The Pier Shareware 6/The_Pier_Shareware_Number_6_(The_Pier_Exchange)_(1995).iso/017/investba.zip/SCM.TXT

Text File | 1994-10-15 | 10KB | 180 lines

                Recognizing the Signs of an Investment Scam


               The lure of a quick buck is all around us, and may
          seem quite irresistible -- especially now.  With money
          tight and investment returns headed nowhere (if not
          down), that alluring offer guaranteed to make you a
          millionaire can paint a very pretty picture indeed.
               However, in most cases, these pictures need some
          serious reviewing, and investors should be extremely
          wary.
               In some cases, the pitches are simply gross
          exaggerations.  Money can indeed be made -- but it's
          not as easy, or as quick, as promoters make it sound.
          Other deals are nothing but scams, underwritten by con
          artists intent on using your money to underwrite their
          retirement.

          An appeal to greed

               So, how do you spot -- and avoid -- these
          dangerous pitches?  Here are some of the warning flags:
               1.  Promised investment returns that are
          substantially higher than average.  Every percentage
          point increase above the going Treasury bond rate
          should be considered an increase in risk.  When an
          offer promises risk-free returns to 10 percent above
          the Treasury rate, you shouldn't only be seeing flags,
          you should be hearing sirens.
               2.  "Now-or-never" sales pitches, or "limited-time
          offers."  Promoters give you this special opportunity
          now, but can't guarantee they'll be able to "hold your
          spot" -- even for an hour.  Why?  If you think about it
          too long, you might come to your senses, so they want
          your check or credit card number now.
               3.  Solicitations (usually phone pitches) from
          unlicensed companies.  Before handing over your money,
          you should know a lot about the company you're
          investing with.  Check it out with a federal or state
          agency that registers or licenses businesses, like the
          Department of Corporations, the Department of
          Insurance, the Secretary of State or the Securities
          Commission.
               If you can't find the company through inquiries
          there, how easily do you think you'll find your money
          once it's gone
               4.  Offshore companies.  Unfortunately, the many
          legitimate advantages offered through investing with
          offshore banks or corporations have sometimes been
          over-promoted by unscrupulous con artists, all too
          ready to relieve you of your assets and then hide
          behind the same blanket of financial privacy you wanted
          to enjoy for yourself.
               You should thoroughly investigate any agency or
          organization offering assistance with offshore
          investments.
               Deal only with long-established firms of proven
          reputation, and request references before entrusting
          your hard-earned money to anyone who claims to be an
          "expert" in the offshore investment field.
               5.  Beware the glib response.  You know the adage,
          "if it sounds too good to be true, it probably is."
               So ask, "If this is such a sure-fire deal, why are
          you offering it to me?  Why won't the banks touch it?"
          Con artist response: "It's such a complex deal the
          banks don't understand."  This is one of the great lies
          of investing.  Banks understand only too well.  It's
          their job.  If they won't touch it, you probably
          shouldn't either.

          Some precautions to take

               Given those dangers, here are some steps you can
          take to ensure you don't wind up the victim of a scam
          artist:
               1.  Don't invest with someone who just calls over
          the phone.  First ask yourself why the called you, and
          where they got your name.  Get a prospectus first,
          which should provide a detailed analysis of the deal
          and its risks.  Never send money or give out a valid
          credit card number without it.
               2.  Check out the company and its officers.  Know
          who you're investing with and what their history is in
          the business.  Many scammers go from one con to the
          next -- and they leave a legit trail behind them.
          Check your wheeler-dealer out with governmental
          agencies or the courts before handing over your cash.
               3.  Don't let someone else do your reading for
          you.  You wouldn't walk blindfolded into a car
          dealership and say, "Give me a good one for $20,000,"
          so don't do it with your investments.  Don't rely on a
          friend to fill you in.  Do the reading yourself -- and
          talk to your accountant, financial planner, attorney or
          other adviser before taking the plunge.
               As long as there are investments, there will be
          investment scams.  However, with a little common sense
          and a few precautions,you should be able to avoid
          becoming the victim of one.


                          The Treasury Bond Scam

               Just when you think that every gimmick to separate
          you from your money has been exposed, a slew of new
          ones appears.  The sad truth about gimmicks is that
          those who can least afford to lose money are the ones
          who get hurt the most.  Gimmicks come in many forms.
          What we're talking about is blatant, shameless deceit
          that's put forth under the guise of protecting you.
          Each one has a different song and dance.  Many of them
          are obvious if you follow the rule of "if it sounds too
          good to be true, it probably is."
               But some of them are so good that they can sneak
          by even a relatively sophisticated investor -- and this
          one is so dangerous that it can take most of your life
          savings before you know it's gone.  And the realization
          comes so many years later, that it's too late to act --
          if the realization comes at all.  This one is so good
          that you can believe you lost your investment due to
          "natural" causes.
               The scam that calls for such strong words is the
          guaranteed account scam.  This scam is one of the most
          effective tricks in the book, because it "guarantees"
          that you won't lose a cent.  The broker calls you up
          and makes a pitch about a great investment idea that
          guarantees you won't lose a dime in principal.  That's
          a guarantee that many people -- including many
          reasonably sophisticated investors  -- will jump on.
          It's true, you will not lose any of your principal --
          but you may lose thousands in purchasing power.
               The scam involves U.S. Treasury zero-coupon bonds,
          which are guaranteed by the government.  These bonds
          are long-term and issued at a discount from face value.
          Their interest each period is simply the difference in
          the market value at the beginning and end of the
          period.  For example, a zero-coupon bond may sell today
          at $600 and after its maturity in five years you will
          receive the face value, or $1,000.  In the meantime you
          will not receive any interest payments.  However, you
          must pay an "imputed tax" on the earnings every year,
          meaning even though you're not receiving interest, you
          pay tax on what you would receive.  Then at maturity
          when you collect, you pay no tax.
               The broker will ask for, say $100,000, and promise
          that if you invest it with him for 10 years, the worst
          you'll do is get all of it back.  No mention is made of
          inflation.  No mention is made of lost interest, or the
          effects of compounding that interest for ten years.
          What the broker intends to do is buy zero-coupon bonds
          that mature in 10 years and that will then equal
          $100,000.  (In other words, if he invests only $60,000
          of your $100,000 in zero-coupon bonds that are yielding
          6%, he will have $100,000 in 10 years.)  The rest of
          your money is as good as in his pocket.  That remaining
          $40,000 will be churned in and out of investments, some
          making money, some losing money, but each buy or sell
          being a guaranteed commission for him.  And at the end
          of 10 years, you are guaranteed to get your principal
          back ($100,000) -- which at just 4% inflation will only
          be worth about $67,000 by then.
               If you're offered any type of guaranteed return
          that sounds too good to be true, it is in your best
          interest to pass it up, but the real danger with this
          one is that it doesn't really sound too good to be
          true.  It sounds very conservative, backed by Treasury
          bonds, offered by apparently reputable brokers who have
          been in business for decades -- not at all like the
          normal get rich quick scheme that would have you
          hanging up the phone.  There are some mutual funds
          offering this same deal today, and as it works,
          variations on the scam will probably turn up in other
          deals.
               Caveat emptor.