When Wall Street suffers, there's a bull market for scams
By Laura Bruce • Bankrate.com

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 Ashley Baker.

"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" stocks.

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 agents
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 license.

"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 agent."

Nevrla says civil prosecution of these scams isn't enough.

"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."

Hambleton agrees.

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 actions.

"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, walk away."

-- Posted: June 4, 2001