SCAMS | All shapes and sizes

Note: The purpose of this feature is to warn investors and borrowers about the kinds of financial scams they may encounter. Please note: Investigations, suits, and indictments do not necessarily mean the named individuals are guilty of wrongdoing.

 

>> Watch out for a new scam that preys on your fear of bank failure (see “The Trouble With Cash”): You get an inquisitive email from what looks like the Federal Deposit Insurance Corporation (FDIC). It’s not. The FDIC does not send out email asking people for private financial information. All such emails are scams trying to get enough information to steal your identity.

>> With the arrest of Raj Rajaratnam, another high-flying hedge fund manager bites the dust. Justice Department prosecutors allege his Galleon Group achieved a substantial part of its apparent success from illegal insider trading. Mr. Rajaratnam is free on $100 million bail.

>> Renters beware: This scam starts online. You see a terrific apartment on Craigslist, for example, and the price is enticingly low. So you call, and you’re asked to put up a deposit of $100 to “borrow the keys.” Goodbye $100. Or someone shows you an empty apartment and asks for a $200 “application fee.” The thieves don’t own the apartment or represent the owner; they just found a way to get into the apartment. If you come across one of these deals, report it to www.ic3.gov. For another real estate scam, check this site under Home Values.

>> Minnesota businessman Tom Petters was found guilty of running a $3.65 billion Ponzi scheme in which prosecutors say he faked the purchases and sales of surplus merchandise. His sentence could mean he’ll spend the rest of his life in prison. He denies guilt and plans to appeal.

>> Scott Rothstein, a lawyer from South Florida, has pleaded not guilty to running a $1 billion Ponzi scheme. Mr. Rothstein is being held without bail, because investigators found he had opened bank accounts totaling about $15 million in Morocco. Mr. Rothstein denies any wrongdoing.

>> Marc Dreier was once the head of a law firm with 270 lawyers and offices in three cities. In July he was sentenced to 20 years in prison and ordered to pay $388 million to the people he defrauded. His pitch: High-interest promissory notes allegedly issued by a legitimate real estate firm, but which were in fact created by Mr. Dreier, who pocketed most of the resulting revenue.

>> Richard Scrushy was once the high-flying CEO of HealthSouth, drawing down as much as $40 million a year in compensation. In June he was ordered to pay $2.88 billion to HealthSouth shareholders—perhaps the largest judgment ever laid against a single individual. The shareholders allege that Mr. Scrushy cooked the books to make earnings look far better than they really were. When the accounting footwork was revealed, shareholders equity tumbled by nearly $4 billion.

>> Unsettling: New York attorney general Andrew Cuomo has sued two large debt-settlement companies, alleging they engaged in deceptive advertising and fraudulent business practices, which included charging a fee before any settlement work was done.

>> The Securities and Exchange Commission (SEC) has sued the Chief Executive Officer (CEO) and two senior officers of Countrywide Financial Corp., alleging they told investors the company underwrote only high-quality mortgages, when in fact it routinely made high-risk loans. The SEC also alleged the CEO used inside information when he sold $140 million in Countrywide stock before the company’s problems were made public. All three men deny the charges. 

To learn more about guarding against deceptive practices, go to www.aarp.org/money/consumer and www.nasaa.org/investor_education.

>> Not all scams involve investments. One of the latest is identify theft for medical reasons. It goes like this: From somewhere, a criminal gets your name and social security number. Then he or she gets expensive medical work done, posing as you. The sinister thing about this scam is how undercover it is: The insurance company doesn’t know it wasn’t you, and you may not know about it until—from left field—you are dunned by a collection agency for unpaid bills. Self-defense in this case is to study the statements you get from your health insurance company to make sure they’re correct. It also helps to check your credit ratings. At www.annualcreditreport.com you can get a free report from all three credit ratings agencies once a year.

>> In a new twist, two foreign exchange traders have been sued by the SEC for claiming to earn large profits through a bank account they in fact did not have. The two traders had raised more than $19 million before the suit.

>> The SEC filed a suit against the operators of the money market fund, Reserve Primary Fund, alleging they had lied to investors when the fund’s share price fell below $1 per share.

Online help: Before we scan more alleged scams, here’s a quick, easy way to get a sense of how real an investment may be. Go to apps.finra.org/meters/2/ScamMeter.aspx, where you’ll find a series of questions. Based on your answers, the Scam Meter will automatically tell you how likely it is that you’re looking at a scam.

>> Norman Hsu pleaded guilty to fraudulent practices in his management of millions of investor dollars. His pitch: telling investors they would earn high returns by making short-term loans to businesses. Turns out many of the companies didn’t exist.

>> The SEC has charged Antigua-based Robert Allen Stanford with master-minding a fraudulent investment scheme amounting to $8 billion. His pitch: Stanford’s firm told investors it had a unique investment strategy that enabled it to earn double-digit returns on certificates of deposit for the past 15 years. That should have been a red flag. In the fixed income market, high returns are almost always a sign of high risk. According to the SEC, the performance record was simply fabricated.

>> The SEC has also come down on James M. Nicholson and Westgate Capital Management in Pearl River, NY. The Commission alleges that the firm “defrauded hundreds of investors of millions of dollars.” His pitch: an astonishing record of investment success. One of Westgate’s funds claimed to have achieved positive returns in 98 of 99 consecutive months. According to the SEC, the clever Mr. Nicholson even set up a fake accounting firm that issued bogus “audited” statements.

More help: The Federal Reserve (yes, the Federal Reserve) is running  a series of commercials in movie theaters in 14 cities with high foreclosure rates. The 30-second spots warn against foreclosure scams and tell viewers how they can get help free, without paying a cent. One way: go to www.federalreserve.gov, click on “Five Tips for Avoiding Foreclosure Scams.”

>> In a case that began in 2002, Lance K. Poulsen was sentenced at the end of March to 30 years in prison for perpetrating a $2.9 billion fraud through his company, National Century Financial Enterprises, of Dublin, Ohio. The sentence may have been unusually severe because Mr. Poulson’s victims were hundreds of health care providers, such as clinics and hospitals.

>> Finally (for now), the Commodity Futures Trading Commission filed a lawsuit alleging that Westridge Capital Management, of Jersey City, NJ, defrauded investors of at least $553 million. The pitch: results that were too good to be true. The firm claimed to have outperformed the S&P 500 index every month for 10.5 years. You would think that alone would set off alarm bells. But in fact the principals of the firm managed to lure big universities and pension funds into their fold – people who should have known better.

Not a scam, but…
> >  Lest you think that all the scams are perpetrated by individuals – the proverbial few rotten apples – check this one out: In March the SEC charged 14 Wall Street trading firms with cheating their customers out of hundreds of millions of dollars. This is not strictly a scam, in the sense that the firms were not trying to fool anybody. But, according to the SEC, they engaged in what is called “front-running,” an illegal practice. The SEC said that when these firms had a big order to buy a stock, they would buy it first for the firm, bid up the price a few minutes before selling it, and pocket the difference. The companies are alleged to have made over $458 million this way. In a negotiated settlement, the SEC accepted a total of $69 million in penalties.

Self-defense: In general, be skeptical of anyone who claims he or she can earn returns higher than the annual long-term compound average of the stock and bond markets—roughly 9.5 percent and 5 percent, respectively, depending on the period measured. Use the Web sites mentioned above. And try to make time to read a book on index mutual funds, which aim to equal the markets, not beat them. We recommend John Bogle’s The Little Book of Common Sense Investing or, if you enjoy reading about this sort of thing, Burton Malkiel’s A Random Walk Down Wall Street. There is even (dare we mention?) Earn More, Sleep Better, by the editor of FinancialThreats.com.

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