THE SCAMS THAT WILL NOT DIE

The Trinidad and Tobago Securities and Exchange Commission today begins a series of articles as part of its Investor Education programme.  These articles are designed to warn the investing public in Trinidad and Tobago about a number of investment schemes which prevail and which can result in tremendous losses to investors. In some cases, the marketing strategies of the fraudsters are so sophisticated, that the ordinary investor may not be aware of the issues until it is too late.  Today we concentrate on two schemes:

• Ponzi or pyramid schemes (also referred to as affinity fraud)
  
• Prime bank frauds

PONZI OR PYRAMID SCHEMES
The Ponzi scheme derives its name after the famous Carl Ponzi whose case came to the forefront in the 1920’s.  Ponzi stole US$9.8 million in a scheme which operated in Boston.  Over ten thousand investors were involved. This scheme promised to pay 50 percent returns every 45 days.  Since then, a Ponzi scheme has been characterised as one in which a very high rate of return is paid to initial investors out of the funds of successive investors, who end up losing all or most of their money to the promoter.  A Ponzi scheme is essentially a pyramid scheme. These schemes are often disguised as transactions in new or poorly understood investment instruments, including different types of securities, foreign currency trades, precious metals and even exotic commodities.

In a Ponzi or pyramid scheme, the promoter takes money from an investor and promises an extremely high rate of return, often times higher that what is currently paid by local banks or other financial institutions. At first, the promoter usually keeps his promise to earlier investors by paying them with money collected from latter investors. Such a scheme, however, depends upon the promoter’s ability to find an ever- increasing number of new “investors” by giving the impression that earlier investors have been successful.  Within a short time, however, the required number of new investors will be difficult to find, and the promoter either disappears or has to admit that he cannot pay investors back.

MULTI-LEVEL MARKETING
Some types of pyramid schemes are based on multi-level marketing arrangements.  Funds are collected from persons at the bottom or entry level to pay persons at higher levels.  These schemes often involve “chain” letters or marketing arrangements that depend more on the recruitment of new victims than the sale of any genuine product or service. A new investor, (Mr X) pays a fee or commission to the promoter for the right to sell the promoter’s product or service.  The new investor does not make any money until at least two or more investors are convinced to pay for the same right to sell the product or service. 

Just like the Ponzi scheme, an ever-increasing supply of money from new investors, rather than the product or service is needed. These schemes often spread so quickly that the chances of an investor finding a sufficient number of new investors are mathematically impossible. These are just two types of common examples of fraudulent schemes.  Some schemes are less complex and simply involve a promoter asking you for an initial payment to assure your participation in a “get rich quick” scheme. The promoter then simply disappears with your money, never to be seen again.

Prime bank frauds
Within recent times, a scheme known as prime bank investment has become quite prominent on the Internet.  This scam involves the fraudster offering a prime bank investment with risk free annual returns of more than 20 percent.  These investments are purportedly guaranteed by prime banks.  Once persons have invested, the fraudster disappears with the money.

How prime bank frauds work
Prime bank programmes often claim investors’ funds will be used to purchase and trade “prime bank” financial instruments on clandestine overseas markets in order to generate huge returns in which the investor will share. These fraudulent schemes involve the purported issuance, trading, or use of so-called “prime” bank, “prime” European bank or “prime” World Bank financial instruments, or other “high yield investment programmes.” The persons who promote these schemes often use the word “prime” – or a synonymous phrase, such as “top fifty world banks” – to give their programmes an air of legitimacy. They seek to mislead investors by suggesting that well regarded and financially sound institutions participate in these bogus programmes. However, neither these instruments, nor the markets on which they allegedly trade, exist.

To further give the scheme an air of legitimacy, the promoters distribute documents that appear complex, sophisticated and official. The sellers frequently tell potential investors that they have special access to programmes that otherwise would be reserved for top financiers on Wall Street, or in London, Geneva or other world financial centres. Investors are also told that profits of 100 percent or more are possible with little risk. Individuals and entities are targeted, including municipalities, charitable associations and other non-profit organisations. Financial institutions such as merchant banks, trust companies and mutual funds which are also seeking to diversify their portfolio to minimise risks by investing in overseas markets now made easier as a result of the liberalised financial environment should also be careful.  Investing in these schemes can seriously affect your bottom line.

The promoters of these schemes have demonstrated remarkable audacity, advertising in national newspapers, such as USA Today and the Wall Street Journal. Some promoters of these schemes avoid using the term “Prime Bank,” and tell prospective investors that their programmes do not involve prime bank instruments in an effort to demonstrate that their programmes are not fraudulent. Regardless of the terminology, the basic pitch — that the programme involves trading in international financial instruments — remains the same, and investors should continue to be vigilant against such fraud.

Below are warning signs of prime bank or other fraudulent bank-related investment schemes.

Excessive guaranteed returns
These fraudulent investment pitches typically offer or guarantee spectacular returns of 20 to 200 percent monthly, absolutely risk free. Promises of unrealistic returns at little or no risk to the investor are hallmarks of prime bank fraud.  Investors need to have a very good knowledge of the performance of the international and regional economies, including trends in interest rates in order to discern the reality behind these purported investments.

Fictitious financial instrument
Despite having credible-sounding names, the supposed “financial instruments” at the heart of any prime bank scheme simply do not exist. Exercise caution if you’ve been asked to invest in a debt obligation of the top 100 world banks, Medium Term Bank Notes or Debentures, Standby Letters of Credit, Bank Guarantees, an offshore trading programme, a roll programme, bank-issued debentures, a high yield investment programme, or some variation on these descriptions. Promoters frequently claim that the offered financial instrument is issued, traded, guaranteed, or endorsed by the World Bank (Department of Institutional Integrity (INT) or Operations Evaluation Department), International Monetary Fund (IMF), Federal Reserve, Department of Treasury, International Chamber of Commerce (ICC), or an international Central Bank.

Extreme Secrecy
Promoters claim that transactions must be kept strictly confidential by all parties, making client references unavailable. They may characterise the transactions as the best-kept secret in the banking industry, and assert that, if asked, bank and regulatory officials would deny knowledge of such instruments. Investors may be asked to sign non-disclosure agreements. Be warned, some investors have even seen sued for breach of these non-disclosure agreements.

Exclusive Opportunity
Promoters frequently claim that investment opportunities of this type are by invitation only, available to only a handful of special customers, and historically reserved for the wealthy elite.

Claims of Inordinate Complexity
Investment pitches frequently are vague about who is involved in the transaction or where the money is going. Promoters may try to explain away this lack of specificity by stating that the financial instruments are too technical or complex for non-experts to understand. You should be especially watchful for prime-bank related schemes promoted over the Internet. Despite numerous actions by the United States SEC charging prime bank promoters with multiple violations of the federal securities laws, prime bank offerings continue to proliferate in cyberspace. Investors in Trinidad and Tobago are asked to take note of the above warning signs and remember that Ponzi schemes, pyramid schemes and prime bank schemes are false and fraudulent.  The purported investments are fictional. 

Anyone offering a security to the investing public must first of all, be registered with the Trinidad and Tobago Securities and Exchange Commission (TTSEC) and secondly, must register the security. Even in cases where an exemption from filing a prospectus is claimed by an entity on account of distribution to sophisticated investors only, the TTSEC must still be satisfied that the security being offered is a legitimate one. Further, anyone giving investment advice to the public must be registered with the TTSEC to do so. Persons with information that schemes such as these are operating in Trinidad and Tobago should contact the TTSEC immediately.