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How to Lose Your Money in Six Easy Steps; How to Avoid Being Scammed

Written by: Ronald Anthony Sarno

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Posted over 2 years ago. 1 helpful vote, 1 comment

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Has anyone wised up to these frauds?

The American economy in the last two years took a very bad hit with the subprime mortgage crisis, the collapse of certain well known and very large financial institutions, and yet people still fall for "get rich quick" schemes that are simply old con games dressed up in new technology: the phone scam where a caller promises you a great return, the bubble investment which depends on more and more people buying at higher and higher prices until the burst, the Ponzi scheme where people are seduced into believing that a "friend" or "fellow countryman" will get them large returns on their investments, over and above the market, until there is no money, and finally pyramid schemes where there is a "business opportunity" to make lots of money by recruiting your personal sales force, where you pay for the product, and the tools, and make zilch.

Phone Scam

You get a call out of the blue from someone you never knew before, they represent a "charity", or an "investment opportunity," "you are a lost heir," "your identity has been stolen and you need to do a credit repair." This always consists of someone wanting your money, your personal financial information and you must make a decision right away. The ONLY document you will get from these callers is a bill. Hang up, it is almost never true unless it is a charity you know or a person in a financial institution where you actually have an account. Otherwise it is a telemarketer working off a list, in which you are a name on a piece of paper. Period.

The Bubble Scam

Years ago the first bubble scam was Dutch tulips. Holland had learned to get color shades from the Turkish flower and this rainbow of hues were very popular with many gardeners. People were willing to pay high prices for them, and speculation grew wild. Soon people were investing in tulips, and as the money came in, more and more people invested with the dream that the price would keep getting higher. Soon enough the market collapsed, the price went down, and investors were holding position papers on tulips that were worthless. Every bubble investment since then has been the same: speculation that the price will never go down: it often happens with precious metals like gold. (You can't trust the government to keep money stable). The most recent one was the subprime mortgage bubble based on the assumption that home prices could only go up. That market collapsed and brought down many investors including large financial institutions which had lost all common sense.

The Ponzi Scam

With the arrest of Bernie Madoff, more people are aware of this scam. The basic ploy is to convince people your investor has secret information, he can "beat" the market and he can "guarantee" a high return. The "wise" investor also convinces you on the basis of family, friendship, and/or "being from the same country or heritage." The investor uses people's money to finance a lavish lifestyle to look as if he is really making large sums of money from his "wise" investments. Initial investors are paid off with new investors money, so at first the Ponzi investment looks great. Madoff did well until most of his major clients had their other bubble investments burst and they demanded their money back plus the dividends which had magically appeared on every statement on their accounts. Madoff admitted it was a huge Ponzi scheme and he did not have the funds to pay back the investments. Federal prosecutors may be able to return pennies for every dollar invested --from his assets.

The Pyramid Scam

I personally remember being recruited for a home meeting about a "business opportunity." When my wife and I showed up at the meeting it was a recruitment pitch for Amway (which is now owned by Quixtar). I found it annoying that the recruitment call never mentioned that it was for selling soap products. I find it dishonest to be told I will have a career and a business opportunity which boils down to I will be selling soap and trying to get other people to sell soap. Anyone who knows math knows that if your income depends on recruiting salespeople who then have to recruit salespeople, who then have to--you quickly run out of people. There is a class action lawsuit in federal court in Northern District California Pokorny v. Quixtar which is suing Amway for being a fraud. According to Quixtar's own financial statement, 99% of its recruits never make money. Some business opportunity!

The bigger they are the harder they fall.

Victims of scams are not only individuals. In the last 2 years we have learned that some of the largest, most sophisticated financial institutions have blown their responsibility to invest their customers' money wisely. Just like an individual, a company can be scammed and get caught up in the cons we have discussed. One factor is the pressure on their own investors to outperform the market which is very hard to do. Some of the most recent "victims" have been Loehmann Bros., Merrill Lynch, the American Insurance Group (AIG), the Bank of America and many of Bernie Madoff's institutional investors. The prior federal administration was also extremely lax about monitoring these companies. Under the banner of keeping markets free of government interference, prior officials avoided close scrutiny of these companies' so- called investment activity. Finally when the bubble burst, and the Ponzi money ran out, the government was left holding the bag, or more accurately, the taxpayers.

Lawyers and accountants: How to Avoid Scams

Lawyers and accountants are not all perfect; some people in both professions contributed to the economic downfall. But honest and competent lawyers and accountants do exist, can stop you from falling into these frauds, or help you recover after being the victim. Some steps to avoid these scams: 1) always get documents about what you are investing in. A stock report from a company which has existed for a century is much different than a fund to invest in a fund to invest in a fund that you never heard of. 2) Do some comparison. If the market or a bank is returning 5% over a ten year period, and your investment is supposedly returning 15% every year, either the investor is a genius or you have your money in a scam. 3) Just say no. You don't have to buy into an opportunity, invest with anybody or make a quick decision. If you are being told the opportunity to invest will only be open for a few days and only a few select people will be allowed to invest, it smells like a scam.

Additional Resources

Avvo legal guides you might find helpful: Attorney Ronald Sarno on How To Succeed in Business by Really Trying Parts One and Two; Attorney Michael Van Cise on What To Do If You Are a Victim of a Phone Scam; Attorney Richard Woodford on How to Spot a Fraudulent Investment Scam; and Attorney Jon Vincent Forehand on How to Handle Qualified Losses in a Ponzi Scheme