Monday, May 21, 2007

Scam Alert

It's past midnight and you've been in the bar for a while. Maybe you've had two or three drinks, or maybe a bit more. You're still alone and some of the people around you are starting to look better than they did a half an hour ago. One of them walks up and says, "I just won the lottery. Would you like to see the $20,000 shower curtain in my apartment?" Are you going to fall for this?

You're living paycheck to paycheck, and any time you have to buy both bread and potatoes at the grocery store, you wreck your budget for the week. Someone who is nicely dressed, sports an expensive watch, and drives a luxury car approaches you and says, "Would you like to get in on an investment that pays 10% a month? You can double your money in less than a year. Look at what it's gotten me!" Will you fall for this?

Life has taught you, in at least some settings, that desperation isn't an excuse to do something dumb. There's no exception to this rule when it comes to money and finances. There's always someone with a good story who wants to take your money. How many people are waiting around to give you money? The next time you hear a smooth sounding story about easy money and no risk, put your hand on your wallet and excuse yourself to take a walk around the block from which you don't return.

Here are some common scams that you may encounter.

1. Internet fraud: be wary of unsolicited e-mails or instant messages promoting investments, or which direct you to websites that promote investments. Always research the investments--see if any independent source of information will verify the claims made. When in doubt, don't invest.

2. Foreign exchange trading scams: foreign exchange, or "forex," trading basically involves betting that one currency (let's say the Japanese yen) will increase or decrease in value against another currency (let's say the Swiss franc). This is a zero-sum game--if one currency gets stronger, the other one by definition gets weaker, and if you don't win, you'll lose. Legitimate forex trading involves millions and even tens of millions of dollars per transaction, and is for the big dogs on Wall Street. There are, however, lots of opportunities for ordinary investors to be ripped off in foreign exchange scams. Avoid this stuff.

3. Oil and gas scams: with the prices of oil and gas scaling Mount Everest, energy and alternative energy scams are now a dime a dozen (and not even worth that much). Research energy investments carefully, and always look for independent verification. Independent verification means you, on your own, should find legitimate sources of information that support the claims made. Don't rely on sources of verification provided by the promoter of the investment--those sources could be in cahoots with the promoter. When in doubt, don't invest.

4. Affinity fraud: some of the lowest forms of life in the financial markets take advantage of social or religious ties to defraud investors. This is called "affinity fraud." For example, a crook might join a congregation, win over one or two prominent members, and use their respected status to convince other members of the congregation to invest in a scam. Or else, a member of a minority group might try to sell phony investments to other members of the same minority group. In these cases, the crooksters exploit the natural human tendency to trust those who have something in common with you. Stay vigilant whenever anyone wants to take your money. Invest in an asset, not in a person.

5. Prime Bank investments: an endemic problem in the financial markets is the prime bank fraud. Scumbag promoters offer you a chance to get into investments offered by "prime banks," which are supposed to be prominent foreign banks that ordinarily serve only the ultra-rich. These investments are touted as high return, low risk and tax free. None of that is true. You're more likely to encounter a swimming pool in the Sahara than a real prime bank.

The North American Securities Administrators Association, which is composed of the state securities regulators in the U.S., has put together a longer list of scams du jour. Go to

The elderly are among the most likely to be victimized by fraudsters. If you have elderly parents or grandparents, try (gently) to keep an eye on their financial well-being.

Crime News: Is this your parakeet? If so, the police may have your camera.

1 comment:

L&L4ever said...

About the crime news link: that's no parakeet -- it's a cockatiel! (I know, because my friend has ten of them.) By the way, I love your site and blog. You are amazing.

Regards from your biggest fan.