When Wall Street suffers, there's a bull market
He's 68 years old and has been living on disability
since he retired 10 years ago as a plasterer. Lung disease cost
him the use of half of his lungs. A bad decision cost him a big
chunk of his savings.
James Hambleton, who lives near Baltimore, blames
himself for buying into what he believes was an investment scam.
"I didn't do any research before I bought them.
That's where I made my mistake," says Hambleton.
Hambleton bought two ATMs for $11,294.75 each. The
company, Bankcard Group Inc., guaranteed him $250 a month, per machine,
according to Hambleton. He received a few payments on time, but
then the company gradually got further and further behind. Hambleton
complained but got nowhere. He was not alone.
In February 2001, the Maryland Attorney General's
Office accused BGI of fraudulently raising at least $3 million from
130 investors by operating an "unregistered and fraudulent"
ATM investment program.
BGI's assets are in receivership and will eventually
be liquidated and returned to the investors. A decision about fines
and possible criminal charges is pending.
For the $22,589.50 James Hambleton invested in the
ATMs, he received a return of $2,479.80.
"The money they stole came real hard to me,"
says Hambleton. "My wife and I take over 13 medications a day,
and I was depending on that $500 to help pay for some of our medications.
It's hurt us bad."
The scams they are a-ragin'
According to the North American Securities Administrators Association,
this is a prime time for investment scams.
Whether it's ATMs or payphones, promissory notes or
callable CDs -- swindles are in high style.
"The end of the bull market on Wall Street
was the beginning of the bull market for scams," says spokesman
"At the end of the bull market, investors
still have expectations of a 20 percent return. They go to the bank
and the bank offers them 4 percent on a CD. How do you reconcile
that with a 20 percent expectation."
When tech stocks were still flying high, investigators
saw a lot of abuses by day trading firms, says Matt Nestor, director
of the Massachusetts Securities Division.
"Firms were misleading people about the risk.
Day trading is very difficult and people lose money. They were saying
just the opposite. They weren't saying that close to 90 percent
of their clients are out of business in a year. With the market
correction, the bloom is off the rose as far as day trading goes."
Now the scam action has shifted to the chat rooms
and message boards. The prime culprits are people who are "shorting"
Short-selling stocks is a legitimate investment method
where the investor capitalizes on the stock price dropping. As an
example, an investor borrows 100 shares of XYZ stock from his broker
at $50 per share and then sells those shares to someone else.
If everything goes according to plan, the stock might
drop to $40. The investor then buys 100 shares at $40, returns the
borrowed shares to the broker and pockets the $10 per share difference.
The problem comes when someone shorting a stock tries
to drive down the price by posting false, negative messages about
the stock or its company on stock message boards and chat rooms.
"Where we find systematic attempts to manipulate
the stock price through false postings, we try to take action, particularly
if it's a short trying to damage a stock," says Nestor. "There's
a fine line. People have a right to post things on bulletin boards,
but you can't yell 'Fire' in a crowded movie theater and you can't
lie in posts to manipulate stocks."
Nestor says there was one case where three people
posted more than 10,000 messages over the course of a month.
Beware independent insurance
But a bigger problem these days, according to NASAA's Baker, is
with independent life insurance agents.
"Of the 16 'cease and desist' orders issued by
Indiana's securities commission in the first quarter of this year,
11 targeted independent insurance agents. It's a huge problem."
Those agents were accused of selling securities without
a license. A security is often thought of as a stock or bond, but
also covers anything representing a debt or ownership. The life
insurance agent problem mainly centers around them selling investments
in viatical settlements, promissory notes, pay phones and ATMs.
"A lot of them will try to make the argument
that what they're selling isn't an investment -- it's a business
venture," says Baker.
The National Association of Insurance Commissioners
Anti-Fraud Task Force says those products should be defined as securities,
and many of the insurance agents involved aren't properly licensed
to sell securities.
Task force representative Marty Nevrla says it's a
very serious problem.
"There are tens of thousands of independent insurance
agents who are unsophisticated and unsupervised, and there are many
that are also unscrupulous. It's a low threshold to get your insurance
"Look at what it takes to become a licensed broker
and there's no comparison. You're going to weed out a lot of folks
who just can't hack it if you up the threshold for becoming an insurance
Nevrla says civil prosecution of these scams isn't
"Agents have to be put on notice of what they
can and can not do and if they do what they shouldn't do, we'll
come down hard on them administratively and criminally. Criminal
prosecution is the best deterrent.
"But it can be hard to get prosecutors to take
these cases, even the high dollar ones. They have low priority compared
to violent crimes."
When stealing pays
"You can hold someone up for $10 and go away for years. These
people steal millions and don't get arrested."
Nevrla says we can expect to see more scams now that
financial modernization is blurring the lines between the insurance,
investments and banking industries.
"We need to dramatically increase the information
and education about what this modernization means. We're addressing
it, we're all working together -- the securities administrators
association is working with us."
There are steps you can take to reduce your chances
of being scammed.
"Check out the investment
and the seller with your state securities division -- they're listed
on the NASAA
Web site," says Ashley Baker. "If 90 percent of the people
we end up talking to had checked with us in the first place they
could have avoided the losses."
Baker also suggests checking with the Central
Registration Depository if a broker calls you pushing an investment.
The CRD will give you the background on a broker including any disciplinary
"Use common sense," advises Baker. "When
someone promises you 12 to 15 percent returns, approach it with
healthy skepticism. If they won't provide credible written material,
Posted: June 4, 2001