Field of Schemes: Investment Scams Sprout New Hybrids

“Do you understand that the only guaranteed revenue on the Internet is from ISPs (internet service providers)?” said the scam artist. He was talking to a representative of the National Tape Library, a national library of audio tapes of telemarketing calls maintained to assist civil and criminal law enforcement agencies. “And that there is such a demand right now that we could turn something — I mean, heck, if you — we’re not talking 500 — 500 percent . . . We’re talking 53 — excuse me — 57,000 percent! We’re talking in terms of returns that are just, I mean, they’re astronomical!”

What a deal! Better get in quick, right? Wrong! Better be careful because investment fraud is spreading to new fields — from movie productions to Internet “shopping malls” to breeding snails for snail ranching — and more traditional investment scams, such as pyramid schemes, are also on the rise.

In 1995, 22 state securities agencies and the FTC responded to the alarming surge in paging license and “900” number complaints by establishing “Project Roadblock.” In 1996, the partnership struck again with a coordinated crackdown on the latest generation of high-tech, information superhighway scams. Now — July 2, 1997 — securities regulators from 21 states, two Canadian provinces, and the U.S. Federal Trade Commission (FTC) have announced “Project: Field of Schemes,” a campaign comprising 60 law-enforcement actions from coast-to-coast.

Field of Schemes is designed to help mow down some of the newest hybrids as well as the age-old favorite telemarketing investment frauds that are bilking small investors out of an increasing share of the estimated $40 billion lost to telemarketing fraud every year.

Scope of the Problem:

Here is a sample of the kind of cases turned up by Project: Field of Schemes:

The Pennsylvania Securities Commission has issued a Cease and Desist Order to Global Financial, also known as American Benefits Consultants, an organization that offered and sold “Commercial Promissory Notes” at $25,000 per note to supposedly finance and develop international projects. These included “constructing state-of-the-art medical facilities in Hungary,” a “water treatment facility in Zaire,” and “roadways and infrastructures in war-torn Bosnia.” The notes offered a supposed 10% interest.

The British Columbia Securities Commission has permanently banned Goldman Stanley Consultants, Inc., and three associated companies from participating in the securities market. The four companies illegally distributed to BC residents foreign exchange contracts — securities that carry substantial risks. The forex contracts were sold without a prospectus by unregistered individuals. In addition, trading activity was not being carried out as represented to clients, account statements were falsified, and funds were misappropriated. Andy Chan, who controlled all four companies, was banned from participating in the securities market for 30 years and fined a $100,000 penalty.

The Iowa Securities Bureau reports that it has taken action against U.S. Snail and Shane Farnsworth, who offered to sell and sold an unregistered business opportunity that involved the sale of breeding snails for snail ranching. According to the company’s sales literature, “Helliculture (snail ranching) has become one of the newest and fastest growing business fields in the United States,” a “financially rewarding experience” for housewives, retired people, the unemployed, or business people.” Advantages are that “snails are easy to breed, easy to handle and multiply rapidly.”

The Massachusetts Securities Division alleges that EZ-Score, a company that promotes itself as producing a basketball training machine used by athletes to better their game, has fraudulently taken investor money. According to the complaint, a 34-year-old Waltham woman saw the product demonstrated at a trade show in Boston. After being promised a return of 8% plus 600 shares of stock in the company, she invested $6,000. Yet three years later, the investor has not received any payment or securities and company President Richard Chipperfield has not returned repeated phone inquiries.

The Missouri Securities Division has charged Millennium Processing Systems of Newport Beach, California, with unregistered sale of securities and employing an unregistered agent. Millennium offers ATM terminals that can not only conduct credit card and smart card transactions, but also charge and recharge prepaid phone cards. A salesperson described the investment as being “a ground floor opportunity on the cutting edge of new emerging technology in the telecommunications and electronic banking industries.” The investment was described as yielding a 33% annual return for four years, after which time the initial investment would be returned, equaling a minimum profit of 132%.

According to the FTC, telemarketers for two Sherman Oaks, California, companies projected as much as a 10-to-1 return on investments in the unregistered common stock of a company raising $1.98 million to reopen a gold mine in La Plata, Colorado. They allegedly misrepresented that the federal government confirmed the mine contains millions of dollars worth of gold and that the proceeds from the offering would be used to finance the purchase of mining equipment and for extracting and processing the ore into gold. In addition, they falsely claimed that Exxon and Mitsubishi are interested in acquiring the mine, the FTC alleged. Investment units sold for $15,000 each.

Questions to Ask Before You Invest: Fraud is always a possibility, even with secured, regulated investments. Before investing, ask tough questions, both of yourself and those who are soliciting your investments. If the answer to any of these questions is “no” — or if the answers are vague or complicated — more likely the investment being pitched is a fraud.

• Is the company I’m investing in registered to sell securities?
  Be cautious if the company selling you stock, assets, or partnership units has not registered its securities. Companies that register their securities file prospectuses and annual reports with securities regulators. If a promoter tells you that your investment is “structured” to exempt the securities of the company from registration, you may be dealing with an outfit that’s purposely avoiding contact with regulators.
• Is it “too late” if I don’t invest my money now?
  Using sales scripts, scam artists create the impression that only a few shares of stock or partnership units are left. They try to convince you that you’ll miss out on a big opportunity if you don’t send them thousands of dollars by overnight courier or wire transfer. Once you give your money to a scam artist, it may be too late to get it back.
• Does the investment have a track record?
  Claiming that their “opportunity” is similar to those of “hot” entrepreneurs, scam artists often use news stories about the success of legitimate companies as bait. Unfortunately, success stories of other companies in the field are irrelevant for your purposes. Get the track record of the company you’re considering investing in and the background of the people promoting it.
• Where is my money going?
  Legitimate companies account for investors’ money at all times. Ask for written proof of how much of your money is going to the actual purchase or development of the opportunity and how much is going to commissions, promoters’ profits, and marketing costs. If most of your financial investment is slated to cover expenses and costs, much less will be available to earn a return. Telemarketing is particularly expensive; if you are investing in a telemarketed investment, how much are your brokers getting paid to talk to you?
• Do I have an independent, knowledgeable, trustworthy person who can advise me?
  Get an independent appraisal of the specific asset, business or venture you’re considering. An appraisal offered by the party selling the investment opportunity can be fake. Talk to the previous owners of an asset or a business you’re acquiring for its value history. Discuss all investment ideas or plans with an accountant or an advisor you know and trust.
• Do I know who I’m dealing with?
  Can you find published information about the company in which you’re investing, proof that the company has registered the securities it is selling with a government agency (if required), or someone you trust who has heard of the company? Have you checked with your state securities agency to see if the promoter or sales person is licensed to sell securities in your state or province, if required? If not, be cautious. You’re giving your money to strangers. Checking law enforcement agencies and Better Business Bureaus in the community where promoters are located is prudent, but not fool-proof. It may be too soon for the company’s victims to realize they’ve been defrauded or to have lodged complaints with the authorities. In addition, fraudulent promoters can lie about their name or their business history or even pay people to be “references.”
• Can I tell a genuine company from a fictional one?
  Don’t let appearances fool you. For a few dollars, anyone can incorporate an entity. Personal computers and desktop publishing software help scam artists produce slick promotional materials. Phone service providers can put toll-free telephone numbers in homes.
• Did my sales representative tell me the risk of losing my money was high?
  Sales representatives should tell you the risk of particular investments. Be particularly suspicious of sales pitches that play down risk or portray written risk disclosures as routine formalities that say you could lose your whole investment. When your money is gone, fraudulent investment promoters often use “risk disclosures” against you.
• Can I be certain a promoter is not lying to me?
  Scam artists lie. Their success depends on having an airtight answer for everything. They inflate the costs and value of worthless investments. They promise you profits years down the road so you won’t find out that your investment is a scam until long after they’ve disappeared with your money.
• Do I know when something is too good to be true?
  Investing is risky business. Anyone who tells you an investment is likely to turn a profit quickly should have a basis for the claim. Demand written proof of profit projections from independent sources. Be especially wary when someone tells you profits will be big enough to offset the risk of investing.

For help and more information:

The oldest international organization devoted to investor protection, NASAA was organized in 1919. It is a voluntary association with a membership consisting of the 65 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, Canada, and Mexico. In the U.S., NASAA is the national voice of the 50 state securities agencies responsible for the promotion of efficient capital formation and investor protection.

If you want to check out a potential investment or salesperson, call or write the securities agency in your state, province, or territory before you make out your check. For a phone number or address, call the North American Securities Administrators Association at (202) 737-0900. Contact information is also available on the association’s web site at www.nasaa.org.

FTC brochures and other information are available at their web site at www.ftc.gov and also from the FTC’s Public Reference Branch, Room 130, 6th and Pennsylvania Avenue, N.W., Washington, DC 20580; (202) 326-2222; TTY for the hearing impaired at (202) 326-2502.

Issued July 1997

This publication was compiled by the North American Securities Administrators Association and the Better Business Bureau and is furnished to you by the Texas State Securities Board.