MONEY COMMENT
The Biggest Scam In Town

By Cliff D'Arcy
July 12, 2004

Ever had your blood run cold? Or experienced that shiver down your spine when someone 'walks over your grave'? Well, it happened to me one evening recently in my local pub - and I didn't like it one bit! It happened during a conversation with two friends who were grumbling about the hassles caused by banking errors. One went on to reveal that he was making tidy sums from a secretive 'investment' scheme that he'd joined. As he explained the details, I felt the blood drain from my face.

My friend explained that, as he was living rent-free for a while, he'd recently handed over half of the £60,000 profit from selling his home to a relative. This relative had 'invested' this money with a work colleague, who promised high returns in just six weeks. My chum claimed that he was drawing a guaranteed 'income' of £330 a month from his capital, which continued to grow within the scheme. What's more, instead of taking out his capital, he was leaving it 'invested', so as to make him even more money.

At this point, I knew something was wrong, because £330 a month on £30,000 equals an interest rate of 1.1% per month - or 14% a year compounded. This sort of return would be impossible to obtain without taking great risks with investors' capital. In fact, it's considerably higher than the 11% a year that the UK stock market has returned on average since 1918 - and we all know how risky shares are, with the market plunging between 2000 and 2003!

Digging further, I discovered that my pal - a normally astute guy - was quite confident that all was above board, because his relative was a financially sophisticated, highly paid executive in a well-known global company, plus loads of his relative's colleagues were also 'in' on this moneymaking opportunity. However, when I asked in what assets his money was invested, he was unable to say.

At this point, I regretfully explained that if his were money invested in cash or bonds, he could expect to make 0.5% a month with little or no risk - less than half of the return he claimed. Any return above this would involve some risk to his capital, whether his money was 'invested' in shares, property, antique duelling pistols or whatever. In many ways, my friend's tale reminded me of the collapse of this dodgy property investment company.

Finally, I warned him that this scheme was illegal, since the organiser was clearly not allowed to take deposits. I also informed him that, because he was not investing with an authorised firm, he could not claim a penny from the Financial Services Compensation Scheme if he suffered any loss or his money disappeared completely.

Nevertheless, despite my warning that he appeared to have invested in a 'Ponzi' scheme - where investors' own capital or that of new recruits is used to generate bogus 'returns' to investors - my friend left in a pretty upbeat mood. Perhaps he wasn't yet ready to face up to the very real possibility that he may have lost half of his life savings?

More: Consumer help from the Financial Services Authority | Investments That Sound Too Good To Be True.