By Andrew Leckey
Old scams don't die. They just modernize.
Thirty-five years ago, my Aunt Elizabeth was stopped in her bank parking lot by a polite young man who explained that he had discovered $500 in cash and was willing to split it with her.
His only requirements were that she provide him with some advance money and her bank account information to enable the transaction.
Her response: "What, do you think I'm crazy?"
But that scam didn't end with Aunt Elizabeth.
In 2005, it is being practiced on the Internet by some crooks who use parking lots only for their new Lexus or Porsche. Millions of their e-mail messages ask us for transaction fees and our personal financial information so that fictitious tens of millions of dollars can be diverted to our personal accounts.
Because he used this infamous "Nigerian advance fee scam" to defraud investors of $2.1 million, a California man was recently sentenced to eight years in federal prison. Another man who cheated 15,000 investors worldwide out of $60 million in an online scheme peddling fake bank debentures was sentenced to five years.
Microsoft Corp. recently filed 117 federal lawsuits against defendants who used mass e-mail and pop-up ads to obtain consumer bank account information, passwords and Social Security numbers. This type of identity theft, known as "phishing," in the old days used to be gleaned from transaction slips and stolen wallets.
"There hasn't really been a really new type of fraud in years," acknowledged John Nester, a spokesman for the Securities and Exchange Commission in Washington, D.C. "And in most cases, the chances of recovering your money are not good, since fraudsters tend to spend it as fast as it comes in."
With oil prices at lofty levels, phony oil and gas partnerships and stocks have appeared as they did during the 1970s Arab oil embargo. So have fictitious alternative energy partnerships and stocks. They continue even as the criminals offering them are being sentenced to prison.
Any news event can translate into a hot scheme for crooks who weave current events with investment fiction. For example, the slightest hiccup in inflation triggers a run of precious-metals scams. There are incalculably more investors available through e-mail, bulletin boards, chat rooms and online investment letters than with traditional letters or cold calls.
"The Internet allows you to create real excitement with bulletin boards and chat rooms as you tout a stock that may be a worthless shell," said Mary Schapiro, vice chairman of the National Association of Securities Dealers in Washington, D.C., who believes investors should equate high returns with heightened risk. "You can also create a sense of urgency by putting together exciting ideas and words in an e-mail that is less likely to be regarded with the necessary skepticism."
Once again, it is old scam wrapped in 2005 technology.
"In stock fraud involving e-mail and letters, the pump-and-dump is the most common," said Nester. "The fraudulent acquire a significant amount of stock in a small company, circulate information that the company is better than it really is and then dump their shares, leaving the people who bought in holding the bag."
A quality counterfeiter never goes out of style.
"One major scam is the promissory note in which the investor is lured by the great return on a very realistic-looking note that turns out to be totally phony," said David E. Robbins, securities attorney with Kaufmann, Feiner, Yamin, Gildin & Robbins LLP in New York City. "We live in a trusting society and, unfortunately, thieves continue to take advantage of our trusting nature."
Senior citizens are favored targets, just as they were in Aunt Elizabeth's day. The graying of the baby boomer generation has criminals smacking their lips in anticipation. This demographic group has amassed considerable money, and not all of its members are entirely savvy about investments.
"Abuse of workers who retire after 30 years with a company and roll their pension assets into individual retirement accounts has become a growing concern," said Brian Smiley, an attorney with Gard Smiley Bishop & Dovin LLP in Atlanta. "There are brokers and planners trying to separate these people from their money."
Unrealistically high returns tempt some seniors who are in the dark about investments. The scam artists lure the seniors to shift their money into inappropriate vehicles with high sales commissions and surrender fees, such as variable annuities within IRAs, said Smiley.
One of Smiley's recent clients is a phone company retiree who went to a four-week financial strategy seminar at a local university. The instructor, a broker, touted an investment at a financial firm, and Smiley's client decided to move her retirement money into it. Only later did she discover that both the seminar and the investment firm to which she was directed were part of the same company.
Research potential investments and those selling them before you invest. Check out disciplinary records of brokers and advisers on the online database of the SEC (www.sec.gov). The NASD (www.nasd.com) also provides background on brokers. Both organizations have online complaint forms on their sites. The SEC's Edgar database (www.sec.gov/edgar.shtml) includes information on a stock and its required filings. In addition, you can obtain information from your state securities regulator.
Editor's Note: Andrew Leckey is a regular contributor to The Bull & Bear Financial Report.
