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Department investigations often concern the offer or sale, without registration, of securities subject to the registration requirements of the Illinois Securities Law. The Department also investigates allegations of misrepresentation or omission of material facts concerning securities offered for sale, whether registration is required or not. It's important to recognize, however, that under Illinois Law, each investor must take responsibility for reviewing the details of any prospective investment. Under the law fraud is illegal, but simply making a bad (or careless) investment is not. As long as consumers are provided full disclosure about a particular investment opportunity, they can choose to invest in whatever they wish without government interference. But the fact is that not all investments are what they seem. Some may be misleading, or may not fully disclose all the risks, while others may be downright fraudulent. Consumers should realize that fraudulent schemes are more common than most people realize, and they may be difficult to spot. No one is immune from a scam. |
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Improper Practices/Self Dealing It's important to remember that consumers can lose due to fraud, self-dealing or incompetence on the part of the "investment professional" with whom they are dealing. Fraud typically involves the inducement of investors into a scheme that sounds too good to be true --- and is --- and that was never intended to benefit anyone but the con artist who put the plan together. Though cases involving fraud appear to be the most egregious, a more common and often equally abusive practice is that of self-dealing by an investment professional. That is the practice of recommending products --- typically that are very risky for the investor --- that generate high commissions for the advisor or broker, but may be quite unsuitable for the client's needs, risk tolerance, or investment goals. And, of course, the development of a comprehensive, well-structured financial plan that meets the client's financial goals and is suitable to his or her risk tolerance requires considerable skill. Accurately discerning who has such skills can be difficult at best. Ponzi and Pyramid Schemes Many times fraudulent schemes are variations on basic "Ponzi Schemes". Early investors are simply paid so-called gains out of money put up by later investors, and the process continues until the bubble finally bursts. The scam is named after Bostonian Charles Ponzi whose swindle took place around 1919. His original plan was to make a profit by purchasing international Postal Reply Coupons in countries where there was a weak currency and then selling them in the US. The profit on this venture was originally supposed to be provided by the difference in the exchange rates. Ponzi promised his investors a return of 50% on their investment within two months. The problem was that the coupons were only available in limited quantities --- Ponzi actually only purchased about $50 worth. And, of course, Ponzi became greedy --- because of the high interest rates he was promising, people were knocking down his door to invest. Since the original business plan would not support the payments, Ponzi began paying original investors with the money he received from new investors. When the authorities finally stopped him, he had fleeced Bostonians for an estimated $10 million--a lot of money today, but but even more in 1919! Other scams may be a "Pyramid". These are similar to Ponzi schemes, but the sale of a presumed product is secondary in this scheme to the recruitment of new members. Variants of the Pyramid scheme include the "airplane" investment game and the "friends network gifting program". Regulators have seen updated versions involving networking via computer electronic mail messages, which promise returns of $60,000 for a $5 investment. In 1994, the SEC shut down a company called European Kings Club, alleging it to be a fraud that raised $1.4 million in 18 states. The club and its affiliates sold club "memberships" for $100, which allowed investors to purchase "letters of investment" for $1,400 each. The letters "guaranteed" monthly payments of $200 for 12 months-- based on the continuing recruitment of new "members". Telemarketing/Cold Calling A vast variety of telemarketing scams have used banks of telephones in packed "boiler rooms" to generate hundreds of "cold calls" a day to potential victims. Consumers may be contacted by a telemarketer if they have responded to a newspaper ad, or filled out a card asking for more information about an investment. Or consumers might be called "cold" -- with their name taken from the phone book or a list of credit card holders. Most telemarketers are very good at what they do. They can use persuasive sales pitches that might weave together facts and half-truths for added credibility. The basic sales pitch of a telemarketing scam will almost always contain three elements:
Penny Stocks Investors in penny stocks are believed to lose all or some of their investment 70% of the time. Some authorities believe that the presence of fraud in that market may push the figure up to 90%. Eight years ago, 55 penny stock firms were headquartered in just six states. Today an estimated 325 penny stock firms have set up main offices in 29 states, employing several thousand brokers at more than 1,000 branch offices that now reach into America's smallest communities. One of the most notorious penny stock firms of the 1980's was First Jersey Securities. That firm was closed by the SEC in 1987 and its founder and chairman, Robert Brennan, was ordered to pay $71.5 million for defrauding clients in a manipulation scheme. The SEC charged that the firm created an artificial demand for the securities of six companies because First Jersey was orchestrating both the buying and selling of the securities. The federal court judge noted that the proven scheme was probably only the tip of the iceberg, as First Jersey had over 500,000 customer accounts and a sales force of 1,200 brokers during its heydey in the mid 1980's. The judge described the scheme in detail and noted that Mr. Brennan was "completely without remorse." Indium A recent scam (from 1993) involved investment in a metal called indium. Indium is a soft metal found in zinc and copper ores, and is captured during the refining process. It has a variety of industrial uses, such as in fiber-optic communications systems, digital watches and as a transparent glaze on some energy efficient windows. There is not, however, (and never has been) any investment market for indium. Yet in 1993, boiler rooms based in Toronto and the Caymen Islands (strategically located to be outside the reach of US regulators) were calling Americans to invest in indium -- for anywhere from $40 to more than $80 a tri-ounce. The scam would work with the con artist first asking for only a modest investment -- perhaps $500 or $1000. Then he would ship the victim the indium by courier service (avoiding the US Mail and the inquiries of Postal Inspectors). A few weeks later, the con artist would call the victim again and report a spectacular rise in indium prices. He pitched an investment of $10,000 or more. Since indium wasn't traded on the commodities exchanges or anywhere else, there was no way for the victim to check the price. Then the con artist would abruptly disappear leaving the victim to eventually find there was no way to sell the indium at the price he paid. And, because the con artist actually delivered the metal to the victim, they could dodge the charge of creating a phony security, or a futures contract. Wireless Communications One of the newest areas of investor fraud involves the sale of wireless communications investments --- usually operating through a telemarketing operation. Promoters offer prospects the chance to invest in a wireless cable franchise for a given metropolitan area. Typically in these scams the companies don't have any wireless franchises actually operating and 50% or more of the investors' money goes directly to sales commissions. The State of California has estimated that in Southern California alone, some 30 boiler rooms have taken in roughly $30 million a month with this scam. Nationwide, authorities estimate that tens of thousands of Americans have been swindled of more than $1 billion by wireless cable schemes. Over 265 companies are under investigation nationwide, with legal actions already taken against more than 100 firms. In January, 1996 the Department joined with the FTC (Federal Trade Commission) and securities regulators from 21 other states in announcing a cooperative effort to combat investment schemes in emerging telecommunications systems --- including FTC-awarded paging licenses and pay-per-call "900 number" partnerships. A total of 85 enforcement actions --- 4 in Illinois --- were announced collectively as "Project Roadblock", a nationwide crackdown on unregistered, allegedly fraudulent offerings seeking to raise a quarter of a billion dollars from consumers. Affinity Fraud Unfortunately, one of the hottest frauds in the 90's is "affinity fraud." Con artists use affiliation in some professional, political, religious or ethnic group to hook victims who let down their guard. Remember, these people are called con artists, because their goal is to gain the confidence of their victims. By tailoring their pitches to the hopes and dreams frequently shared by members of particular groups, they are often able to sway people who are normally not gullible. When approached by someone they know, from church or a club, consumers may fail to adequately check out someone's pitch. Re-Load Scams While many consumers have learned to be wary of some of the classic scams in the market, investors also need to be aware of so-called "reload" scams. These swindlers offer to retrieve money that victims have lost in previous scams. They may have names like "Consumer Retrieval Network" or purport to be a law firm or a nonprofit organization. These firms often claim the company that swindled the victim has gone into bankruptcy and they can retrieve the lost money for them. The reloaders convince the victims they can retrieve the money for a fee, or they ask for the customer's credit card or bank account number for "verification." DISCLAIMER |
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