Federal Trade Commission - May 1992

Telephone Investment Fraud
fast facts

Every year tens of thousands of consumers put some of their money in investments. The Federal Trade Commission (FTC) estimates that every year American consumers from all walks of life lose $1 billion or more in investments that turn out to be fraudulent.

Between 1983 and 1992, the FTC put a variety of such fraudulent companies out of business. It brought suit against 325 defendants and recovered almost $100 million for injured consumers.

But if you invest in what turns out to be a fraudulent scheme, the chance of getting all of your money back is slim. Even in cases where money is recovered, consumers often get back less than 10 cents on every dollar invested. That is because companies engaged in fraud often operate a particular scam for a short time, quickly spend the money they take in, and frequently close down before they can be detected. Then they reopen under another name selling another investment scam.

Investment frauds are sold in a variety of ways -- print and television advertising, for example -- but three-quarters of the investment scams the FTC investigates are sold by the telephone. There has been a dramatic increase in telemarketing investment fraud because of the ease of establishing fraudulent operations and the popularity of telephone selling. Everyone with a telephone is vulnerable.

How Telephone Investment Fraud Works

To be sure, many investment plans are sound. Ones that are not take many forms. Typical investments sold by fraudulent operators have included coins, gemstones, art, oil and gas leases, interests in oil wells, application services related to cellular telephone licenses, precious metals such as gold and silver, or strategic metals such as chromium, used in defense and high-tech industries. Fraudulent companies often choose to sell investments that may fluctuate substantially in response to world events. For example, fraudulent sellers may offer you an investment based on the scarcity of a foreign metal after news of a trade embargo, or they might offer you an investment in a new, widely publicized high-tech product. The fraudulent seller's goal is to make it difficult for consumers to scrutinize their overinflated value claims.

The heart of the telemarketing operation is usually centered in a "boiler room," a setting filled with desks, telephones, and salespeople who spend their days calling hundreds of prospects all over the country. You may be contacted by one of these boiler room operators if you respond to a newspaper ad or fill out a card asking for more information about an investment, or you might be called "cold." Some fraudulent investment sellers target investors who have been victims of an earlier scam. These sellers know that investors who have been tricked once often have a certain vulnerability because they hope to recoup their losses.

Who are the fraudulent salespersons?

Salespersons in boiler room operations often spend years going from fraud to fraud. Their years of selling experience and natural sales talent make them very good at what they do. They use persuasive sales pitches that weave together facts and half-truths in ways that are likely to deceive all but the most experienced investor. Their sales pitches are directed to the universal desire to get great financial return for very little risk.

In addition to being glib, these sales operators are resourceful. They use a wide variety of reasons why their investment opportunity is a sure thing. They may say, for example, that they: have high-level financial connections; are privy to inside information; will guarantee the investment; or will buy back the investment after a certain period. To close the sale quickly, these fraudulent sellers may offer you phony statistics, misrepresent the significance of a current event, or stress the uniqueness of their offerings to try to dissuade you from verifying the story.

What is their typical sales pitch?

Often, fraudulent salespersons will:
* Say you have been specially selected to participate in an unusual investment opportunity;

* Present a popular, believable message mixed with truth and lies;

* Guarantee large and rapid profits;

* Claim that virtually no risk is involved; and

* Require that money be paid immediately because the "market is moving." The salesperson even may give price quotations to "document" the rise.

How To Avoid Losing Your Money

Because it is so difficult to recover money paid to fraudulent sellers, the best thing you can do is refuse to give them money in the first place. If you are approached by anyone selling an investment opportunity, remember the following cautions. They may help you avoid investing in a bogus firm.

* If it sounds too good, it probably is a scam. No legitimate salesperson will ever claim to offer a risk-free investment. Big returns usually mean big risks. Any claim that there is little or no risk should act as a red flag.

* Do not be pressured into buying. High-pressure sales tactics that urge you to buy now or forever lose your opportunity to profit are tip-offs to possible fraudulent operations. If you are being pressured, you can simply hang up the phone. Once you send a fraudulent investment seller your money, it may be gone forever.

* Invest in business opportunities you know something about. It is unlikely you will make money in a business deal that you cannot understand and verify. You especially should be wary of any investment where you need to rely exclusively on the seller's representation of the investment's value.

* Be skeptical about any unsolicited phone calls about investments. Think twice before you buy investments from out-of-state salespeople you do not know. You may find it very hard to get your money back if the deal sours.

* Get all the information you can about the company and verify the data. Before you invest with any company, check the seller's prospectus with someone whose financial advice you trust. Also check the company's reputation with appropriate references. Many are listed at the end of this brochure.

Any resistance you get from a seller when you seek additional investment information or references should make you suspect. But if you do receive additional references, keep in mind that these may not provide reliable information about the investment or the company. For example, a bank may tell you that an investment company has an account, but this does not mean the company is legitimate.

* Beware of testimonials. Fraudulent companies sometimes hire references to claim that the firm's investments brought them sudden wealth. And Ponzi schemes, where promoters use the money from new investors to pay high returns to early investors, may explain why the company is praised.

* If in doubt, do not invest. Before you invest, ask questions and seek information from a variety of sources. If you cannot get solid information about the company and the investment, you may not want to risk your money.

Where To Go For More Information

Listed here are government agencies and business organizations that register, regulate, investigate, or monitor companies and individuals who offer investment opportunities. If you have questions about a company or an individual, or you wish to make a complaint, contact one or more of these offices, as appropriate. When you seek information, understand that the absence of complaints filed with governmental and private agencies does not mean that a company or an investment is necessarily sound.

* The Federal Trade Commission is a law enforcement agency that investigates and prosecutes a variety of investment frauds. If you have questions or complaints about claims made in advertising or in telephone promotions for investment services, write to: Federal Trade Commission, Investment Fraud Project, Room 200, Bureau of Consumer Protection, Washington, D.C. 20580.

* Your State Attorney General's office and your local District Attorney's office investigate and prosecute fraud cases. You can find their telephone numbers by checking your local directory in the state and local government section.

* Your State Securities Commission, Securities Department, or Department of Corporations regulates the public offer and sale of securities by companies in your state. You can get the name and telephone number by calling the operator in your state capital.

* The Chief United States Postal Inspector, United States Postal Service, Washington, D.C. 20260-2112, handles complaints about bogus mail-order investment services. The USPS has jurisdiction over fraudulent business operations that use, advertise, or sell through the mail. The Federal Bureau of Investigation also has jurisdiction when investment offerings constitute mail or wire fraud, or other violations of criminal law.

* The Commodity Futures Trading Commission regulates most firms that deal in commodity futures markets. Futures trading markets include petroleum products, U.S. government securities, foreign currencies, options on futures contracts, and dealer options. Write the Commodity Futures Trading Commission at 2033 K Street, N.W., Washington, D.C. 20581.

* The Securities and Exchange Commission is a federal agency that regulates the public offer and sales of securities. Contact the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, or call (202) 272-7440.

* The Better Business Bureau mediates disputes between consumers and businesses and may be able to inform you about complaints lodged against local investment firms. Contact the BBB in the city in which the firm is located for information or to report a problem. For the phone number of an out-of-state BBB, write to the Council of Better Business Bureaus, 4200 Wilson Boulevard, Arlington, VA 22203.

* The National Association of Securities Dealers is a self-regulatory organization that governs stock brokers. Check your phone directory for a local district office of the National Association of Securities Dealers, or contact its Washington office at 1735 K Street, N.W., Washington, D.C. 20006, or call (202) 728-8221.

* The National Futures Association is a self-regulatory organization for all registered individuals or brokerage firms. Contact the National Futures Association at 200 West Madison Street, Suite 1600, Chicago, IL 60606, or call (800) 621-3570. In Illinois, call (800) 572-9400.

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