Investing Safely

How to avoid investing scams, Ponzi schemes and scandals:
Internet ScamBusters #73

With the news filled with Martha Stewart, WorldCom, Enron, Adelphia, Tyco… the list goes on and on… we decided that this was an excellent time to focus on an issue we’ve been wanting to cover for a long time: investment fraud.

Plus, since Charles Ponzi, known as the father of investor schemes, was born in the month of March, this seems like the perfect time to address the broader topic of investment scams.

We’ll tell you the top investing scams, danger signs to look out for, how to avoid becoming an investing scam victim — and share some additional useful resources with you.

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OK, let’s get to it…

Investing Safely: How to Avoid Investment Scams, Schemes and Scandals

The North American Securities Administrators Association (NASAA) — not to be confused with NASA, the space agency 😉 — has identified the Top 10 scams, schemes, and scandals that investors will most likely face in 2004.

According to Ralph Lambiase, NASAA’s President:

“Investors are facing increasingly complex and confusing scams. Our fight against fraud never stops because each year con artists discover new ways to fleece the public. Sadly, many of the age-old scams still work to cheat victims of their hard-earned savings as well. It pays to remember that if an investment opportunity sounds too good to be true, it usually is.”

Lambiase continues: “Education and awareness are an investor’s first line of defense against investment fraud.”

And that’s the purpose of this issue.

Some investment scams take place on the Internet, and some offline. By understanding the principles of avoiding investing scams and by following the guidelines below, you can reduce your risk dramatically.

Ponzi Schemes

The top scam on the NASAA list is the Ponzi, or pyramid, scheme. Named after Charles Ponzi, who scammed investors out of $10 million in the early 1900’s by promising them 40% returns, these are a big favorite among scamsters.

Ponzi scams work by promising high returns to investors. They use money from new investors to pay previous investors. That leads to excellent testimonials — and everything goes OK for investors… for a brief period of time. However, the scheme inevitably collapses, leaving the vast majority of investors poorer.

The only people who consistently make money are the initial promoters.

For example, you’re asked to put in a sum of money (often up to $5,000) with the hope of getting a lot more in return once you recruit others below you on the ‘pyramid.’

These schemes have been known as the ‘Airplane Game,’ the ‘Dinner Party,’ and other names.

They often include confidentiality requirements (under many different guises) — so you don’t tell someone about the scheme who recognizes it as the fraud it is.

Pyramid schemes are illegal. Nonetheless, they continue to thrive. Last year in Mississippi, a Tennessee attorney and a Mississippi security dealer pleaded guilty to defrauding 41 investors in four states out of $10.2 million.

Senior Investment Fraud

We could easily devote an entire issue to this topic (perhaps we will in the future) — it’s number 2 on the NASAA list.

The fact that interest rates are so low, the stock market so volatile, and that life expectancy has increased are just three of the trends that create the perfect backdrop for rampant senior investment fraud.

Seniors are being targeted with increasingly complex investment scams. These include: CD Alternatives, unregistered securities, charitable gift annuities, promissory notes, variable annuities, viatical settlements, prime bank schemes, and many others.

To learn more about how seniors can avoid these investing scams, visit:


We don’t have space to review the entire Top 10 list from the NASAA. You can find it here:


Investment Fraud on the Internet

Investing scams are everywhere on the Internet. The Net has made it simple — and extremely inexpensive — for scammers to reach millions of potential victims.

Perhaps the most common type of investing scam is called “pump-and dump.”

Con artists send bulk email, use chat rooms, send phony online newsletters, or post messages on Internet stock message boards praising a specific stock, “pumping” the price up.

They often claim that they have “inside” information that they are sharing with you (and thousands — or millions — of other potential victims).

They then “dump” the shares they own, driving the stock back down.

The SEC catches some of these scammers. However, it’s next to impossible to regain the money you lost.

Moral: NEVER buy stock based on a hot tip from bulk email or based on what you read on the investment message boards or chat rooms. The chances are excellent that it’s a scam.

For a more detailed explanation of how “pump and dump” scams work, visit:


6 Danger Signs to Look Out For

1. Fast money – Making money fast is a goal for many people. If you’ve been on the Internet for a while, you’ve probably seen the “Make Money Fast” emails that have circulated for years.

People still fall for this nonsense, and the lure of fast money — with little or no work — lives on.

2. Guarantees – If someone tells you a particular stock or investment is guaranteed to double or triple in price, run.

No reputable financial advisor or stockbroker will ever guarantee a rate of return, unless it’s an investment such as a term deposit or government bond. Every investment carries some degree of risk, no matter how small.

3. Foreign Investments – Certainly not all foreign investments are scams — far from it. Nonetheless, if a foreign investment goes bad, it can be much more difficult to recover any money, since the investment will be beyond the jurisdiction of your country, and will be difficult for officials to investigate and prosecute. Be extra careful.

4. Buzz Words – A hot company that suddenly springs up, offering to capitalize on a current issue (terrorism, child safety, anthrax) may be legitimate, or it may simply be preying on fears to bilk investors. Use the resources at the end of this newsletter to check it out.

5. High Pressure Tactics – If someone (especially someone you don’t know) pressures you to act now, run!

6. Hot Tips and Rumors – Ignore these. Sometimes scammers issue fraudulent press releases as part of “pump and dump” scams. Rely on real facts and official press releases only.

Consider the Source

In the 1980’s, ‘boiler room’ operations employed smooth-talking salesmen to sell worthless stocks over the telephone. This practice continues today, although the Internet is being used more and more because it’s cheaper and faster to contact potential targets.

Whether you receive a hot tip or investment suggestion from a telephone call, an email, a Web site, or Uncle Frank, consider the source. Do you know the source? Do you trust him or her? Does this person have an impressive track record of success?

Even if you answer yes to all these questions, always investigate before you invest. A little bit of extra work can save you a lot of grief!

How to Avoid Becoming an Investing Scam Victim

1. Always do your own research before you invest your money.

2. Check with your state or provincial securities regulator to see if both the investment vehicle and the person who is selling it are properly registered. Also, find out the disciplinary and complaint history of the sales person.

3. Ask for a written prospectus and read it carefully.

4. Avoid investments that involve any of the danger signs described above.

Useful Resources

The Motley Fool isn’t foolish (in the bad sense) at all. It’s an excellent resource to learn and discuss investing, the stock market, retirement, personal finance, and other subjects. One must-see section of the site is the Fool’s School, which provides 13 Steps to Investing, and numerous short articles on finance written in clear, simple language.


The U.S. Securities and Exchange Commission (SEC) has a very good page on “Internet Fraud: How to Avoid Internet Investment Scams” at:


The National Association of Securities Dealers (NASD) has an extensive Web site that lets you check your broker or financial advisor’s background, learn how to file complaints, and view alerts about frauds, scams, and unethical dealings.


We hope you found these tips and guidelines useful. Have a safe and scam free month.