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Every year tens of thousands of consumers put some of their money in
investments. The Federal Trade Commission (FTC) estimates that every
year American consumers from all walks of life lose $1 billion or
more in investments that turn out to be fraudulent.
Between 1983 and 1992, the FTC put a variety of such fraudulent
companies out of business. It brought suit against 325 defendants and
recovered almost $100 million for injured consumers.
But if you invest in what turns out to be a fraudulent scheme, the
chance of getting all of your money back is slim. Even in cases where
money is recovered, consumers often get back less than 10 cents on
every dollar invested. That is because companies engaged in fraud
often operate a particular scam for a short time, quickly spend the
money they take in, and frequently close down before they can be
detected. Then they reopen under another name selling another
Investment frauds are sold in a variety of ways -- print and
television advertising, for example -- but three-quarters of the
investment scams the FTC investigates are sold by the telephone.
There has been a dramatic increase in telemarketing investment fraud
because of the ease of establishing fraudulent operations and the
popularity of telephone selling. Everyone with a telephone is
How Telephone Investment Fraud Works
To be sure, many investment plans are sound. Ones that are not take
many forms. Typical investments sold by fraudulent operators have
included coins, gemstones, art, oil and gas leases, interests in oil
wells, application services related to cellular telephone licenses,
precious metals such as gold and silver, or strategic metals such as
chromium, used in defense and high-tech industries. Fraudulent
companies often choose to sell investments that may fluctuate
substantially in response to world events. For example, fraudulent
sellers may offer you an investment based on the scarcity of a
foreign metal after news of a trade embargo, or they might offer you
an investment in a new, widely publicized high-tech product. The
fraudulent seller's goal is to make it difficult for consumers to
scrutinize their overinflated value claims.
The heart of the telemarketing operation is usually centered in a
"boiler room," a setting filled with desks, telephones, and
salespeople who spend their days calling hundreds of prospects all
over the country. You may be contacted by one of these boiler room
operators if you respond to a newspaper ad or fill out a card asking
for more information about an investment, or you might be called
"cold." Some fraudulent investment sellers target investors who have
been victims of an earlier scam. These sellers know that investors
who have been tricked once often have a certain vulnerability because
they hope to recoup their losses.
Who are the fraudulent salespersons?
Salespersons in boiler room operations often spend years going from
fraud to fraud. Their years of selling experience and natural sales
talent make them very good at what they do. They use persuasive sales
pitches that weave together facts and half-truths in ways that are
likely to deceive all but the most experienced investor. Their sales
pitches are directed to the universal desire to get great financial
return for very little risk.
In addition to being glib, these sales operators are resourceful.
They use a wide variety of reasons why their investment opportunity
is a sure thing. They may say, for example, that they: have high-
level financial connections; are privy to inside information; will
guarantee the investment; or will buy back the investment after a
certain period. To close the sale quickly, these fraudulent sellers
may offer you phony statistics, misrepresent the significance of a
current event, or stress the uniqueness of their offerings to try to
dissuade you from verifying the story.
What is their typical sales pitch?
Often, fraudulent salespersons will:
* Say you have been specially selected to participate in an unusual
* Present a popular, believable message mixed with truth and lies;
* Guarantee large and rapid profits;
* Claim that virtually no risk is involved; and
* Require that money be paid immediately because the "market is
moving." The salesperson even may give price quotations to "document"
How To Avoid Losing Your Money
Because it is so difficult to recover money paid to fraudulent
sellers, the best thing you can do is refuse to give them money in
the first place. If you are approached by anyone selling an
investment opportunity, remember the following cautions. They may
help you avoid investing in a bogus firm.
* If it sounds too good, it probably is a scam. No legitimate
salesperson will ever claim to offer a risk-free investment. Big
returns usually mean big risks. Any claim that there is little or no
risk should act as a red flag.
* Do not be pressured into buying. High-pressure sales tactics that
urge you to buy now or forever lose your opportunity to profit are
tip-offs to possible fraudulent operations. If you are being
pressured, you can simply hang up the phone. Once you send a
fraudulent investment seller your money, it may be gone forever.
* Invest in business opportunities you know something about. It is
unlikely you will make money in a business deal that you cannot
understand and verify. You especially should be wary of any
investment where you need to rely exclusively on the seller's
representation of the investment's value.
* Be skeptical about any unsolicited phone calls about investments.
Think twice before you buy investments from out-of-state salespeople
you do not know. You may find it very hard to get your money back if
the deal sours.
* Get all the information you can about the company and verify the
data. Before you invest with any company, check the seller's
prospectus with someone whose financial advice you trust. Also check
the company's reputation with appropriate references. Many are listed
at the end of this brochure.
Any resistance you get from a seller when you seek additional
investment information or references should make you suspect. But if
you do receive additional references, keep in mind that these may not
provide reliable information about the investment or the company. For
example, a bank may tell you that an investment company has an
account, but this does not mean the company is legitimate.
* Beware of testimonials. Fraudulent companies sometimes hire
references to claim that the firm's investments brought them sudden
wealth. And Ponzi schemes, where promoters use the money from new
investors to pay high returns to early investors, may explain why the
company is praised.
* If in doubt, do not invest. Before you invest, ask questions and
seek information from a variety of sources. If you cannot get solid
information about the company and the investment, you may not want to
risk your money.
Where To Go For More Information
Listed here are government agencies and business organizations that
register, regulate, investigate, or monitor companies and individuals
who offer investment opportunities. If you have questions about a
company or an individual, or you wish to make a complaint, contact
one or more of these offices, as appropriate. When you seek
information, understand that the absence of complaints filed with
governmental and private agencies does not mean that a company or an
investment is necessarily sound.
* The Federal Trade Commission is a law enforcement agency that
investigates and prosecutes a variety of investment frauds. If you
have questions or complaints about claims made in advertising or in
telephone promotions for investment services, write to: Federal Trade
Commission, Investment Fraud Project, Room 200, Bureau of Consumer
Protection, Washington, D.C. 20580.
* Your State Attorney General's office and your local District
Attorney's office investigate and prosecute fraud cases. You can find
their telephone numbers by checking your local directory in the state
and local government section.
* Your State Securities Commission, Securities Department, or
Department of Corporations regulates the public offer and sale of
securities by companies in your state. You can get the name and
telephone number by calling the operator in your state capital.
* The Chief United States Postal Inspector, United States Postal
Service, Washington, D.C. 20260-2112, handles complaints about bogus
mail-order investment services. The USPS has jurisdiction over
fraudulent business operations that use, advertise, or sell through
the mail. The Federal Bureau of Investigation also has jurisdiction
when investment offerings constitute mail or wire fraud, or other
violations of criminal law.
* The Commodity Futures Trading Commission regulates most firms that
deal in commodity futures markets. Futures trading markets include
petroleum products, U.S. government securities, foreign currencies,
options on futures contracts, and dealer options. Write the Commodity
Futures Trading Commission at 2033 K Street, N.W., Washington, D.C.
* The Securities and Exchange Commission is a federal agency that
regulates the public offer and sales of securities. Contact the
Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, or call (202) 272-7440.
* The Better Business Bureau mediates disputes between consumers and
businesses and may be able to inform you about complaints lodged
against local investment firms. Contact the BBB in the city in which
the firm is located for information or to report a problem. For the
phone number of an out-of-state BBB, write to the Council of Better
Business Bureaus, 4200 Wilson Boulevard, Arlington, VA 22203.
* The National Association of Securities Dealers is a self-
regulatory organization that governs stock brokers. Check your phone
directory for a local district office of the National Association of
Securities Dealers, or contact its Washington office at 1735 K
Street, N.W., Washington, D.C. 20006, or call (202) 728-8221.
* The National Futures Association is a self-regulatory organization
for all registered individuals or brokerage firms. Contact the
National Futures Association at 200 West Madison Street, Suite 1600,
Chicago, IL 60606, or call (800) 621-3570. In Illinois, call (800)
Facts for Consumers from the Federal Trade Commission
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