Investment Fraud

E*Trade, Discover Brokerages, Datek Online, and a host of other investment firms have made their presence felt on the Internet. Maybe you have already started investing online or are considering getting into the market. While it's great that the web has made financial planning and management services more accessible to the public, this doesn't mean you shouldn't be wary of investment schemes pitched online. The FBI has conveniently provided a list of some common fraudulent investment schemes that often appear in web ads or spam e-mail. Help2Go has translated the Bureau-speak into layman's terms so you can steer clear of these scams.

In this Help2Go article, we'll cover four types of fraudulent investments which may one day show up in your web browser.

Ponzi Scheme (Pyramid Scheme)

What it is: A "Ponzi" scheme is essentially an investment fraud wherein the operator promises astronomical dividends for "nontraditional" investments. Investors are strongly urged to bring family and friends into the investment group.

The pitch: Ponzi schemes are usually advertised through friendly-sounding spam e-mail: "I didn't think making money could be this simple... but it IS!? The nature of the investment is often vague and emphasis is solely placed on the incredible rate of return.

The scam: The "dividends" paid to initial investors are actually comprised of money invested by new victims of the scheme (those who enter later than the initial group). This second group of victims is the family and friends you may have recruited. The racket breaks down when the operator flees with all of the proceeds, or when the necessary number of new investors cannot be lured into the plan. Without new investors to provide 'dividends' for older members of the scheme, the cash flow dries up.

For those who love trivia, you can tell your friends that this type of fraud is named after Charles Ponzi of Boston, Massachusetts, who operated an extremely attractive investment scheme in the early 1900's. Ponzi guaranteed investors a fifty percent return on their investment in postal coupons. Although he was able to pay his initial investors, and pocketed the remaining money, the plan dissolved when he was unable to pay investors who entered the scheme later.

Bottom line: Help2Go has said it before, and we'll say it again: No one does legitimate business through unsolicited e-mail! Dump it in the trash immediately. Do not respond, even if you'd like to fire a few choice expletives in the spammer's direction.

Micro-Cap Stock

What it is: Micro-Cap stock fraud is considered to be the latest incarnation of high-pressure penny stock marketing. Penny stocks are defined under federal law as a publicly-traded stock valued at less than $5 per share, or are stocks that are not listed on any national securities exchange nor traded through NASDAQ. These stocks are for companies with market capitalization of less than $300 million. These Micro-Cap stocks exist within the vast underworld of the securities markets that are exploited by perpetrators of fraud, including organized crime.

The pitch: Because of the minimal initial value of the stocks, the potential profits are considerable. Micro-Cap fraud typically involves high-pressure sales tactics in spam e-mail and Internet web sites promoting risky and low-priced stock. Potential Investors are quoted astronomical returns on initial investments. Micro-Cap "brokers" may also lurk within chat rooms or post to newsgroups concerned with investment discussion.

The scam: Many Micro-Cap stocks are risky stocks issued by startup companies with little or no earnings, often technology-oriented companies. These risky ventures depend on Micro-Cap stocks as a source of capital, since they cannot attract well-established investors. These Micro-Cap stocks exist within the vast underworld of the securities markets that are exploited by perpetrators of fraud, including organized crime.

Because they are not traded on major exchanges and thus have none of the mandatory safeguards or investor protections, Micro-Cap stocks are susceptible to fraud and manipulation. It has been reported that the losses to Micro-Cap fraud exceeded $6 billion per year. Micro-Cap schemes often ignore the reporting requirements of the Securities and Exchange Commission (the SEC) and employ market manipulation of the stock price. Foreign bank and brokerage accounts may be used to hide the fraudulent nature of the broker.

Bottom line: Avoid the "get rich quick" sales pitch. Even if the investment itself is legal, it will be very risky and you have no authority like the SEC monitoring activities. Stay out of "investor" chat rooms and don't bother with web sites that provide "hot stock tips".

Prime Bank Note Scheme

What it is: These investments are touted as if they were issued by well-known domestic or foreign financial institutions such as the World Bank, or a national central bank. The financial instruments may be sold in the form of bank notes, letters of credit, or debt acquisition.

The pitch: "Brokers" make projections of high rates of return, claims of 'risk free' status or drop hints that the investments are made on a secret international exchange of which the general public is unaware. Prime Bank con artists will often state that these investments are approved and/or sanctioned by the Federal Reserve, the International Chamber of Commerce (ICC) or other known international organization.

The scam: With the globalization of the securities and commodities marketplace, old investment fraud schemes have found new life using the Internet. The pitchman may mention organizations such as the World Bank, the International Development Bank, or the central bank of a third world nation. Official-looking documentation or government seals are part of the scam. These legitimate institutions have nothing to do with the "Prime Bank" offers. Money put into these phantom investments disappears with the broker.

Bottom line: Yes, there is a legitimate market out there for buying foreign debt or bank notes, but unless you have a degree in international finance, steer clear of this investment field.

Foreign Currency

What it is: Other investment schemes involving solicitations of the Internet are related to trading of foreign spot currencies (daily fluctuations in currency value). The investor is betting on which way the value of a currency will move in relation to the US dollar, capitalizing on movements of the exchange rate.

The pitch: The schemes include claims of high rates of return, the relative safety of principal, and the liquidity of worldwide exchanges. The fraudulent traders display phenomenal earnings forecasts on their websites.

The scam: This kind of speculation is risky enough when the broker is legitimate. Federal law requires that legal currency futures traders and trading firms be registered and monitored by federal regulators. Unfortunately, foreign spot currency exchanges deal in the interbank market. Such traders and trading firms are not under the same scrutiny. With fraudulent traders, little or no currency exchange actually takes place. Your money disappears into the trader's bank account.

Bottom line: Again, this is risky stuff. You CAN make money through currency speculation, albeit at great risk. But with scam artists involved, you have no chance at all.

Conclusion

If someone tried to get you involved in a get-rich-quick scheme, chances are you are just waving good-bye to your hard-earned cash. High-return investments are almost always high-risk, and if you cannot afford to lose that money, you better keep it in a low-risk investment.

Investment schemes you find online are shams -- don't get caught up in one. If you are solicited through e-mail, take extra care to avoid any contact with these people. No one does legitimate business though unsolicited e-mail.

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