With interest rates at 30-year lows and the stock market setting record highs, many investors — especially older Americans who depend on interest and dividend income — are vulnerable to con artists pushing an old scheme — bogus “prime bank” investments that promise “risk free” annual returns of 20 percent to 200 percent or more. The investments — supposedly debt obligations guaranteed by the world’s top 100 banks, or “prime banks” — are costing investors tens of millions of dollars, say state securities regulators.
In recent months securities regulators in at least 12 states and one Canadian province have brought actions — ranging from cease and desist orders to criminal convictions — against 33 companies or individuals offering supposedly safe and lucrative prime bank investments, according to the North American Securities Administrators Association (NASAA). The Securities and Exchange Commission (SEC) took at least 11 actions this year against prime bank fraud, up from 5 actions in 1996.
The schemes go by many names: bank secured trading programs, high-yield investment programs, standby letters of credit, prime bank notes. The common denominator: all are supposedly debt obligations guaranteed by the world’s top 100 banks, or “prime banks.”
Con artists claim only big corporations, foreign banks or ultra-wealthy investors know about them. In Idaho, regulators say con artists tried to lure investors by suggesting that a “Saudi oil sheik” and “the Onassis family” were poised to invest in the same prime bank trading program.
“They’re pitched as secret trading programs that the Rothchilds and Rockefellers set up years ago, which are only offered to the elite,” says Tony Taggart, Utah’s Securities Commissioner. “They’re supposedly so secret not even the traders are identified. The real reason is because there are no traders.” Adds Marilyn Scanlan, Bureau Chief of Idaho’s Department of Finance, “This market is purportedly so secret that investors are told not to independently investigate the offering or risk being permanently expelled from participating in these markets.”
Prime bank schemes are a recurrent securities fraud, say regulators. “Like wide and narrow ties they go in and out of fashion and now they’re back in style,” says Peter C. Hildreth, NASAA President and New Hampshire’s Director of Securities. In 1993 federal regulators, including the Federal Reserve Board and the Comptroller of the Currency, issued a joint warning about prime bank investments.
Many prime bank scam victims are senior citizens. In Missouri two elderly women in nursing homes, aged 90 and 87, invested a total of $300,000 in bogus prime bank debt obligations.
Con artists claim the money goes to finance international investments such as roads and health care facilities. In fact, the stolen money goes to mundane purposes. Utah regulators allege a Jupiter, Florida man spent $50,000 raised in an alleged prime bank scheme on mortgage payments and a Jeep sport utility vehicle. The man is scheduled to go on trial for securities fraud in February.
Not just individuals are scammed. In New Mexico, say regulators, the city of Clovis lost $3.5 million in a prime bank scheme. County treasurers and small town finance officers are prime prey, according to Michael J. Vargon, Deputy Director of the New Mexico Securities Division.
Con artists reach investors in different ways — over the phone, in person and via the Internet. In Kansas a dozen potential investors gathered in a meeting room at the Holiday Inn at the Wichita Airport and were told about a prime bank scheme purportedly designed to raise money for the International Monetary Fund. The minimum investment was $25,000, which they were told would yield $1.9 million in two years. Investors in New Mexico and Pennsylvania were solicited over the Internet.
The schemes cost investors tens of millions of dollars, state regulators estimate. In Washington state, one scam raised more than $1.7 million from at least 28 residents. In the Canadian province of Saskatchewan six scams regulators investigated were believed to have cost investors $5 million (Canadian). “The actual amount (of losses) could be much higher,” says Vic Pankratz, Saskatchewan’s Deputy Director of Enforcement.
These investments violate a cardinal rule of finance, says Ryan Ushijima, Hawaii’s Commissioner of Securities. “The simple rule of investing is the higher the possible profit the higher the risk. If anyone claims that a high yield investment has no risk, don’t believe it.” Ushijima also cautions investors not to be hasty. “A solid investment will be around tomorrow — after you’ve had time to thoroughly check it out with your state securities regulator and independent financial experts.”
States taking recent action against prime bank frauds include Alabama, Arizona, Hawaii, Idaho, Kansas, Missouri, New Mexico, Ohio, Pennsylvania, Utah, Washington and Wisconsin.
Commenting on a prime bank action his staff brought, Mike Burton, Director of Arizona’s Securities Division, warned: “There are no risk-free returns of 18 percent; not with 30-year Treasury bonds yielding 5 percent today.” Some investors, however, probably will disregard regulators’ warnings. Says Dave Wayment, investigator with Utah’s Division of Securities: “There is a group of investors who insist on believing that there are ‘secret’ investments which pay high returns with no risk; this is just a fantasy.”
Issued December 1998
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.
