1500, QE USUALLY by electronic funds transfer. About three weeks later, when you check your bank account for the funds from the “loan” that were to be transferred in, it’s empty. “At this point, we can only say two things: your identity has been stolen, your money has been stolen, and the likelihood of getting it back is nil,” says the Better Business Bureau’s Bob Whitelaw.

9. Bogus equipment leasing operations
While there are legitimate business opportunities in the equipment-leasing sector, investors should be wary of some recent headline-making scams involving the leasing of vending machines, pay telephones and ABMs. For example, for many retired 50-plussers, the opportunity to own a vending machine that will make big bucks for almost no work is too tempting to pass up. In most cases, huge returns are promised but never delivered, and victims lose the money they’ve invested. The actual setup in the less-than-ethical versions of these business ventures varies: some investors pay a lump sum for a machine and territory and never receive the machine at all; others buy shares in a pay telephone and a designated location, only to find that the spot’s already taken by another machine.

10. Fraudulent offshore investments
One of the reasons these investment frauds are so appealing — and so often, successful — is that many Canadians are concerned about whether they’ll have enough money when they retire. And low interest rates and poor market performance have done little to instill confidence lately. That’s just one of the many ways scam artists are convincing people that taking their money out of Canada and putting it into an offshore account is the way to grow your money exponentially and avoid taxes. Because your money is protected if it’s held in a Canadian account, you automatically forfeit any type of protection once you take it out of the country. Once the “broker” has your money, you have no protection and no recourse by the time you realize the money has disappeared. The fraudster is also banking on investors being hesitant to confess that they have sent money offshore to avoid paying taxes. “There should be a cautionary note when people want to move your money offshore,” says Brian Butler of the Ontario Securities Commission, “because you lose control over it. Toronto is a very sophisticated market, and why would there be better advisers in some Caribbean island than here in Canada?”