Ponzi Schemes

This is one of the most popular scams perpetrated on inexperienced investors. It is named after Charles Ponzi, who in the early 1920's in the U.S.A. managed to swindle 2 million dollars from unsuspecting people. It is often called pyramid schemes.

The promoters of these schemes promise investors a very high return on their investment with no risk. The investment promoted doesn't actually exist with early investors receiving their dividends out of the money they already invested. This allays any concerns they may have initially had, and often they will then make larger investments over the coming months and happily spread the word to family, friends and work colleagues of this great investment. Soon there is a steady flow of funds into the scheme, and the number of investors grows.  

The scam can go on for many years however in practice this is rare. It usually collapses when the amount of money from new investors is not sufficient to cover the dividends of those already in the scheme. At this point the promoter will withdraw all monies and make a quick exit.

They can be very elaborate schemes like the Wattle group in Queensland that had a sales force to promote it. The scheme lasted  a number of years and made a few investors rich who were fortunate enough to get out early. Overall 2760 investors invested $160 million with a 50% per annum return promised with monies supposedly on loaned on a short term basis. When it collapsed it left many people in financial ruin with their money planned for retirement gone.

It is easy to see how people can get caught up in it when dividends are received. Some schemes don't pay out at all with the promoter working the scam for a few months and then shutting it down taking all the money.

The old saying "if it seems too good to be true it probably is", certainly rings true here.  

  Lottery Scams

Lottery scams have become more and more popular with technology enabling promoters to send out thousands of emails at one time to unsuspecting people.

They usually start with you receiving an email saying you have won a prize in an international lottery. Most likely you will have difficulty in remembering how you entered the lottery in the first place, but who cares you're a winner!

You are then asked to contact the sender who will politely tell you that to process your winnings you need to send them a fee! The promoters are well scripted and have appropriate answers to your questions. After all what do you know about laws and regulations in other countries? What's $100 if you have just won $100,000!  

This type of scam can be promoted in many different ways here are a few of the more popular ones:

You receive a letter from a legal firm in another country, informing you a long lost relative in that country has died and has left all their wealth to you! After making contact you will be told that to finalise the will, you will need to send some money to cover the firm's legal costs to date and Government expenses. The fact is this is a scam. The firm doesn't exist and the promoter only has a mail box, phone, fax and a very nice and professionally looking letter.

Another popular scam is to receive a letter from an individual or company in a third world country like Nigeria. They say government legislation prevents them from taking the money out of the country themselves. They can however send it to a third party which in this case is you! To do this you will be very well rewarded. However they need you to send them some money to pay off some Government or Bank official or any other reason that may convince you!

Share promotions over the phone

This scam is usually operated from somewhere in Asia often using expatriate Australians as the sales team. They often make calls during meal times, offering you shares in companies that have struggled in the past which are about to boom. They know this will occur due to them having inside information, tips or just good old rumours. They use high pressure tactics and insist on you making a decision to invest immediately. The investment is promoted as being risk free however the window of opportunity is small meaning this golden opportunity won't last!

They will be unable to provide any written data on the company to be invested in, with vague comments sometimes being made about a new product that will corner the market. 

The promoter may say they will receive a commission on the sale. The fact is your money won't be invested and you will lose the lot.

How do they get your phone number? Well there are numerous ways from phone books to magazine subscriptions. To stop them from ringing again don't be nice and ask them not to call again. Be rude and promise to report them to the authorities!

Fact: Australians have lost over $400 million dollars in this type of scam alone! Don't be the next one.

Request for Bank Details

Now this isn't an investment scam however it is becoming more common and sophisticated. It is targeted at those who use internet banking. You will receive an email from your Bank advising they are making changes to their site and need you to log in to their site via log in button on the email. You will then be requested to confirm an account number. The fact is this is a scam to obtain your account details.

After hearing about this type of scam I received one as outlined above. What impressed me was how much it looked like an email I would sometimes receive ie logo, layout etc. Knowing my Bank would never request my account details, after all they know them already, I declined the request and deleted the email.

Sure enough within a few hours I received a legitimate email from my Bank confirming the scam.

Offer to buy your shares

Some of you may have heard of David Tweed who is notorious for writing to shareholders offering to buy their shares at a ridiculous low price. He obtains public company shareholder records which is legal to do so and then targets those who he believes may not know what they are really worth. In recent times he has advanced this scam by offering to buy your shares at close to market valuations however paying the proceeds in instalments over many years.

The key here if you own shares it is easy to obtain up to date prices via newspaper and the internet (Australian Stock Exchange)

Don't be caught out!