Scams

Scams Ripped From Today's Headlines

When markets and the economy go haywire, criminals cash in.

By Bob Frick, Senior Editor

From Kiplinger's Personal Finance magazine, January 2009

Think of a headline about the financial crisis, and criminals have found a way to exploit it. Bad credit? Bank problems? Home foreclosures? Each of these, and many more, comes with a matching scam, helping make today one of the most fertile periods ever for rip-offs. Pulling off a successful scam "is all about establishing credibility, and the news gives credibility to 'opportunities,'"says Pat Huddleston, a former Securities and Exchange Commission chief who now runs an investor-protection business.

Hard times breed both criminals and victims. People who are on the moral margin to begin with may turn to crime to make ends meet, says David Perry, of Trend Micro, an Internet-security firm. And people who wouldn't ordinarily fall for some outrageous swindle, he says, might take a chance in the hope of offsetting losses in their stock portfolios. Perry says that starting a year ago there was a "fantastic upturn" in financial scams. That's about when the slide into the bear market began.

What follows are descriptions of today's most prominent scams -- or at least those we know about. As Barry Lanier, chief of investigations for the Florida Department of Financial Services, notes: "There's a lag effect, so sometimes you don't discover rip-offs until after the fact."

Foreign currency. The dollar's volatility has led to a rash of currency con games. The hook is simple: A criminal promises high -- and often outlandish -- returns from foreign-currency trading. For example, in May 2008 the SEC charged Las Vegas-based Gold-Quest International with running a Ponzi scheme that raised more than $27 million from 2,100 investors by promising profits of 87.5% from trading foreign currency.

If you want to bet on a weaker dollar, consider a mutual fund such as Merk Hard Currency (symbol MERKX). It lost 11.6% in 2008 through November 7, but returned 5.1% annualized over the past three years. One sponsor of exchange-traded funds lets you bet either way: PowerShares DB US Dollar Index Bearish (UDN) prospers when the buck sinks, while PowerShares DB US Dollar Index Bullish (UUP) gains when the greenback gains. Just know that trading currencies is more like speculating than investing.

Energy. As energy prices soared for most of this decade, scams involving oil-and-gas deals made a big comeback, says the North American Securities Administrators Association. Cold callers pitched energy-related limited partnerships that were often conceived in one state, involved drilling in another, and were sold to investors in still other states. Such a setup makes it tough for investors to check out the proposal, and tough for law enforcement to identify and expose a fraud.

In one such case, the SEC recently charged Donald Allen of Colorado Springs and his two companies of defrauding investors by diverting for his personal use more than $2.3 million raised in a series of oil-and-gas deals.

If you're tempted by such a pitch, NASAA suggests you start by checking the registration of the deal. Ask in which state the offering is registered, then contact that state's securities agency to confirm that a security is really being offered and whether it can be sold in your state.

Energy partnerships are risky -- and high-priced -- investments even when they are legitimate. If you want an investment that simply tracks the price of oil, consider United States Oil Fund (USO), an exchange-traded fund that tracks the price of West Texas Intermediate light, sweet crude.

Debt negotiation. With average household debt at record highs and personal bankruptcy rates rising, it's no wonder more people are reaching out for help with their debts. It's tempting to pay someone who promises to make creditors go away. But some debt-negotiation companies counsel their clients to ruin.

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