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Investment scams - a cautionary tale

Posted to Financial Capability on 25-07-2018

Investment scams genericDavid had dabbled in the sharemarket for a couple of years when he received a call from a well-spoken sharebroker called Peter. He took up Peter’s offer to buy a US$5000 package of shares from an up and coming international company, thinking it might yield a profit, and if it didn’t work out, it had been worth the bet; it was money he could afford to lose.

Eight months later he’d handed over nearly US$250,000, only to discover that his payments had not bought shares at all, but disappeared into the black hole of an investment scam.

David is a middle-aged, NZ European businessman. He’s used to backing himself, making judgement calls and spotting opportunities. His disbelief that he had fallen for a scam was so acute that it took some effort by Bronwyn Groot, the Fraud Education Manager at the Commission for Financial Capability, to convince him that the company he dealt with was phoney, the brokers not registered, the bank accounts not legitimate share trading accounts, the shares non-existent, and his money was gone.

Yet the scammers’ MO was one that Groot sees all too often, as investment scams increase in number and sophistication. Among the victims on her books are a CEO who lost $16,000, a pilot who lost $25,000, a doctor who lost $30,000 and a company owner who lost $266,000.

“These people are not gullible or stupid,” says Groot. “But they’re up against international cartels that run scams as a business, siphoning millions of dollars into organised crime involving drugs, arms and human trafficking. They have the technology, the time and the money to keep one step ahead.”

Among the tricks that had kept David engaged with his ‘sharebroker’ Peter for months was documentation that looked legitimate, logins to website portals where he could ‘see’ his shares and their value increasing, and receipts for payments made to Hong Kong bank accounts. Requests to pay money into different accounts, under different company names, were explained away as credit limits and buy-outs.

More than that, Peter formed a relationship with David. He became a mate, was going to come to New Zealand to visit David and his family, have a beer, see the country – he gained David’s personal trust as well as his professional approval.

But one day David needed to cash in some of his shares. He contacted Peter, asked him to sell a particular parcel. Peter tried to dissaude him, saying it wasn’t a good time to sell those shares, distracted him with another deal. David’s wife Jean grew suspicious, told him to keep pressing. Suddenly, Peter had been replaced by another broker. This man said David’s broker had been called away due to family illness – they were trying to get David’s money but they suspected Peter had locked it into a different account. They needed more funds to get it released.

And so on, and so on.

David’s wife contacted their bank. They said there was little they could do, as the money was long gone overseas. The couple contacted Groot, who, having worked in the banking industry for 20 years before joining the CFFC, knew there was something she could do. She contacted the Hong Kong Securities and Futures Commission, and helped David make a complaint to the Hong Kong Police, who froze the bank account containing some of his money. The case will now go to court in Hong Kong, where David’s Hong Kong lawyer will try to get his funds released.

David is one of the lucky ones. Groot says in most cases, the money is no longer in an account to be frozen, but disappeared into the criminal underworld. The best way to avoid losing money on an investment is to know the signs that will give it away as a scam:

• Cold calling is illegal in New Zealand. If you receive an investment offer by cold call, it’s almost certainly a scam.

• Do your research. Search the bank account’s name in the companies register of the country it’s in. If it’s not registered, it’s fake. If it was only registered a month or two ago, be suspicious.

• Ask the broker for their full name and registration number, then contact the regulator in that country to check if they are legitimate. In New Zealand, financial advisors and financial institutions must be registered with the Financial Markets Authority (FMA).

• New Zealand banks have rules on lending money to buy shares. If the broker tells you to lie to the bank about why you want to borrow money, it’s likely a scam.

• If you suspect a scam, go to www.fma.govt.nz It keeps a list of scam companies, and you can report your suspicions to them.

Groot says the impact of investment scams is not only financial, but also emotional.

“The victims I deal with are more than embarrassed, they’re devastated - they may have bankrupted their business, taking away their employees’ livlihoods, and lost their family’s money. They suffer terrible guilt, self-loathing, and some become suicidal.”

But Groot insists they should not blame themselves. “The blame rests with the scammers – they are the ones consciously wreaking havoc on the lives of innocent people. We can only keep trying to expose their tactics to help others avoid falling into their trap.”


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