Investment scams multiply, with assist from bull market, enforcement cutbacks
New York — Financial securities. The very name implies trust and safekeeping. The vast majority of investments deserve such faith. But not all. Securities regulators interviewed say that now -- more than any other time in recent history -- investors must be alert to fraud.
``When the market is hot, investors tend not to pay as much attention to the quality of the issues they're buying. Unscrupulous promoters will take advantage of this,'' says Royce O. Griffin, president of the North American Securities Administrators Association.
This tremendous once-in-a-lifetime rally in the stock and bond markets makes offers of unbelievable profits seem more believable. The stampeding bull market creates an emotional level that spurs people to act without doing their homework. Everyone wants a piece of the action, say regulators.
Other recent developments that make the environment ripe for rip-offs:
A confusing array of new financial products. Deregulation of the securities business has spawned hundreds of esoteric, risky investments. Even professionals have trouble discriminating between a con and the latest financial ticket to success.
Cutbacks in federal funding of enforcement agencies. ``It's going to get worse with Gramm-Rudman. When those cuts go into effect, that's the time to open a boiler room [investment fraud] operation,'' says Dennis O'Keefe, head of the state and federal liaison unit of the Commodities Futures Trading Commission.
A wider acceptance of gambling, as state-sanctioned lotteries, casinos, and other forms of betting proliferate. People tend to forget the odds and begin to accept the idea that huge windfalls are possible -- even commonplace, say securities officials.
How widespread is investment fraud now?
In three years, investors nationwide lost more than $750 million in 30 major Ponzi schemes alone (see accompanying story for Ponzi schemes), according to a state survey in 1985 by the North American Securities Administrators Association (NASAA).
Last month, the NASAA issued an investor alert on oil and gas investment scams. Despite the slump in oil prices, five states report a total of 850 investigations into illegal oil and gas investment operations during the last two years. Illinois alone has 17 investigations into this type of scheme where some 1,250 investors lost $14 million.
The NASAA numbers are but a sampling of the overall fraud picture. No comprehensive national statistics are kept. But there is abundant anecdotal evidence.
Take the Oxborrow case -- one of the largest swindles in recent history. From 1979 until late 1984, many families in the rural Moses Lake area of the state of Washington entrusted their life savings to Kenneth Oxborrow and two partners.
Oxborrow, a well-to-do farmer, began trading wheat, potato, and Treasury-bill futures. Before long, he was inviting neighbors to join him in what appeared to be sizable gains. Oxborrow would send investors reports, telling them their money was growing at rates of 1 or 2 percent each week.
Mr. Oxborrow seemed a decent sort, ``a good Christian,'' said one investigator. He made large contributions to his church. He was reported to have said, ``These are my financial advisers,'' pointing to a picture of Christ Jesus and the Bible.
News of this ``opportunity'' spread by word of mouth -- it was too ``good'' to publicize otherwise. Some investors actually made a profit. But along the way, others started losing money in the market, lots of money. And soon original investors were being paid out of funds deposited with Oxborrow by new investors. A classic Ponzi scheme.
Ultimately, about 1,200 investors from half a dozen states entrusted Oxborrow and partners with some $59 million. Most was recovered. But the US Attorney General's office in Spokane estimates investors have yet to recoup some $15 million. Oxborrow is now serving a minimum of 10 years in prison. His partners, Bonnie E. Frost and Orville W. Moeller, will be sentenced in May.
The Oxborrow case follows a common pattern. By targeting small groups -- professionals, relatives, churches, ethnic communities -- swindlers can quickly capture the confidence of a pool of victims. Sometimes, the promoters believe they can reap huge profits but later switch to fraudulent ways when losses suddenly mount.
Similarly, real cons start by giving the first few investors massive profits. Once duped, they spread the word to their peers about this exclusive deal.
``They feel, `Maybe I've discovered the goose that laid the golden egg. Maybe I'm one of the few on the inside. Too bad those other poor slobs are getting just 7 percent in money market accounts,' '' says Mathew Zale, head of the Arizona Corporate Commission. ``Then, six months or a year later the whole thing explodes, and they kick themselves.''
Other tactics include setting up a ``boiler room'' sales operation. Swindlers set up an office, fill it with phones, and train people in high-pressure sales tactics to solicit money for shady or nonexistent investments. In the lingo of the trade, the salesmen are ``yaks'' or ``phone pros.'' Their victims, ``mooches.''
``They call out of state. Companies don't locate where the victims are. The last thing they want is somebody coming in to see their offices,'' says Douglas L. Campbell, an investigator at the National Futures Association.
To disguise their intentions, con artists will take a legitimate-sounding name and locate their sales offices (or a post office box) at a prestigious address.
For instance, last month the ``Kimberly International Gem Corporation'' of Hollywood and Beverly Hills, Calif., was indicted on fraud charges. (A huge fraud investigation is now under way in southern California.)
The US attorney's office alleges Kimberly telephone salespeople talked diamond owners nationwide into sending in their diamonds for cash. Gem owners were told, among other things, an Arab sheikh was in the market for $1 million in diamonds and would pay top dollar.
And Kimberly allegedly offered to sell gems to investors at a special low price because a Thai family was trying to raise money quickly to get relatives out of jail. Whatever the pitch, Kimberly officials pocketed the diamonds and money, says the indictment.
Sound too outrageous to fall for? Perhaps. But investors tend to rationalize that the best deals are secret or shady or just far-out enough to work.
Over the last two years some 12,000 people in 30 states put down more than $10 million for ``crud farms kits.'' Investors were to grow a special fungus; a nonexistent cosmetics firm would ``guarantee'' to buy the fungus at high prices.
Next: Southern California: fraud capital of the world.