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Even as the dust continues to settle after the calamitous financial crisis of 2008 that cost investors and tax payers trillions of dollars, there is still no shortage of hucksters scheming for our money. And incredibly, the pool of hapless investors, willing to turn over their life savings in pursuit of “homerun” returns seems to be ever-expanding.
Drawn by the allure of easy-money, investors continue to fall victim to scams, some of which are outright fraudulent schemes and others which are glazed over with a sheen of legitimacy because they originate in the lobby of a “trusted” bank. The lessons of Enron, WorldCom, the Internet Bubble, the housing bubble, Bernie Madoff, and the double-dealing of investment banks throughout the 2000’s have apparently gone unheeded, as investors continue to ignore the most fundamental tenet of investing: If it sounds too good to be true, it’s because it is.
Scam artists are particularly adept at utilizing the power of media and the internet to target and capture their prey, which typically consist of older people who are anxious over their ability to fund their retirements. They’re the ones with the money and the “urgency” to move their funds from low-yielding savings vehicles into something that can generate “high returns with no risk of principal” as most of these fraudsters advertise.
Take, for example, one of the fastest growing scams being promoted on the Internet and late-night TV – FOREX trading. FOREX, which stands for foreign exchange, is a global network of electronic exchanges that enables institutions and individual investors to buy and sell currencies. FOREX traders can make a substantial amount of money from trading profits on a daily basis. Because the currency markets are very volatile, traders can capitalize on the smallest of price movements with short term trades lasting mere minutes. It’s also why FOREX trading is not for the faint hearted.
Enter FOREX scammers who profess to have the mechanisms to invest your money in the lucrative currency markets without the downside risk. The speak of “hedges” and other techniques that allow your profits to run while protecting your principal.
Too good to be true? The Commodity Futures Trading Commission (CFTC) has uncovered a number of FOREX operators who have collected millions of dollars of investors’ money with such promises, but as it turns out, they are operating nothing more than a Ponzi scheme. Aside from the fact that Ponzi operators never really invest your money in actual securities, you usually don’t learn of the scheme until the operator has been caught or has fled the scene. By then, your money is gone.
No company ready to go public has captured the attention of investors more than Facebook, which is planning its initial public offering (IPO) sometime this spring or early summer. With over 800 million users across the globe, Facebook is as common to the popular vernacular as Google, which made instant millionaires out of thousands of investors. So, who wouldn’t want another chance at that? The prospect of getting in on the ground floor of Facebook stock is so enticing that it has launched a whole industry of scammers professing to have the inside track to pre-IPO shares. Too good to be true?
While pre-IPO shares of Facebook stock do exist, they are held by institutional investors, such as private equity firms and venture capitalists that invested billions of dollars in the company from its inception. IPO shares are available, but, generally, not to individual investors who must wait until after the IPO to buy the stock on the open market. Any firm offering pre-IPO shares of Facebook to individual investors is almost certain to be an outright scam.
Your Trusted Bank
The same people who brought us the unregulated, overly-complex and high-risk derivatives-masked-as-low-risk-investments, have now packaged a product just for you and it is offered through your trusted bank. That’s right, the same type of structured product that brought our financial system to its knees, has been re-packaged and refined to meet the needs of struggling, fixed-income investors looking for a way out of their low-yielding bank products. The pitch? Above-market returns with principal protection. Who can resist that?
As it turns out, these products, also referred to as “principal protection notes” by some banks, are every bit as risky and complex as the derivative products that skunked the most sophisticated institutions in the late 2000s.
Even the investment banks didn’t know how these products worked, but they guaranteed their safety. The same ploy is being perpetrated on fixed-income investors today on commission-laden products made to look like they can generate double-digit returns without the downside risk. What is particularly insidious about this scam is that it’s graced with all of the legitimacy of a bank CD because it is sold through the bank. These products are not regulated nor are they suitable for anyone with an aversion to risk, yet they are the precise target.
There simply isn’t enough law enforcement to protect individuals from the hundreds of scams that proliferate in a world that seems to gravitate to greed. The only real defense against fraud and deceit is our own instinct and natural skepticism. High returns simply don’t come without a commensurate amount of risk. Period. The first red flag is always, “that sounds too good to be true.” And, unless your thorough due diligence firmly establishes otherwise, then it is.
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