COMMON INVESTING SCHEMES
Almost every case that leads to a criminal prosecution involves an unlicensed person selling securities. To verify that a person is licensed or registered to sell securities, call us. If the person is not registered, ask the person why not. If all people followed this advice, it would end a great deal of securities fraud.
Pyramid schemes are fraudulent because compensation is primarily derived from the fees paid by new recruits to the scheme, rather than actual profits. Participants have to recruit others to the plan to make money. As participants join, additional people must be recruited so that current participants can be paid. The pyramid eventually collapses because participants exhaust the pool of new people available and willing to join. Often goods or services are offered in an attempt to appear legal. If more money is raised by recruiting than by sales, be wary.
Investment fraud involving the payment of returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors thereby creating the false appearance that investors are profiting from a legitimate business.
Many scammers use their victim’s religious or ethnic identity to gain their trust—knowing that it is human nature to trust people who are like you. They then steal a person’s life savings. From “gifting” programs at some churches to foreign exchange scams targeted at Asian Americans, no group seems to be without con artists who seek to exploit others for financial gain. In the last ten years, we have prosecuted affinity fraud cases involving churches, ethnic groups, the lesbian community, chambers of commerce, and even farmers and ranchers.
Debt instruments that promise a return of principal and interest often take the form of a promissory note because it is a promise to repay a loan. Promissory notes are only as good as the person or company making the promise. Often interest rates offered are unusually high and guarantees of little or no risk are a lie. If a promissory note is created for investment purposes, it is likely a security and should be registered.
Scammers use the wide reach and supposed anonymity of the Internet to “pump and dump” thinly traded stocks, peddle bogus offshore “prime bank” investments, and publicize pyramid schemes.
These higher-yielding certificates of deposit will not mature for 10 to 20 years, unless the bank, not the investor, “calls” or redeems them. Redeeming the CD early may result in large losses—upwards of 25 percent of the original investment. In Iowa, for example, a retiree in her 70s invested over $100,000 of her 97-year-old mother’s money in three “callable” CDs with 20-year maturities. Her intention, she told her broker, was to use the money to pay her mother’s nursing home bills. Regulators say sellers of callable CDs often do not adequately disclose the risks and restrictions.
Originated as a way to help the gravely ill pay their bills, these interests in the death benefits of terminally ill patients are risky and sometimes fraudulent. The insured gets a percentage of the death benefit in cash and investors get a share of the death benefit when the insured dies. Because of uncertainties in predicting when someone will die, these investments are extremely speculative.
Scammers promise investors triple-digit returns through access to the investment portfolios of the world’s elite banks. Purveyors of these schemes promise access to the “secret” investments used by the Rothschilds or Saudi royalty. In North Dakota, the United States attorney recently indicted three men, including a local pastor, of using religion and family ties to bilk investors in a prime bank scam.
The metaverse is a term that generally refers to online virtual worlds that stand alone or are interconnected. Regulators have seen an uptick in persons purchasing “cyber real estate” for investment purposes, often through fraudulent means. In one instance, Russian cyber criminals created a Flamingo casino, branded almost identically to the Flamingo Hotel in Las Vegas (thus giving it an aura of legitimacy), to entice investors to purchase virtual restaurants, rooms, and real estate.
Cryptocurrency schemes often use get rich quick schemes to find investors who do not understand the technology. In a Montana case from 2018, a cryptocurrency developer claimed to have contracts with large companies such as Apple and Amazon, and if a person would buy their software and their hardware, they could mine their token. The claims were fraudulent, and the CSI Securities Division quickly shut the company down in Montana. In another instance, many crypto-traders went bankrupt when the price of various cryptocurrencies plummeted and the cryto-traders did not have enough money to pay the persons who were attempting to liquidate their assets.
Promoters of precious metal purchases often take high commissions (sometimes as much as 40%), without disclosing these costs and without giving the purchaser actual possession of the metal. In a recent case, over 40 states and the CFTC took action against a company who had encouraged persons to set up self-directed IRA’s to fund the purchase of these metals. The investors did not have access to the metals, and the firm had received an undisclosed 30% commission from the sale.
Seminar hosts connect with the public in many different ways. Frequently these hosts utilize mailers to edlerly people to advertise free dinners. They then encourage these persons to liquidate safe investments in order to buy the product they are pitching. These seminars can also be marketed through newspaper, radio, and TV advertisements and “infomercials” on cable television.
Often the people getting rich are those running the seminar, making money from admission fees, and the sale of books and audiotapes. Regulators urge investors to be extremely skeptical about any get-rich-quick scheme. We also encourage you to check with the CSI to determine if the person hosting the seminar is registered.