Ponzi, pyramids and pumps -- schemes designed to take your money and run

Ann Hatchitt

One of the largest areas of growth is individual investing, because more and more people are responsible for their own retirement plans," Crawford says.
The Texas Securities Board has established a Web site with links to the National Fraud Information Center and Investor Protection Association, as well as the Security and Exchange Commissions and other organizations with helpful information for the new investor.
"Unfortunately, by the time someone calls to report a suspected fraud or scam, many times the money they invested is gone," she says. "We immediately shut the operation down to prevent other people from becoming victims, and always try to get the person's money back. But that doesn't happen often. As a deterrent to the criminals, we vigorously prosecute criminal securities fraud cases in Texas and have the most convictions in the nation."
Wells has described investment frauds in detail in his books and lectures. They usually fit into one of several categories.
`Pump and dump'
In the simplest form, an example of "the pump and dump" scam is a con artist purchasing a significant amount of a security at a low price. The value of the stock is "pumped" up when the individual sets up online bulletin boards, chat rooms, "spam" -- email junk mail -- or sends out newsletters with inflated, impressive and false information about the stock.
All that Internet hype can run the price of a stock up. The initial investor then "dumps" or sells off his or her investment at a profit.
On a larger scale, investigations reaching as high as the congressional level are underway to determine if company officers intentionally sought to overvalue the stock of Houston's Enron Corp. Questions are being asked about the filing of financial statements to the Securities and Exchange Commission. If intentionally misleading information was filed, the premise would be similar, Wells says.
According to Wells, "A company will `cook its books' to show it earns more money than it really does. Based on that, investors buy stock."
The `risk free' fraud
In general, another type of fraud promises easy money delivered on a silver platter, and every other glorified, descriptive adjective ever used.
Prospective investors will hear: "Guaranteed, hot tip, no way you can lose money, gotta get in on the ground floor," and "If this doesn't perform as I just said, we'll refund your money, no questions asked."
That could be true if the hapless investor can find the con artist who made the promises. Scam investment opportunities range from precious metals to land deals to buying into nonexistent companies.
"We are seeing viatical settlements, which are sales of life insurance policies to other individuals, which can or cannot be legitimate," Crawford says. "Bogus certificates of deposits are sold through small ads in the newspaper offering higher interest rates than the banks are offering, but they are not legitimate."
Early in January, the SEC shut down an Internet operation called "Invest Better in 2001." A 17-year-old California teenager, Cole Bartiromo, lured more than $1 million from 1,000 investors worldwide with promises of "risk-free returns" of up to 2,500 percent. Not surprisingly, it turned out the operation was bogus.
"We are often most concerned about the elderly when we talk about these `risk free' types of scams," Crawford says. "They are particularly vulnerable to savvy salespeople. Many times they are contacted over the phone. When the elderly person is a victim and loses their life's savings, they don't have the years ahead of them to make it up again."
Pyramid schemes
In a pyramid scheme, money is collected from people on the bottom to pay off other individuals farther up the pyramid. As more people invest, new pyramid levels are created, and a position in the pyramid rises. In theory, an investor would be entitled to more money.
In some schemes, investors also must buy a product to join. Unlike a true multi-level marketing plan, however, selling the product is less important than recruiting others to join the network.
Ultimately, there comes a time in either case when no new money flows in. When this happens, the pyramid collapses.
In the early 1900s, an Italian immigrant named Charles Ponzi solicited people to invest in international postal reply coupons, which could be redeemed for stamps. He promised a 40 percent return in just 90 days. Ultimately, the authorities discovered there weren't enough coupons in circulation to support Ponzi's schemes. Ponzi's name is now synonymous with pyramid-type schemes.
According to James Ratley, Association of Certified Fraud Examiners program director, the victims are almost as hard to control as the perpetrators.
"Once they realize they have lost a certain amount of money, the con artist may tell them there is an even better deal that will help them get everything they lost back, plus some," Ratley says. "Sometimes we find out about victims sending money to the criminals in jail."
Steering clear of scams
In order to invest wisely and steer clear of frauds, experts emphasize that prospective investors must research for and find the facts on a company or money-making presentation.
The Security and Exchange Commission has these recommendations when considering investing in individual securities:
Ask for financial information from the company and analyze those documents.
Verify claims about new product developments or lucrative contracts.
Call the company's suppliers or customers and ask if they do business with the company.
Check out the people running the company and learn if they've ever made money for investors in the past.
Federal securities laws require many public companies to register with the SEC and file annual reports containing audited financial statements. For example, the following companies must file reports with the SEC:
All U.S. companies with more than 500 investors and $10 million dollars in net assets; and
All companies that list their securities on the Nasdaq or other stock exchange such as the New York Stock Exchange.
When evaluating different investment opportunities, the North American Securities Administrators Association recommends:
Contact the state securities board to see if the investment vehicle and the salesperson are registered.
Contact the Better Business Bureau and ask if any complaints have been filed against the venture's promoters or principals.
Deal only with financial advisers, broker-dealers or financial institutions with a proven track record.
Ask for written information on the investment product and the business. Such information, including financial data on the company and the risks involved in the investment, is contained in a prospectus. Read it carefully.
Don't take everything heard or read at face value. Ask questions and do some personal sleuthing. For help in evaluation the investment, go to an independent resource, such as an attorney or an accountant.
Texas Securities Commissioner Crawford encourages anyone with questions or with any situations to report to contact the state office at (512) 305-8300 or to visit the agency's Web site at (http://www.ssb.state.tx.us).

Ann Hatchitt is an Austin-based freelance writer.