Having spent decades building up your wealth, don’t gift it to these crooks and charlatans!
One topic about which I’m particularly passionate is scams. Fortunately, here at the Fool, we have our A fool And His Money discussion board (note the small ‘f’), where there is much discussion of questionable goings-on and possible financial trickery.
In my view, the worst possible financial disaster is to lose some or all of your nest egg to a swindle, after having spent your life carefully saving and investing. Recently, I came up with a list of no fewer than 22 different scams to avoid. After this exercise, I concluded that for every honest method of making money, there are dozens of ways to fleece people!
Many scams are a variant on what’s known as advance-fee fraud. This involves taking money upfront, with a false promise of delivering far greater sums further down the line. In this category, I include such delights as bogus lotteries, Nigerian 419 scams, Ponzi schemes and dodgy gambling syndicates.
Although it’s often said that ‘you can’t con an honest person’, you don’t need to be daft or stupid in order to be taken in by con artists. Indeed, many experienced and well-off stock-market investors have been taken to the cleaners by what are known as ‘boiler rooms’.
How a boiler room works
Setting up a boiler room is remarkably simple. First, rent some cheap office space in an out-of-the-way place. It’s best to do this is in far-flung locations with plenty of English visitors or speakers, such as Spain, Greece, Thailand or the Philippines. Also, to give your business a thin veneer of respectability, make sure that you have a ‘virtual office’. So, create a half-decent website by cut-and-pasting content from genuine brokers’ websites.
Next, recruit a bunch of young salesmen with dubious morals, Champagne tastes and beer incomes (few women work in boiler rooms). Once you’ve assembled your team, then the scam can begin. Your merry band of fraudsters start cold-calling British investors, sometimes relying on shareholder information gleaned from the public records of listed companies. Alternatively, you can send millions of spam emails, all claiming that ‘Dodgy plc’ is all set to be the next hot stock.
Sometimes, the companies being promoted are genuine businesses, perhaps private companies or small firms listed on overseas stock markets. However, you can run a boiler room using entirely fictitious firms. At the end of the day, it doesn’t matter whether your ‘incredible investment opportunity’ involves real or fake businesses. All that matters is that investors send you lots of money.
Your high-pressure salesmen (known as ‘openers’) should make hundreds of calls every day, sticking closely to an agreed script. Once a ‘mark’ or ‘mug punter’ shows an interest in your ‘hyper-growth share’, he has taken the bait and can be handed over to a ‘closer’. These ruthless, highly experienced crooks convince victims to invest as much as they can, on the promise of making a guaranteed fortune.
Keep biting the cherry
By inventing share data, you can con victims into believing that they have made a killing. This makes it easier to convince them to invest even larger sums. Of course, some punters become nervous when they suspect that their ‘wonder stock’ appears to be a complete dog or doesn’t exist. Nevertheless, it’s possible to cheat these worriers out of yet more money, simply by promising to make up their losses with your next tip.
By repeating this exercise, it’s possible to amass several million before vanishing. However, even after closing down, you can still continue the scam. Simply set up an identical outfit under a new name and then contact previous victims, pretending that you can recover their losses. All they need to do is to sell their shares to a reputable company which wants them for tax-avoidance reasons. Of course, this service involves payment of an upfront fee and the game continues...
How to avoid this share scam
The simple way to avoid being scammed is not to be overcome by greed, flattery and fear. Be extremely sceptical of anyone contacting you to discuss investment opportunities. If s/he claims to be from a reputable organisation, then hang up, look up the company’s details and deal only with its UK office. Don’t be fooled by impressive-sounding names, plush addresses and impressive locations. In many cases, these bogus brokers work from squalid basement offices -- hence the boiler-room tag!
If you do lose money to an unauthorised investment firm, then you will not be covered by the Financial Services Compensation Scheme (FSCS). In other words, you can kiss goodbye to your money. Only firms regulated by the Financial Services Authority (FSA) are covered by the FSCS, so check a firm’s FSA registration here.
Finally, if you’d like to see this all works in practice, then watch the film Boiler Room, starring Giovanni Ribisi, Vin Diesel and Ben Affleck. After watching this eye-opening movie, you may never answer your phone in quite the same way again!
More: Learn more about investing for profit | Don't Buy Shares Before Reading This | Top Specialist Investment Trusts
> Buy and sell shares using The Motley Fool Share-dealing Service
