Archives for scams category
9
Feb
Posted in scams by Roger |
It occurred to me as I was assembling my list of good blog articles for yesterday that several dealt with identifying or avoiding scams, either particular scams or the general concept of scams. This makes sense; anytime is the perfect time for nefariously minded individuals to dangle the possibility of huge profits and giant returns to see who nibbles. The only solution is constant vigilance, and understanding of how scammers work, in order to protect yourself.
In the spirit of informing the public of how to identify and avoid these types of nefarious schemes, here’s a quick primer to help you learn how to protect yourself and your money. These are far from the only ways to reduce the possibility of finding yourself on the wrong end of the scheme, but they are a good start. Follow these simple, largely commonsense suggestions, be careful and cautious, and you’ll be a much tougher target for scammers:
If it seems too good to be true, it probably is: If you can keep this one point in mind, you’ll save yourself an endless amount of scam related trouble. One of the most common tactics used by scammers is promising results well beyond that of other methods, so long as you trust them and give them your money (or personal information). If you know the sort of results you can reasonably expect to get through normal means, you’ll be able to recognize when scammers are promising more than they can possibly deliver. Here’s some advice about ‘normal’ returns to help guide you:
-Investing: The usual figure cited for the long term return offered by a diverse large cap index (like the S&P 500) is 10% annually, including inflation. That’s about the best you can expect from a ‘risk-free’ investment (and even that amount is far from certain in the short term, since the market is volatile). If someone is touting an investment that returns much more than that amount, it’s either significantly riskier (as with things like forex or options) or they are flat out lying. If they toss the word ‘Guarantee’ around as well, like ‘140% annual return, GUARANTEED!’, then run, don’t walk, as far away from the investment as possible.
Taking a chance on a potential scam is an even worse gamble
-Employment: When you’ve been out of work for a while, the ads you see like ‘Make $133 an hour from home, no skills required’ start to seem more and more tempting. Keep a few points in mind though. First, the amount you can reasonably expect to get from a starting job is around $10 an hour, at most; anything above that amount is likely physically hard (touting freight onto and off trains), requires special training (computer programming skills or at least a college degree), or is generally unpleasant (handling trash). Second, while work at home jobs do exist (case in point, I’m a blogger), most require you to start your own business (again, see blogging), rather than being offered by major corporations with high starting pay (particularly to people who haven’t ever worked for them). Finally, any place trying to fill a job half that profitable won’t need to resort to paid ads (or pieces of paper on telephone poles); a few days on Monster or CareerBuilder and they would have more applicants then they could ever handle.
-Government Money: Yes, the government does provide money to people. No, it’s unlikely that you’re missing out on any money that information from a late night infomercial will help you to find. Especially since the most famous proponent of ‘Free Money From the Government’ just copied the whole thing, anyway. If you really want to find government money, check online at any number of government websites; a little searching will yield all the information you need, ready and available (and for free, to boot).
Don’t Give Away the Store: Or your personal finance information, at least. If you can keep information about your financial institutions, social security number, and credit cards from falling into the wrong hands, you can foil a lot of scams. Remember, the only time you should even consider providing such information is when you initiate a transaction; if you are approached by an outside source, just say no. Speaking of which…
ALWAYS avoid wiring money to people you’ve never met: Things like Western Union or MoneyGram are a good way to transfer money to family members who are difficult to reach otherwise. But they are untraceable and unrecoverable, making them an ideal way for scammers to separate you from your money. Unless you need to reach people you care about and have no other means of doing so, avoid wiring money.
Recognize (and know how to avoid) the most common scams: I’ve covered many types of schemes in depth previously. For internet users, Advanced Fee schemes are common, convincing people to put up money up front to ensure a job or a share of a windfall. Ponzi Schemes, where proceeds from future victims provide money to fund the returns of current victims and Pyramid Schemes, which depend on an endless amount of future victims, are also common schemes. Be aware that not all sources of investment suggestions are completely benign; some hope to Pump and Dump stocks (especially penny stocks) after convincing you to invest in them.
Don’t Be Greedy: Probably the best advice I can give to help you avoid scams of all types is not to let a lust for wealth get ahead of your common sense. Keep your head, be rational, and ask yourself a few pertinent questions, like ‘Could a company really stay in business and compete effectively if they pay tens of thousands of dollars to someone for glorified email sending?’ or ‘If I knew the secret to doubling my money in the stock market each month, why would I share it?’ That should help to put the crazy scams you read or hear into perspective.
Now, head back out into the world, and avoid those scammers, everyone!
More Resources:
The Federal Trade Commission’s resources for Fighting ID Theft and Fraud
Scambusters: Exactly what it sounds like, a website devoted to busting the most common scams
6 Tips to Avoid Senior Scams: Even if you aren’t a member of AARP, these are still some good suggestions to keep your money safe.
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18
Sep
Posted in scams by Roger |
“Greetings! I am the executor of the estate of the Nigerian Prince Iam Notreal. I am looking for someone who can help transfer the money from his estate into the United States. In return for your help in conducting this transfer, you will receive a substantial reward, equal to 45,029,387 US dollars. I just need a few thousand dollars to pay the accounting expenses. Please respond with your bank account information and relevant passwords at your earliest convenience.” Sound like a tempting offer? Think again!
The Scheme
Chances are, you’ve encountered emails saying something similar to this during your time online, particularly if you don’t have a very effective spam filter on your email system. The scam is hopefully very obvious; if you give up your financial information (or send money in advance as a ‘processing fee’, or something similar), you’ll end up losing your money and never see a penny in return. By holding out the possibility of huge returns on your ‘investment’, the scammer hopes to make you blind to the reality that the offer is a fake, and to get money or financial information out of you.
Historical Advance Fee Frauds
Spanish Prisoner: A classic advance fee fraud, dating back to the beginning of the twentieth century. The fraudster convinces the victim that there is a rich man being held in a Spanish prison, and if some money can be provided to secure his release (in the form of bribes), then the victim will be richly rewarded when the man is released. Of course, such a reward will never come.
Nigerian (419) Scam: The modern scam with which most of us are familiar, featuring emails sent from untraceable accounts (frequently originating in Nigeria, hence the name of the scam), trying to get money from victims. They can either focus on getting victims to send them money voluntarily (usually through a wire transfer, making the money untraceable and unrecoverable) or on getting financial information from the victim in order to defraud them.
An Example Scheme
I decide that, after a whole week spent scamming my way to a small fortune, to use my email skills to make money. I create an elaborate scenario, where I claim to be an employee at a bank who knows of a rich, elderly client who is about to die with nobody to inherit his vast fortune. Now of course, I can’t simply keep all his money for myself; being an employee, I would be too suspicious. Instead, I offer to transfer the money into the account of the email recipient, in exchange for an ‘advance fee’ to cover the legal fees of the transfer.
What the average 'Nigerian Prince' actually looks like
Realizing that there are few people who would fall for such a scheme, I decide to contact thousands, even millions of people at once. Luckily for me, I can use the power of technology to reach them via email and other technological means to reach those people with minimal effort on my part. So what if only one in a million people will fall for my scheme; if I contact ten or twenty million, I’ll still have a steady supply of people responding. Once they do, I can follow up with the next part of plan, to get the people who respond to give me access to their accounts or to send me money through a wire transfer, whatever my diabolical mind can determine. All I need is an opening.
How to Protect Yourself
Be Skeptical – I hate to be the bearer of bad news, but nobody, with the possible exception of your parents, will give you great amounts of money for nothing. If you get any offers for free money, there’s going to be some kind of catch. There’s always a price when you receive money, such as having to do something you’d prefer not to do with your time in exchange for money (also known as ‘work’). Don’t expect to get money for nothing, and you’ll reduce your risk of being scammed significantly.
Take Care When Sending Money to Strangers – You shouldn’t send money to people who try to contact you online. If you do need to send money to someone online, for a legitimate item sold on an auction site, for example, stick to methods that offer you some protection, such as PayPal or other online payment services, rather than using wire transfers. There are legitimate sources of goods and services online, but avoiding scams requires diligence and care.
Don’t Give Out Financial Information – The best way to protect yourself is to ensure that nobody other than you has access to your financial info. If you do get embroiled in a scam, sending money via a wire transfer or other method will be bad, but at least your losses will be limited to what you actually send; the scammers won’t get any more money from you (at least, as long as you don’t take their comments about ‘needing more money for additional fees’ seriously). While losing money is never fun, having your life savings depleted because a scammer got into your accounts is even worse.
Follow these steps, and you’ll find yourself much safer from advanced fee frauds. Just don’t worry the next time someone from Nigeria tries to give you some money, and delete the email right off the bat.
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17
Sep
Posted in scams by Roger |
If you spend much time reading financial information online, you’ve probably noticed that many otherwise reputable sites have sidebars displaying advertisements touting penny stocks, with a come on like ‘3 penny stocks about to soar.’ In fact, you probably see several of them on my sidebar, now that I’ve used the phrase ‘penny stocks’ in this article. The problem with penny stocks is that, by definition, they are associated with lightly traded companies who have only a small net capitalization, making them subject to any number of scams. Which brings us to today’s topic…
The Scheme
The basic pump and dump scam has three main parts. First, the schemers buy up a great deal of a stock, preferably one with a small price, allowing them to purchase a lot of shares. Second, the schemers attempt to build a buzz for the stock, touting it on message boards and other resources, hoping to pump up the perceived value (the ‘pump’ part of the scheme). This is why penny stocks and others with few outstanding shares are favored; few scammers possess the resources needed to move the price of large-cap stocks, given the high trade volumes, large numbers of shares and many sources of other information.
First Comes the Pump...
Finally, after the price of the stock has risen significantly, the scammers sell their shares, netting a large profit and leaving the victims holding greatly overpriced shares (the ‘dump’ step of the scheme). The overall result is schemers who profit greatly, and investors who lose money on stocks they never should have purchased.
A Historic Pump and Dump Scheme
Jonathon Lebed: An example of one teenager doing something other than loitering, he made a small fortune buying penny stocks, touting them on message boards, and then selling them. The SEC caught wind of him and prosecuted him (the first time they ever prosecuted a minor), eventually settling out of court and allowing Johnathon to keep more than a half a million dollars in profit. Not bad for someone who couldn’t legally drive at the time.
An Example Pump and Dump Scheme
Once again, I decide I can make a much higher profit by running a stock scheme than I can by blogging, and this time (luckily for our example) I decide to try a pump and dump scheme. I search through the ranks of penny stocks, eventually settling on one (or a small number) that are selling for a very small price, are lightly traded, and sound vaguely intriguing. I purchase a large number of shares of each company, after I do some homework to ensure there isn’t much information to be found on any of them.
After I buy up a large amount of these stocks, it’s time to make them appealing to other investors. There are any number of ways to do this; creating a fake review of the company, making a video that calls it the ‘pick of the century’ or even writing posts recommending my own stocks on a financial blog. To ensure that people encounter my ‘pumps’, all I need is some clever and provocative ads, like the ones mentioned at the start of this article, placed on sites that gather a lot of traffic. Before long, I’ve got thousands of people reading my ‘expert’ views on these crummy stocks, and with few, if any, sources contradicting me, more than a few of them will take me at my word and start bidding up the stock price in their rush to buy.
...Then Comes The Dump
Depending on how greedy I am (as well as how much I think my touts will bump up the price of the stock before people get wise to my scheme), I can start selling after the stock prices double, or triple, or increase ten-fold, netting me massive profits. I will more than cover the expense of the advertising and other costs associated with setting up the scheme, leaving the people I conned into buying those securities holding the bag, with stocks that have no justifiable reason for their high valuation.
How to Protect Yourself
Avoid Penny Stocks – Frankly, there’s few reasons to ever consider penny stocks. There are plenty of opportunities in small cap stocks that are small enough to grow rapidly, but large enough that they can’t be readily manipulated by unscrupulous profiteers. Save yourself a great deal of time and aggravation and avoid penny stocks (and other questionable investments, while we’re on the subject).
Be Skeptical About Investment Advice – Hopefully, you already take most investment claims and suggestions with a grain of salt; not all advice is appropriate for everyone, after all. But especially when taking advice from online sources (which do not require fact-checking or even knowledge of the creator’s true identity), you have to stop and ask yourself what the writer has to gain from you following their advice. Most people, if they have a stock they genuinely believe will increase many times its current price in a short time, will not be willing to share that stock’s identity with you; if they are, you have to ask yourself, why?
Do Your Own Research – Alright, so you’ve just read about a stock that sounds like a fantastic investment. Before you go and buy based on a single recommendation, it’s time to do plenty of research. There should be plenty of resources that detail the stock, providing you with material to support your choice, or perhaps to change it. If you can’t find research on the stock (preferably from large, well-established firms and not just blogs or other ‘anonymous’ sources), then do yourself a favor and don’t buy it.
Follow these simple steps, and you should have few problems with ‘advisers’ trying to pump up their stocks and then dump them on you.
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15
Sep
Posted in scams by Roger |
All this week, we’re looking into some of the most popular scams used by ne’er do wells to take your money. Today’s subject is especially diabolical, as it attempts to convince you to give up your money voluntarily, and then convince others to do the same thing. These schemes also lose points for tarnishing the name of one of the Wonders of the Ancient World. Yes, this episode looks at pyramid schemes.
The Scheme
The basic promise of a pyramid scheme is simple; by making a one-time payment to someone higher than you on the pyramid, you will get a place in line and will, as more people join, make many times their initial deposit back. All they need to do is recruit more people to the scheme (or, as it will likely be called, the ‘investment opportunity’) and you and all the other investors can make many times your initial investment, all by just getting other people to join the investment. It’s a simple way to become rich, right?
Sadly, these aren't the pyramids we're discussing
As with many quick and easy ways to become rich you’ll hear about, there are some issues. If you get in the scheme near the start, you can profit (at least, until the authorities find out about your involvement), you can profit from your involvement, but the bulk of the participants end up paying money for their involvement with no return. The only way to keep the profits flowing is to find an endless series of new participants. Since the human population is finite (and squirrels tend not to have money to invest), eventually the whole scheme will fall apart, with the latest recruits unable to find enough new participants to recuperate their investments.
An Example Scheme
Let’s say that I decide to start a pyramid scheme. (As always, I’m a diabolical character in these examples.) I recruit three people, offering to tell them how to make a huge profit with minimal work, after they pay a fee of $1000. I pocket $3000 and walk off laughing, after telling these first three how to recruit others to our scheme. They each go out, recruiting three more people, who in turn recruit three more people. The scheme works well for a while; everyone in the first few levels gets $3000 after their $1000 ‘investment’, a 200% return on their money.
The problem is that the number of people required increases exponentially. After five rounds of each individual participant needing to find three new people to join, there will be 81 people need; high, but far from impossible. More than 19,000 people are needed after ten rounds, and nearly 5 million people (the population of several small states) after fifteen rounds; as you can see, the number of needed people quickly becomes very high. After a mere twenty-two rounds, 10 billion people are needed to maintain the scheme, an impossible level of people given the current world population. The people in the last round of the scheme (which will likely occur way before it requires the whole world population to participate) will get stiffed, meaning around 75% of the pyramid scheme participants will lose their money no matter what.
How to Protect Yourself
Understand How You Will Make Money – Understand how your investments will work BEFORE you put any money into them. If all or the vast majority of your profits come from recruiting other people to the business rather than selling a product or investing your money, you’re likely looking at a pyramid scheme. Proceed with caution and behave accordingly.
Be Wary of Network Marketing – Network Marketing and Multi-Level Marketing, usually through companies like Amway and Tupperware, tends to get a bad name, as well as being associated with pyramid schemes. There are some disturbing similarities, the profits from recruiting new people being a big one, but some of these can represent legitimate opportunities. (My aunt swears by Avon, for example.) Just be aware that there can be a fine line between the legitimate opportunities and the scams, and do plenty of research before committing any money to anything.
Be Skeptical – Hopefully, you’re experienced enough in life to realize that getting massive returns on your money in a short period of time with almost no work is tough, if not completely impossible. Don’t worry that you’re missing a great opportunity by not joining in on a touted investment ‘opportunity’; there are enough legitimate, good opportunities available without trying to shoot the moon.
That’s all there really is on pyramid schemes; don’t be suckered the next time your cousin calls you, telling you about an amazing investment opportunity, if you just help him find five more investors, and you’ll be alright. Let him know what you’ve just learned, and hopefully he hasn’t put up his money yet.
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14
Sep
Posted in scams by Roger |
All this week, I’m going to be taking a closer look at many of the tricks and techniques used by men and women with questionable ethics in order to take money from innocent people, whose ranks include my readers (I hope…). In order to help you fight against these charlatans, we’re going to look closer at some of the most popular techniques used to separate you from your money. First on the agenda is the Ponzi scheme, which has been getting a lot of attention due to recent purveyors of this rather old scheme.
The Scheme
A basic Ponzi scheme works like this: investors are convinced to invest with the schemer, usually as a result of clever marketing and promises of unrealistic investment returns (doubling your money, risk-free, in ninety days, for example) in an unorthodox investment arrangement. A small number of investors form the first group, putting their money into the investment. They receive the promised returns, paid from their own deposited money, and word spreads of the lucrative opportunity to become rich offered in the schemer’s investment. A steady influx of cash ensures that the payouts continue, drawing in an even greater amount of investment money, forming an endless circle. Endless, that is, until the scheme collapses under its own weight, unable to get enough new money coming in to cover the payouts or having the funds depleted by withdrawals.
Historic Ponzi Schemes
William Miller – Offering a ten percent weekly return, he earned the nickname ‘520 percent’ and a ten year prison sentence, years before Ponzi came on the scene. (Which means all you Millers out there can breath a bit easier; if William’s scheme had been more famous, you might be reading an article on ‘Miller Schemes’ right now.)
Charles Ponzi – The man who lent his name to this whole class of schemes, he claimed to increase your money by 50% within 45 days or double it in 90, all by buying foreign stamps and reselling them in the US. He ended up in prison for much of his adult life, as a result of this and other wrong-doing.
Bernard Maddow – The most famous recent example of a Ponzi scheme, he ran an investment fund that ended up being busted during the fall of 2008, leading to criminal charges against him at the end of 2008. As a result of the huge size of this fraud (and the fact that his last name is pronounced ‘Made Off’, lending itself nicely to ‘made off with all my money’ comments) ,he is one of the most talked about Ponzi schemers.
An Example Scheme
Let’s say I decide to run a Ponzi scheme. I advertise that for a mere $10,000 minimum deposit, I can provide you a ten percent return each week (repeating Miller’s claim, basically) from a scheme involving hedging pork bellies with soy beans, or whatever scheme I think will catch people’s attention. I get ten initial investors, and at the end of the week, I dutifully return 10% of their money, which I call the ‘investment proceeds’. In reality, all I’ve done is take their money and give part of it back to them, but make them think that the entirety of their cash is still being invested.
With the fame I derive from these first ‘investments’, suddenly there are even more investors lining up to give me money. The problem is, eventually the whole thing catches up on me. Even if I get ten new investors with each week, after ten weeks, they will think I’ve got their money, even if after ten weeks, I only have half as much cash as they led me to believe, or after nineteen weeks, when I run out of investor money to pay everyone (sooner, if I take part of the incoming money for my own profits):
Ponzi At Work
As you can see, the real value of money I have in my ‘fund’ is always less than the amount people have added to my scheme, and eventually, the difference becomes so large that the fund is essentially bankrupt. The only solution is to get the number of people who donated each week to increase; but even in that case, eventually the funds will run out, and everyone will realize I don’t have their money held safe, steadily making profits.
How to Protect Yourself
Become Financially Educated – The best defense against Ponzi schemes, as well as most other types of scams in the investment world, is to have at least a basic financial understanding. If you learn about stocks, bonds, mutual funds and other investments, and have an understanding of the amount of return you can get from them, you’ll be able to look at the pitches of a Ponzi scheme and realize how absurd they sound. Which brings us to our next tip to protect yourself…
Maintain a Healthy Skepticism - It’s easy to look at some of the promises offered by Ponzi schemes (1o% weekly returns, doubling your money in ninety days, etc.) and get caught up in emotion, investing your money to chase wealth. Instead, consider such dramatic claims as enticements, and do your own careful research. If it doesn’t seem like the specifc advice you’ve encountered on the types of investments touted by a sales person is right, don’t make a purchase. That’sa ll there is to it.
Diversify Your Portfolio – While this is not advice specific for dodging Ponzi schemes, per se, but it’s an important part of any financially responsible family. If you have all your money in one place, it’s easier for your money to disappear should the investment turn out to be part of a Ponzi scheme. No matter what returns are being offered, be sure to split up your money, to keep one bad egg from crushing your nest egg.
That’s all for Ponzi schemes. Turn in next time, same financial time, same financial station!
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