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Unfunny Money: Investment and Finance Swindles

Larry Chisholm's friend was making money playing the stock market. And she shared with Chisholm the secret of her success: She was following the advice of an anonymous tipster who posted suggestions on the message boards hosted by the financial Web site Raging Bull.

The tipster was singing the praises of E-pawn.com, a Florida-based Web site.

Chisholm, of White Bear Lake, Minnesota, admits that he knew virtually nothing about researching stocks, but the things he read about E-pawn on Raging Bull's board convinced him to buy in big. According to the tipster, "They were going to be like EBay," he remembers.

Anonymous tipsters in stock scams may be con men themselves or innocent dupes caught up in the excitement.

So Chisholm, retired facilities manager for a technology consulting firm, bought a block of stock at $6.50 per share. The price went up to $8.50 and then started to decline. As it sank, Chisholm figured it was a chance to buy more E-pawn cheap. He spent $41,809 to buy 17,100 shares. The value of his stock now? About $800.

Chisholm was the victim of a pump-and-dump--a scheme in which con artists use the Internet to fraudulently promote the stock, then sell their shares for a big profit, according to a federal indictment from the U.S. Attorney's Office in New York.

This pump-and-dump had a particularly sinister twist, government officials say: It was run in part by the Mob. In the indictment, U.S. attorneys allege that two principals of E-pawn and a stock promoter went for help to DMN Capital Investments. That investment house worked with known Mafia members to commit stock fraud, another federal indictment alleges.

Last summer, the FBI charged 120 people, including members of the five organized-crime families of La Cosa Nostra, with securities fraud and related crimes. E-pawn was 1 of 35 companies that federal officials say the Mob helped to manipulate. Those frauds cost innocent investors approximately $50 million.

The case taught Larry Chisholm a hard lesson. Now he does his homework before investing his money, and he ignores the advice he sees on message boards. "Investment message boards will probably be the cause of more people losing their shirts and jumping off the bridge than anything else," says Chisholm.

Beware of anyone on an investment message board who claims to have inside information, says Barry R. Goldsmith, executive vice president of NASD Regulation, which oversees the securities industry. Sham tipsters will say, "You're going to miss the boat, you have to buy quickly before the news gets out," he warns.

Instead, do thorough research before putting your money in any company, Goldsmith recommends. Good places to start include SmartMoney.com, Forbes.com, BusinessWeek.com, Hoovers.com, Morningstar.com, and Bloomberg.com.

Not So Prime

Sad to say, stock manipulation is far from the only financial scam practiced on the Web. Another popular con is the "prime bank" scheme. One example, according to regulators in West Virginia and Texas, is the Tri-West Investment Club.

The club, which at press time continued to advertise through its Web site, www.triwestinvest.com, promises investors returns of 10 percent per month through a "bank debenture trading program." There is "no risk of losing [your] investment," the site claims. And members who convince other people to invest reap even higher rewards, the site says.

The club has two big problems, according to West Virginia State Auditor and Commissioner of Securities Glen B. Gainer III. Problem number one: "Prime bank debenture trading is just nonexistent," says Gainer. And number two, offering investors a referral bonus for signing up friends and relatives--in essence running a pyramid scheme--violates securities laws, he says.

Gainer ordered Tri-West to cease all operations in his state (officials in Texas issued similar orders). Tri-West officials did not respond to our multiple requests for comment on the charges.

Yet another common financial scam preys on a particularly vulnerable category of consumers: those people who already have money troubles. Scammers, often angling for victims through junk e-mail or in newsgroups, offer a guaranteed credit card to any interested party--even people with more debt than some Third World nations. Or they'll offer to finance a loan, perhaps to consolidate all the debts an unlucky person already has.

These kinds of offers have lots of catches. First of all, they insist that customers pay a fee up front just to cover the processing of their loan application. People who complained about the scams to the National Consumers League last year reported losing an average of $138 on credit card offers and $881 on loan offers.

What do applicants get in return? Nothing, in many cases. The companies often disappear after collecting the fees.

In other instances, instead of sending a credit card, the companies send a list of hundreds of banks that offer credit cards, says Elizabeth Grant, an attorney in the FTC's division of marketing practices. For information on advance-fee loans, check out Consumer Protection.

The best way to avoid scams like these is to accept an unpleasant truth, IFW's Susan Grant says. "No one is going to give you a credit card or a loan if you've really got bad credit." Consumers should also bear in mind that most legitimate lenders don't ask for application fees at the outset. So a request like that "should immediately raise a red flag," adds Grant.

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