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Investors learn how to identify an investment scam

by Wayne Cheveldayoff, 2003-09-28

Hardly a day goes by without someone in the media warning that if something seems too good to be true, it usually is. Yet, ordinary people are still getting caught up in investment scams.

It is a problem that is as old as money, and the anonymity of the phone, and now the Internet, seems to be making it easier for scam artists to operate.

The scams or frauds are often some variation of the Ponzi scheme, named after an Italian immigrant in the United States who successfully scammed thousands of people out of millions of dollars in 1920.

In such schemes, people are promised a much higher return on their money than they can get anywhere else. The problem is that these enticing “returns” aren’t actually being made. Instead, people are paid from the money brought in by new investors.

Eventually the scheme collapses, with the perpetrators disappearing with enough of the money to keep them in luxury hotels and champagne for the rest of their lives.

Canadian regulators have taken the view that the more people know about investments, the less susceptible to fraud they will be. They have focused on warning the public and introducing investor education programs.

The B.C. Securities Commission, for instance, has recently resumed its “investigate before you invest” seminars that are provided through partnerships with seniors groups, credit unions, the Better Business Bureau and other organizations in the province.

The commission delivered more than 50 such seminars to people throughout British Columbia last year and expects to bring as many or more sessions to the public this year.

Investors attending the seminars learn to identify an investment scam, how to check out the background of an investment advisor and how to determine if an investment is suitable for them.

The commission also publishes advice on how to avoid scams on its website at www.bcsc.bc.ca.

One of the reasons scams are successful is that mainstream investors have little knowledge of the workings of financial markets and can be snowed by claims that the spectacular returns are made the same way the “big boys” make money.

In November 2001, the B.C. commission publicized a scheme it uncovered involving an Internet-based investment club.

The club’s organizers, who were heavily fined and banned permanently from B.C.’s capital market, claimed they were making money by buying and selling “prime bank instruments,” which were supposed to be fully negotiable bank instruments of the top, or prime, banks in the world.

In fact, neither the instruments, nor the markets on which they allegedly traded, existed.

“The Internet has greatly facilitated the proliferation of prime bank instrument frauds throughout the world,” said the commission panel that investigated the scheme. In this case, the panel noted, the individuals “used the anonymity and the reach afforded by the Internet to peddle their fraudulent investment scheme to anyone with access to their website, including investors in British Columbia.”

The commission panel found that at least 17 B.C. residents invested U.S.$100,000 in the scheme.

Why did so many people get fooled? Surely they had all heard the too-good-to-be-true warning many times. The obvious explanation is that they let their greed and trusting nature overwhelm common sense.

This leads to an intriguing question: If all of these victims had previously attended the commission’s seminar, would any have still invested in the scheme?


Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. He can be contacted at wcheveldayoff@yahoo.ca.

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©2003 Wayne Cheveldayoff