Techniques Investment Swindlers Use

Their techniques are as varied as their methods of establishing contact. If there is a common denominator, however, it is their ability to be convincing. The skills that make them successful are essentially the same skills that enable any good salesperson to be successful.

But swindlers have a decided advantage: They don't have to make good on their promises. In the absence of this responsibility, they have no reluctance to promise whatever it takes to persuade you to part with your money. These are some of their techniques:

* Expectation of Large Profits

The profits a swindler talks about are generally large enough to make you interested and eager to invest--but not so large as to make you overly skeptical. Or he may mention a profit figure he thinks you will consider believable and then, as a further enticement, suggest that the potential profit is actually far greater than that. The latter figure, of course, is the one he hopes you will focus on. Generally speaking, if an investment proposal sounds too good to be true, it probably is.

* Low Risk

Some are so blatant as to suggest there's no risk--that the investment is a sure money maker. Obviously, the last thing a swindler wants you to think about is the possibility of losing your money. (If you ask how you can be certain your money is safe, you can count on a plausible-sounding answer. Besides, at this point, he figures you will believe what you want to believe.)

To make his pitch more credible, a swindler may acknowledge that there could be some risk--then quickly assure you it's minimal in relation to the profits you will almost certainly make. A con man may become impatient or even aggressive if the question of risk is raised--perhaps suggesting that he has better things to do than waste time with people who lack the courage and foresight needed to make money! With this kind of put down, he hopes you won't bring up the subject again.

* Urgency

There's usually some compelling reason why it's essential for you to invest right now. Perhaps because the investment opportunity can "be offered to only a limited number of people." Or because delaying the investment could mean missing out on a large profit (after all, once the information he has confided to you becomes generally known, the price is sure to go up, right?).

Urgency is important to a swindler. For one thing, he wants your money as quickly as possible with a minimum of effort on his part. And he doesn't want you to have time to think it over, discuss it with someone who might suggest you become suspicious, or check him or his proposal out with a regulatory agency. Besides, he may not plan on remaining in town very long.

* Confidence

They don't call them con men for nothing! They sound confident about the money you are going to make so that you will become confident enough to let go of your savings. Their message is that they are doing you a favor by offering the investment opportunity. A swindler may even threaten (pleasantly or otherwise) to end the discussion by suggesting that if you are not really interested there are many other people who will be. Once you protest that you are interested, he figures your savings are practically in his pocket.

Although you can't necessarily spot a con man by the way he talks, most are strong-willed, articulate individuals who will dominate the conversation-even if they do it in a low-key, friendly sort of way. The more they talk, the less chance you have to ask questions.

Several Investment Swindles and How They Work

There's a saying among swindlers that it's not the scam that counts, it's the sell. Judging from the number of arcane and often outlandish schemes that have been employed to separate otherwise prudent people from their money, the saying would seem to reflect reality. The evidence is that if people can be made believers, they can be sold practically anything. Consider several of the ways in which hustlers of phony investments have won the confidence of persons whom they planned to victimize.

The Old-Fashioned Ponzi Scheme

It's become one of the oldest and most often employed investment schemes because it's proven to be one of the most lucrative. While there are innumerable variations, here is how a person we will call Frank C. practiced it. At the outset, Frank approached a relatively small number of influential persons in the community and offered them the opportunity to invest--with a guaranteed high return--in a computer-generated program of arbitrage in foreign currency fluctuations. To be sure, it sounded high tech and sophisticated but Frank had his eye on sophisticated and well-heeled victims.

Within a short period of time, he approached and sold the scheme to still other investors--then promptly used a portion of the money invested by these persons to pay large profits to the original group of investors. As word spread of Frank's genius for making money and paying profits, even more would-be investors anxiously put up even larger sums of money. Some of it was used to recycle the fictitious profit payments and, like a pebble in the water, the word of fast and fabulous rewards produced an ever-widening circle of eager investors. And more money poured in.

And Frank C. left town a wealthy man.

The Infallible Forecaster

Jim L. (among his many aliases) had a full-time job in the daytime, but with assets that consisted only of a phone, patience and an easy way of talking he managed to parlay a nighttime sideline into an ill-gotten fortune. The routine went like this.

Jim would phone someone we'll call Mrs. Smith and quickly assure her that, "No," he didn't want her to invest a single cent. "Never invest with someone you don't know," he preached. But he said he would like to demonstrate his firm's "research skill" by sharing with her the forecast that so-and-so a commodity was about to experience a significant price increase. Sure enough, the price soon went up.

A second phone call didn't solicit an investment either. Jim simply wanted to share with Mrs. Smith a prediction that the price of so-and-so a commodity was about to go down. "Our forecasts will help you decide whether ours is the kind of firm you might someday want to invest with," he added. As predicted, the price of the commodity subsequently declined.

By the time Mrs. Smith received a third call, she was a believer. She not only wanted to invest but insisted on it--with a big enough investment to make up for the opportunities she had already missed out on.

What Mrs. Smith had no way of knowing was that Jim had begun with a calling list of 200 persons. In the first call, he told 100 that the price of so-and-so a commodity would go up and the other 100 were told it would go down. When it went up, he made a second call to the 100 who had been given the "correct forecast." Of these, 50 were told the next price move would be up and 50 were told it would be down.

The end result: Once the predicted price decline occurred, Jim had a list of 50 persons eager to invest. After all, how could they go wrong with someone so obviously infallible in forecasting prices?

But go wrong they did, the moment they decided to send Jim a half million dollars from their collective savings accounts.

All That Glitters:

Not only did the two brothers have a fancy office building with their own company name on it, but the investment offer seemed sound and straightforward: "Instead of buying gold outright and holding it for appreciation, make a small downpayment that the firm could use to secure financing that would permit much larger quantities of gold to be bought and held for the investor's account." That way, when the price of gold rose--as was "sure to happen"--investors stood to realize highly leveraged profits.

The company provided storage vaults where investors could view the wall-to-wall stacks of glittering bullion. By the time authorities caught wind of the scheme's suspicious smell and looked for themselves, it turned out the only thing gold was the color of the paint on the cardboard used to construct look-alike bars of bullion.

The counterfeit gold, however, proved far easier to find than the millions of dollars of investors' money. Most of that is still missing.

16 Questions That Can Turn Off an Investment Swindler

The first line of defense against investment fraud is your inalienable right to ask questions and--until you get the right answers--to say "No." And mean no. Not surprisingly, this is usually an investment swindler's first point of attack. To keep you from asking questions, he asks them! Invariably, the questions have "yes" answers, such as "You would at least be interested in hearing about such a fantastic investment opportunity, wouldn't you?" or "You would like to make a large amount of money in a short period of time with little or no risk, right?"

One difference between a reputable investment firm and a swindler is that reputable firms encourage you to ask questions, to obtain as much information as possible, to clearly understand the risks involved, and to be entirely comfortable with any investment decision you make. The only thing a swindler wants is your money These are some of the questions that swindlers don't like to hear:

1. Where did you get my name?

If the response is that you were chosen from a "select list of intelligent and prudent investors," that select list may be the telephone directory, or a purchased list of persons who've bought certain types of books, subscribed to particular magazines, or responded to newspaper ads. If you have made ill-advised investments in the past, you can be pretty sure your name is on someone's alumni list. It's the list swindlers prize most: Easy preys who are eager to recoup (but are doomed to repeat) their earlier losses.

2. What risks are involved in the proposed investment?

Except for obligations of the U.S. Treasury, which are considered risk-free, all investments involve some degree of risk. And some investments, by their nature, involve greater risks than others. Keep in mind that if the salesman had knowledge of a sure-thing, big-profit investment opportunity, he wouldn't be on the phone talking with you.

3. Can you send me a written explanation of your investment so I can consider it at my leisure?

For someone peddling fraudulent investments, that can be a double turnoff. For one thing, most crooks are reluctant to put anything in writing that might cause them to run afoul of postal authorities or provide material that, at some point, might become evidence in a fraud trial. Secondly, swindlers don't want you to do anything at your leisure. They want your money now.

Accordingly, it's a good rule of thumb that any investment which "absolutely has to be made immediately" shouldn't be made at all. You may not always be right, but you are less likely to be sorry.

4. Would you mind explaining your investment proposal to some third party, such as my attorney, accountant, investment advisor or banker?

If the answer goes something along the lines of "normally, I'd be glad to, but there isn't time for that," or if the salesman snaps back by asking "can't you make your own investment decisions." these are virtually certain clues that your final answer should be an emphatic "No."

5. Can you give me the names of your firm's principals and officers?

Although some persons who establish and operate dishonest firms change their own names as often as they change their firms' names, even the hint that you are the kind of investor who checks into things like that can be a fast turn-off for a swindler.

6. Can you provide references?

Not just another list of other investors who supposedly became fabulously wealthy (the names you get may be the salesman's boss or someone sitting at the next phone), but reputable and reliable recommendations such as a bank or well-known brokerage firm that you can easily contact.

7. Do you have any documents such as a prospectus or risk disclosure statement that you can provide?

This may not be available in connection with all types of investments but in many investment areas--such as securities, futures and options trading--it's required. And there can be requirements that you be provided with this information and acknowledge in writing that you have read and understood it. Obviously, it's not the sort of information a swindler is likely to distribute.

8. Are the investments you are offering traded on a regulated exchange, such as a securities or futures exchange?

Some bona fide investments are and some aren't, but fraudulent investments never are. Exchanges have strict rules designed to assure fair dealing and competitive price determination. There are also in-place mechanisms to provide for rule enforcement and to impose severe sanctions against those who fail to observe the rules.

9. What governmental or industry regulatory supervision is your firm subject to?

If the salesman rattles off a list that ranges from the FBI to the Boy Scouts, tell him you'd like to check the firm's good standing before making an important investment decision. Then verify the response. Few things discourage a swindler faster than the thought that his first visitor the next morning may be from a regulatory agency.

If, on the other hand, you are told his particular area of investment isn't subject to regulation (perhaps because everyone in his business is an ethical, upstanding citizen), take that explanation for whatever you think it's worth. At the very least, keep in mind that any ongoing supervision which isn't being provided by a regulatory organization or agency will have to be provided by you.

10. How long has your company been in business?

In any kind of business activity, there can be advantages to dealing with a known, established company. This isn't to say that new businesses aren't starting up all the time or that the vast majority aren't perfectly reputable. But if you find yourself talking with someone who doesn't seem to have a past, it can be worthwhile to find out why. Many swindlers have been running scams for years but understandably aren't anxious to talk about it.

11. What has your track record been?

Before you accept a salesman's assurance that he can make money for you, you have the right to know what his performance has been in making money for others. And ask to have the information (if there is any) in writing. Boasting over the phone is one thing; putting it down on paper is quite another. In any case, even if you are able to obtain a documented performance record, don't lose sight of the fact that past performance in itself provides no assurance of future performance.

12. When and where can I meet with you or with another representative of your firm?

Chances are a crooked operator--particularly if he is operating out of a telephone boiler-room--isn't going to take the time to visit with you and even more certainly doesn't want you to see his place of business.

13. Where, exactly, will my money be? And what type of regular accounting statements do you provide?

In many investment areas, such as futures trading, firms are required to maintain their customers' funds in segregated accounts at all times. Any mingling of investors' funds with those of the firm or its principals is prohibited. You might also want to find out what, if any, routine outside audits the firm's account records are subject to.

14. How much of my money would go for commissions, management fees and the like?

And ask whether there will be other costs such as interest or storage charges, or whether the investment agreement involves any type of profit sharing arrangement in which the firms' principals participate. Insist on specific answers, not glib and evasive responses such as "that's not important" or "what's really important is how much money you are going to make." And, again, get it in writing, just as you would any other type of contract.

15. How can I liquidate (i.e. sell the item I'd be investing in) if and when I decide I want my money?

If you find that the investment is illiquid, or there would be substantial costs if liquidated, or that you are unable to get straight and solid answers, these are all things to consider in deciding whether you want to invest.

16. If disputes should arise, how can they be resolved?

Short of having to go to court to sue someone, does the company or regulatory organization provide a mechanism for resolving disputes equitably and inexpensively through arbitration, mediation, or a reparations procedure? Aside from seeking important information, you may be able to detect whether the salesperson is uncomfortable or impatient with this line of questioning. Swindlers generally will be.

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