Corruption, embezzlement, fraud, these are all characteristics which exist everywhere. It is regrettably the way human nature functions, whether we like it or not. What successful economies do is keep it to a minimum. No one has ever eliminated any of that stuff.
—Alan Greenspan, Former Chair of the Federal Reserve of the United States
Have you ever been a victim of a fraud or scam? If so, you probably vividly remember this unpleasant incident. You experienced the pain of losing money and the shame of being duped. Fraud occurs when someone illegally gains something of value from a victim, usually money or property, by deceiving that person. This breach of trust is a serious crime and a violation of civil law. Fraud includes a broader category of wrongdoing than a scam, which is a deceitful scheme usually involving money and some type of business transaction. Thus, a scam is a more minor offense than a fraud and isn’t a legal term. Whether a fraud or a scam, you’ve been victimized and feel violated.
You face an almost limitless number of frauds and scams that come in various forms. Many are so professional and believable that it’s difficult to distinguish them from real investment opportunities. The world’s ever-increasing connectivity brings with it many financial conveniences but it also provides an attractive venue for fraudsters and scammers. The internet has changed the global landscape of their activities as millions of people can be targeted with minimal costs and con artists can operate anonymously. In cyberspace, you can fall victim to new, innovative schemes that may include complex trading algorithms or cryptocurrencies.
This chapter offers insights into different frauds and scams that lure unsuspecting targets into their deceptive web. It also reviews case studies to illustrate the creativity of these swindlers in separating you from your money. Savvy investors need to be aware of and avoid these shams or suffer the consequences on their wealth and egos. Remember – you’re not immune to falling prey to these clever traps.
The foreign exchange market (FX, forex, or currency market) is a global decentralized market for trading currencies by investors and speculators. It’s largely an over-the-counter or interbank market, meaning trading continuously takes place on electronic platforms between banks and other market participants continuously. Only about 3% of FX occurs on exchanges. The FX is the largest actively traded market in terms of volume. According to the Bank for International Settlements, more than $5 trillion is traded daily, which is more than 25 times larger than the daily trading in global equity markets. Although commercial and financial transactions are part of the trading volume, most currency trading is based on speculation. In other words, most of the trading volume comes from traders buying and selling in an attempt to profit from intraday price movements.
As a savvy investor, you should consider several things about investing in FX markets. First, FX trading is at best a zero-sum game, meaning that one trader’s gain is another trader’s loss. Currencies are traded in pairs. If one trader buys one lot in the Euro to the US Dollar and another trader sells one lot of the pairing, then one trader’s gains offset the other trader’s losses. In fact, FX trading is a negative-sum game after considering commissions and other transaction costs. Second, according to extensive research, not even FX professionals can consistently be winners in the long run. Thus, even experts can’t generate profits on a regular basis.
Foreign exchange fraud refers to any trading scheme used to defraud traders by convincing them that they can expect to gain high profits by either trading in the FX market or letting someone else do it for them. Below are several types of FX frauds and scams.
Engaging in Ponzi schemes where new investors’ money isn’t used to trade but to pay earlier investors and to fund the fraudster’s personal lifestyle.
Falsely advertising huge guaranteed profits with low or no risk.
Churning customer accounts resulting in excessive trading to generate commissions.
Selling software that is supposed to signal when to buy and sell or otherwise guide the investor to large profits when the software doesn’t work.
Having built-in incentives for the “broker” to make the customer lose money.
The typical and brightest red flag indicating fraud or scam is large returns with no risk, either promoted or guaranteed by the con artist. Developments in technology foster the recent increase in phony FX schemes by enabling fraudsters to set up deceptive online FX trading platforms and services.
Sydney Lemos and Ryan D’Souza ran a large Ponzi scheme in Dubai. They claimed to possess a complex computer algorithm that could make excessive guaranteed returns on the FX market. Lemos was the chief executive officer (CEO) of Exential, an FX trading company in Dubai Media City. Exential promised returns up to 120% on deposits of $25,000. Someone could open as many $25,000 accounts as desired. In the regular Ponzi fashion, Lemos and D’Souza initially made payments to early investors, but these payments eventually stopped.
These fraudsters targeted Filipino churchgoers and Emirates cabin crew. Overall, the scheme resulted in about 18,000 FX accounts from 7,000 individual investors from the United Arab Emirates. For example, a senior executive at an oil and gas company reportedly had 700 accounts of $25,000 each and a former vice president of an aluminum company had about 350 accounts. Enticed by attractive monthly returns, hundreds doubled and tripled their investments by taking bank loans. Everyone was happy as long as they received the promised money at month’s end. But when the money stopped flowing, many realized that they’d been duped.
Lemos spent investors’ money on a lavish lifestyle that he flaunted on social media. To project the image that he was a successful businessman behind a prosperous company, he owned expensive cars, a posh villa, and arranged lavish parties. Lemos also became the principal sponsor of FC Goa, a football club in his home country of India, which enhanced his reputation. He employed Goan boys for twice the salary they’d get in other FX companies in Dubai. In exchange for the high salary, he asked them to wear suits and pretend to work and look busy at the office when needed, when in fact they had no work to do. Lemos treated his employees to extravagant parties and posted pictures on Facebook. Lemos and D’Souza transferred money to an Australia-based brokerage firm owned by Lemos’ wife, Valany.
Officials shut down Exential’s office in Dubai in July 2016. In March 2018, Lemos, D’Souza, and Valany faced more than 500 cases filed against them in court. Authorities sentenced each to a year in prison per case, totaling 517 years for each fraudster. By June 2018, authorities had located $15 million worth of property owned by Lemos and $6 million in other assets.
Binary options are simple to understand, making them a popular choice for low-skilled traders. A binary option, also called an all-or-nothing option, digital option, and fixed return option is a financial option in which the payoff is either some fixed monetary amount or nothing at all. They’re “binary” because every bet has only two possible outcomes. Typically, a trade involves whether or not an event will happen. If you’re correct, you “win” and see a return on your investment. You can lose your entire investment if the event doesn’t occur. Binary options are effectively gambling, like betting on the flip of a coin.
Binary options usually involve predicting whether the direction of the price change of an underlying asset such as a stock, currency, or commodity will increase or decrease within a short period. You can bet on virtually any publicly traded asset. The odds favor the “house” just like at a casino. To break even, you must correctly guess the direction of the price change more than 50% of the time. No one, no matter how knowledgeable, can consistently predict what a stock, currency, or commodity price will be within a short period.
Most binary options brokers aren’t really brokers. A broker is a person who buys and sells goods or assets for others. One investor’s trade isn’t paired against another trader. Instead, investors bet directly against the brokers like you would do with a sports bookie. An investor’s win is a broker’s loss and vice versa. Brokers may let investors win in the early stages to encourage them to keep betting and to bet more.
Binary options brokers often advertise on social media. The ads are linked to websites that are well-designed and professional in appearance. These ads look respectable because they represent themselves as offering a form of investing. Many of the marketing gimmicks are similar to the ones used by online casinos and gambling sites.
Ludicrously large potential profits with little to no risk, such as “Gain 90% in a single 60 second trade” or “83% average winning rate!” or “Win, regardless of your trading results.”
Free registration prizes to get people hooked, such as “free” $100 in credits.
Heavy promotion on various social media platforms and spam e-mails.
Fake testimonials by people who “got rich quickly with next to no effort.”
Many fraudulent binary options trading websites have popped up around the world. Although some binary options are listed on registered exchanges, most binary option web sites are unregulated and no securities commission protects investor interests. Binary options fraud is a growing problem. The Federal Bureau of Investigation (FBI) has listed the typical investor complaints into three categories:
Manipulation of trading software. The internet trading platforms may be reconfiguring the algorithms they use to purposely generate losing trades, often by distorting prices and payouts.
Refusal to credit customer accounts or reimburse funds to customers. Those running this scam may cancel investor withdrawal requests, ignore phone calls and e-mails, and freeze accounts. Investors themselves may be accused of fraud.
Identity theft. Fraudsters may ask for an investor’s credit card, passport, driver’s license, utility bills or other personal data to steal the person’s identity.
According to the report by the Bureau of Investigative Journalism, about 80% of those investing in binary options lose their entire investment, while only 3% make a profit. According to the FBI, some European countries report that binary options fraud complaints now constitute 25% of all fraud complaints received.
Jared J. Davis ran a fraudulent binary options investment scheme from 2012 to 2016 through Erie Marketing LLC. His binary options business used various trade names including OptionMint, OptionKing, and OptionQueen. The scheme included foreign shell companies with foreign bank accounts and several centers with employees located in Sandusky, Ohio, Costa Rica, and Sint Maarten, an island country in the Caribbean. In 2015, Canadian regulators cautioned investors about OptionMint and OptionQueen.
This binary options scheme had many characteristics of a typical fraud.
Davis didn’t register his businesses with the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC).
Despite acting as a broker, Davis didn’t connect participants to a legitimate binary options exchange to match them with other participants. Instead, he took the opposing position himself on each trade.
Davis falsely told the participants that their money was held in an account when he actually spent their deposits as he received them.
He falsely portrayed his employees as brokers or analysts when they had no relevant experience or qualifications.
Davis represented to victims that they could withdraw their money at any time when he actually required unnecessary and burdensome documentation to close an account.
He frequently manipulated the options trading software to increase the odds of participant losses.
Davis told victims that they could make “risk free,” “insured,” or “guaranteed” binary options trades if they deposited more money.
Davis solicited victims through call centers and used the internet and social media marketing.
Davis managed to fleece victims out of $10 million, which he used for his personal benefit and real estate interests. Authorities arrested Davis on June 5, 2018, and charged him with 19 counts including money laundering, wire fraud, and obstruction of justice.
Cryptocurrencies are digital or virtual currencies that are encrypted (secured) using cryptography. Cryptography refers to the use of encryption techniques to secure and verify the transfer of transactions. Cryptocurrencies boomed, especially in late 2017, yielding returns of hundreds or even thousands of percent in a short time. The price of bitcoin, the largest and most reputable cryptocurrency, was below $1,000 at the beginning of 2017 but peaked above $19,000 in December. In January 2018, Nobel Laurate Robert Shiller compared the cryptocurrency boom with Tulip mania in the Netherlands during the seventeenth century. Many consider tulip mania as the first recorded speculative bubble. During the Dutch Golden Age, in 1637, investors began to fanatically buy tulips, pushing their prices to unprecedented highs. Almost overnight the price structure for tulips collapsed, which had widespread consequences for the Dutch economy by forcing many people into bankruptcy.
In its 2018 Annual Report, the SEC noted that the exuberance around the cryptocurrency markets can sometimes obscure the fact that these offerings are often high-risk investments. Some offerings are simply outright scams cloaked in the veneer of emerging technology.
New cryptocurrencies emerge constantly. Promoters claim that cryptocurrencies fix the issues of the established coins or offer some features not shared by other coins.
The SEC estimates that initial coin offerings (ICOs), which are the cryptocurrency counterpart for initial public offerings, have raised more than $12 billion since 2017.
People are lured by the attraction of quick returns and are trying to find the “next bitcoin.”
Many believe in absurdly large promised or guaranteed returns due to the past performance of many coins.
Despite the prevalence of cryptocurrency scams, new ones keep popping up due to creators’ anonymity provided by blockchain technology. Blockchain is a time-stamped series record of transaction data managed by a cluster of computers not owned by any single entity. Each “block” of data is secured and bound to each other using cryptographic principles (“chain”). Bitcoin blockchain is public and verifiable, which means that anyone can check all the transactions. Although a person is linked to a public bitcoin address, no one knows the actual name or address. Decentralization and anonymity are the keys of any cryptocurrency transaction.
The usual scams include pump-and-dump style ICOs combined with pyramid/Ponzi schemes. To lure investors and pump up the price, scammers often falsely market the new coin to provide investors with impossibly large, unsustainable returns. Inventor anonymity enables these con artists to exit the scheme and to abscond with the money raised.
In May 2018, reporters from The Wall Street Journal investigated some 1,450 ICOs and reported finding “red flags” in 19% of them. Of these problematic ICOs, they described 271 as using “deceptive or even fraudulent tactics” including guaranteed no-risk returns, extremely high percentage returns, and celebrity endorsements. Many used plagiarized texts as well as images of team members and investors taken from stock photography banks.
BitConnect was the largest cryptocurrency pyramid scheme thus far, resulting in more than $2 billion in losses to investors. It tried to capitalize on the cryptocurrency craze that exploded in 2017. Released in 2016, BitConnect’s goal was to become the world’s first peer-to-peer (P2P) bitcoin lending platform, allowing users to lend bitcoin and gain interest automatically. Investors transferred bitcoins to their BitConnect account and converted them into BitConnect coin (BCC). Bitcoin is untraceable, which allowed BitConnect’s founders to stay anonymous. At its peak, BitConnect’s market cap topped $2.6 billion, while BCC’s unit price exceeded $400.
BitConnect shared some characteristics with the most common financial frauds, especially with Ponzi/pyramid schemes.
Massive promised returns. The guaranteed base level return was 1% a day or up to 40% a month. Organizers also promised investors an additional 0.10–0.25% daily return, depending on the size of the initial investment. A quick sanity check reveals the absurdity of the promised returns. By investing a modest $1,000, an investor would accumulate $50 million in less than three years.
Claim of a trading bot capable of beating the market many times over. A trading bot is a program using advanced algorithms to automatically execute buy and sell orders. The promoters claimed that BitConnect’s own proprietary “trading bot and volatility software” were responsible for achieving the huge promised returns.
Difficulty of getting the invested capital back. Investors couldn’t withdraw their invested capital whenever they liked. Depending on the initial investment, BitConnect offered to pay back the invested capital in 120 to 299 days. Until then, the capital was frozen. BitConnect’s founders promised that investors could get their money back more quickly when they invested more.
Multi-level affiliate program to recruit new investors. By promoting BitConnect and making new investors (affiliates) join and invest in BitConnect, investors could achieve “even higher profits.” Upper-level marketers promoted the company by presenting potential investors screenshots of “profits” that BitConnect had brought them. Factually, the profits came from recruiting new affiliates, not from the trading bot and volatility software.
Lack of information about the company and its founders. Who was running the scheme is still unclear, even though police and regulators have been trying to locate the perpetrators.
Multiple typos and spelling errors on the website. For example, the website used both “BitCoin” and “bitcoin” and misspelled words such as “exchange.” Legit businesses usually spell-check everything before being included on the website.
Vitalik Buterin, the founder of Ethereum, one of the larger and more reputable coins, was among the first ones to call BitConnect out for running a Ponzi scheme in early November 2017. He wrote on Twitter: “If 1%/day is what they offer then that’s a Ponzi.” But despite many warnings, BitConnect continued to grow in popularity. Besides its extensive digital and event marketing efforts, the company enlisted numerous multi-level affiliated marketers to recruit new investors, who could then work their way up by bringing in even more new investors. This approach is typical of pyramid schemes.
Eventually, the increased popularity of BitConnect drew the attention of regulators. In November 2017, the UK Registrar of Companies threatened to shut down the dodgy platform if BitConnect couldn’t provide evidence of its legitimacy. On January 5, 2018, the Texas Securities Board issued an “emergency” cease and desist order to BitConnect for running a potentially fraudulent operation. The Board then ordered BitConnect to shut down its operations and its BCC in Texas within 30 days. A week later, BitConnect received a similar letter from the North Carolina Securities Division. On January 16, BitConnect announced that it was shutting down its lending and exchange platform while freezing everyone’s accounts. BitConnect promised to refund all lending balances in BCC based on the 15-day average price of about $364. It published the following statement on its website in January 2018:
We are closing the lending operation immediately with the release of all outstanding loans. With the release of your entire active loan in the lending wallet, we are transferring all your lending wallet balance to your BitConnect wallet balance at USD 363.62. In short, we are closing lending service and exchange service while BitConnect.co website will operate for wallet service, news and educational purposes.
This announcement effectively meant that investors couldn’t withdraw their investments. Within a day after the news of the shutdown, the price of BCC plummeted 97% from $300 to $8. BCC continued trading on some exchanges until August 2018, when authorities delisted it from every exchange in the world. The last BCC trade was at $0.68, effectively meaning that the virtual asset was practically worthless. Some estimates state that about 1.5 million people lost money in the BitConnect scheme.
The sudden loss of value led to many lawsuits seeking restitution citing securities sale laws and fraud. In October 2018, plaintiffs brought a class action complaint to the US District Court for the Southern District of Florida. Included in the list of defendants was the Google-owned video sharing platform YouTube, which was sued for allowing BitConnect promoters to publish more than 70,000 hours of content.
The fraud involved about 40 individuals including BitConnect India head Divyesh Darji, whom authorities arrested in August 2018. In early January 2019, the Australian John Bigatton received a travel ban. The Federal Court froze his assets following a request by the Australian Securities and Investments. According to reports, Bigatton was one of Australia’s leading BitConnect promoters. The Australian court also froze assets of an investment company called JBS Investment Management, owned by Bigatton’s wife, due to the firm’s possible involvement with BitConnect. She has been missing since March 2018, which reportedly coincides with the start of investigations into BitConnect. Authorities don’t believe that Bigatton had anything to do with his wife’s disappearance.
BitConnect still remains mysterious. Who masterminded the scheme and the exact number of victims are still unknown. So far, action focused on a network of promoters, who in some cases may have been unaware of the scheme’s fraudulent nature. In February 2019, the FBI issued a public call seeking victims of BitConnect.
The internet provides a global venue for communication and marketing. Criminals have also discovered these benefits. The internet is a great environment for fraudsters and scammers because they can operate anonymously from anywhere in the world. Examples of fraudulent online investment practices include unsolicited, too-good-to-be-true email offers, stock-picking websites, and investor bulletin boards.
China’s online finance sector shows that internet fraud knows no boundaries. Due to China’s highly regulated banking markets and late adoption of capitalistic principles, ordinary people and small businesses faced a financing bottleneck. This situation sparked a huge demand for alternative financing methods and applications. The government encouraged the wider use of technology to expand financial services to small borrowers. These conditions have been perfect for internet-based finance and investment solutions to thrive. This sector includes P2P lending platforms, third-party online payment, online asset management, online-based insurance, and crowdfunding. Since 2008, China has the largest population on the internet with about 772 million active users.
Although the rapid development of online finance has greatly helped both investors and borrowers, the boom has had its costs. Lax supervision and regulation translated easily into low barriers to entry, which in turn enabled fraudulent schemes to emerge and thrive. China has also faced some of the largest investment frauds in its history due to the rise of its online financing sector. In 2016, fraudsters stole $1,400 from the average victim of online crime in China. This is a relatively substantial amount of money in a country where the per capita GDP reaches slightly over $8,000. Often, the victims are from rural areas where education and income levels are low.
Some of the most problematic operators have been the P2P lending platforms. After the launch of the first platform in 2007, its popularity exploded. High-ranking Chinese officials and big tech firms promoted the platforms as innovative financial tools. Between 2012 and 2015, the number of P2P platforms grew 18-fold. During the same period, total transaction volume increased about 40-fold. The industry peaked in late 2015 with more than 3,300 platforms in operation. Since August 2016, financial regulators issued a series of rules to rein in reckless growth in the country’s $93 billion P2P sector. Some P2P lending companies amassed a huge amount of funds from private investors under lax supervision but were unable to repay them. Some platforms defaulted by misappropriating investor funds.
The authorities tightened regulation by, among other things, requiring that every platform complete a so-called record filing, which is essentially a form of licensing, with the local financial affairs offices in their home region. New regulation prohibits service providers from guaranteeing principal or interest on loans they facilitate. Regulators also have new rules to clean up a microlending sector rife with ultra-high interest rates and improper marketing and loan-collection practices.
The regulators are constantly catching fraudulent schemes. At the end of June 2018, only 1,836 of the more than 6,000 launched platforms remained operational, meaning that regulators viewed in excess of 4,000 platforms as problematic and shut them down. In Hangzhou, local authorities had to convert two sporting stadiums into makeshift welcome centers where various bureaus could receive complaints from disappointed P2P investors.
In 2012, Zhang Xiaolei launched Qianbao or Qbao, which means “money treasure” in Chinese, as a Chinese online finance platform. Qbao offered annualized returns up to 80% to investors after they deposited the required amounts with the company and took part in product promotional activities, such as watching advertisements, sharing information about products on social media or simply signing into their account every day.
Qbao promised investors higher returns with more deposits. It also offered a daily bonus of 1,000 yuan when a depositor put in a minimum of 1 million yuan and signed on Qbao’s app. In late 2017, Qbao attracted two million users to sign up every day. Many of Qbao’s investors borrowed heavily from banks or online micro-lenders to invest in Qbao with the aim of profiting from the interest rate difference between the bank and Qbao.
Qbao established a reputable image by having close ties with the state. Xiaolei appeared on CCTV, the Government’s official broadcaster, China Central Television, and sponsored the Nanjing Marathon and the Spanish La Liga club Real Sociedad. Xiaolei also appeared in state-run publications that touted Qbao as “a unique ecosystem” helping small businesses to promote their goods online. Many companies in Qbao’s investment portfolio had connections to Zhang and weak business records. Zhang owned 80 companies and his wife owned another six.
Qbao conducted little actual business to generate profits to pay for its high promises to investors. Yet, the company claimed it had investments in various assets ranging from chemical plants to wineries. It mainly used funds raised from new investors to pay returns to previous ones. Several investors said that they hadn’t expected Qbao’s downfall because the company always paid them on time, sometimes even in advance. Investor returns were essentially “paper” profits because they appeared only as figures on their Qbao account. As long as customers didn’t withdraw the “profits,” the company didn’t have to pay out any funds. The early interest payments were a strategy to increase investor confidence.
The authorities initially suspected Qbao of illegal fundraising in 2015 but the investigation didn’t result in any actual punishment. They delayed acting against Qbao out of concern for a public backlash. Zhang surrendered to police in December 2017 as he no longer could find enough new cash to repay debts and the scheme was falling apart. “I have taken in money from new investors to pay old investors,” Zhang said in a handwritten statement published by the Nanjing police. “I cannot pay back the principal and interest and I am very sorry about the loss to investors,” he added. The next day, the central bank’s Nanjing branch ordered all commercial banks in Jiangsu province to launch internal inspections for potential loan transactions linked to Qbao and its affiliated firms. In January 2018, authorities arrested Zhang and 11 other suspects on charges of illegally siphoning off public money. They later accused him of illegally raising 70 billion yuan, making Qbao the largest online Ponzi scheme in China’s history.
Legitimate investments in precious metals can take several forms such as gold coins or bullions and stock in mining companies. Other precious metals are silver, palladium, and platinum. As material goods, they’re traded as commodities, which differentiate them from securities such as stocks and bonds. Precious metals are classified as an alternative investment that sometimes outperforms traditional investments. Including precious metals in a portfolio could enhance its overall performance but they’re subject to large price movements.
Many individual investors are unfamiliar with the precious metals market and thus may fail to recognize its risks. Therefore, they might fall prey to fraudulent investment deals. For example, investors may be told they only need to pay a small percentage, say between 15% and 25% of the total purchase price, and the rest would be financed by a loan arranged by the selling company. In reality, no metal is purchased and no loans are acquired. Nevertheless, promoters may require these investors to pay interest fees on their phony loans and be charged for storage fees for the non-existent precious metals stockpile. Additionally, these con artists sometimes require investors to make additional payments or “margin calls” due to unfavorable price movement in the commodities market.
Using persuasive tactics such as “I’ll give you a break on my commission if you buy now – half off” or “There are only two units left and the Asian market is about to open, so I’d sign up today” are clearly red flags. Investors should be cautious about any bullion deals if the contact from the seller is unsolicited and particularly when the promoters claim that their precious metals transactions aren’t regulated by the CFTC and the National Futures Association.
Northwest Territorial Mint (NWTM) operated both a custom business involving the manufacture of medallions, coins, and other awards, as well as a bullion business involving selling, buying, exchanging, storing, and leasing gold, silver, and other precious metals. The company’s headquarters was in Washington since 2002. In 2009, NWTM bought Medallic Art Company (MACO), a leading producer of medals that had a large minting facility in Nevada. MACO produced many famous awards such as the Pulitzer Prize Medal and official medals of the presidential inauguration. NWTM also manufactured the United States Medal of Honor – the nation’s highest award for valor.
Bernard Ross Hansen, the owner-CEO of NWTM, was once respected within the industry. In 2011, he testified before the House Committee on Financial Services’ Domestic Monetary Policy and Technology Subcommittee on suggested changes to the US Mint’s bullion program. He had, however, serious skirmishes with the authorities. According to a 1995 Seattle Times article, police arrested Hansen in 1989 after a large drug bust led them to him. In the seizure of more than a ton of marijuana, police also stumbled across $600,000 worth of precious metals, which Hansen had sold to a drug dealer. Prosecutors never filed charges against Hansen in that case due to a loophole preventing them from proving that Hansen broke the law. They did, however, charge him with “avoiding federal tax-reporting requirements” and gun possession. After pleading guilty, he served three years in prison.
NWTM, through its bullion division, sold precious metals on its website (www.nwtmint.com), over the telephone, and at its showroom in Federal Way, Washington. NWTM was not registered with the CFTC. NWTM filed for bankruptcy in April 2016. At the time of the filing, NWTM was the largest private mint in the United States with 240 employees at facilities in six states. Hansen and Diane Erdmann, his long-time girlfriend and vault manager, were running a Ponzi scheme. From 2012 onwards, the company lacked enough assets to fulfill customer orders. They used new customer money to pay off prior customers. More than 3,000 customers paid for orders or made bullion sales that were refunded. Customers lost more than $25 million from this scheme.
The couple managed to defraud other parties out of $11 million. More than 50 people who stored their bullion with NWTM found all or part of their bullion worth $4.9 million was missing. The couple also defrauded 20 customers involved in a bullion-leasing program of more than $5 million. Altogether the cost of the frauds exceeded $36 million. To date, plaintiffs have filed more than 3,000 creditor claims totaling nearly $72.5 million against NWTM. Many NWTM precious metal customers filed creditor claims because they hadn’t received the precious metals for which they paid.
Besides these frauds, the couple defrauded NWTM’s clients by lying about shipping times for precious metal orders. They also used customer money to pay for their personal expenses. Between 2012 and 2017, the couple used more than $2 million to pay personal expenses. Between March 2016 and June 2017, Erdmann sold more than $700,000 worth of precious metals, including gold and silver bullion and used the proceeds to benefit Hansen and herself.
In April 2018, authorities indicted Hansen and Edermann on 20 federal felonies resulting from their Ponzi-like scheme. The indictment charged the pair with 10 counts each of mail fraud and wire fraud. Each charge is punishable by up to 20 years in prison.
Prime bank programs falsely claim to grant investor access to sophisticated and complex investment schemes and vehicles that are usually available only to the top financial institutions, financiers, and the super-rich. The promised returns may reach 20–200% per month. Well-known organizations such as the World Bank, International Monetary Fund, or a central bank issue, trade, and guarantee these instruments. Promoters of prime bank programs falsely claim that investors will receive guaranteed, high investment returns with little or no risk. Fraudsters often suggest that these types of investments are the exclusive, “secret way” that some wealthy people make their money.
Common factors that these con artists fraudulently promote include:
Purported sky-high returns in a short period.
Guaranteed or insured returns and principal.
No risk.
Issuance or guarantee by a well-known organization.
Secrecy by requiring victims to enter into non-disclosure agreements.
Complex and official-sounding terms, such as a standby letter of credit, bank guarantee, prime world bank financial instrument, private funding project, offshore trading program, and high-yield roll program.
Claims that the trading program takes place abroad. Fraudsters induce victims to send money to a foreign bank, where it’s eventually transferred to an off-shore account controlled by the con artists.
The SEC states that every prime bank investment program is fraudulent. Neither these instruments nor the markets on which they allegedly trade exist.
Allseas Group S.A. is a Swiss-based offshore contractor specializing in pipelay, heavy lift, and subsea construction. The company, founded in 1985 by the Dutch billionaire owner and president Edward Heerema, employs 3,000 people and operates worldwide. Allseas’s Pioneering Spirit is the world’s largest construction vessel and can install the heaviest offshore pipelines in waters up to about 2.5 miles deep.
In 2011, Allseas wanted to raise capital to fund building the Pioneering Spirit. Allseas had €100 million in cash, but it needed more to build the vessel that would dismantle oil rigs. The company sought outside advice about how best to use this money. One of the bankers, Paul Sultana, claimed that his uncle was the secretary to the Pope and he had access to the Federal Reserve (Fed) in Washington, DC. Sultana promised Allseas representatives that they could double their investment within 30 days and would receive €1.2 billion within three years. Sultana suggested that the money should be invested through Malta. Allseas representatives later met Marek Rejniak, who purportedly was one of only six Fed agents able to authorize the secret trading.
Rejniak suggested employing Luis Nobre, a banker with links to the Fed. He allegedly had access to a “secret and lucrative” trading platform connected to the Vatican via the Spanish royal family. Nobre was the director of LARN Ltd. and ERBON Wealth Management Ltd. that are registered to exclusive addresses in Harley Street and Marylebone, central London. He presented himself as a wealthy businessman with the lifestyle to match: living in apartments of five star hotels, having private security, eating at exclusive restaurants, and spending vast sums of money on high quality clothing.
Allseas transferred €100 million to Rejniak’s Maltese company. Once Rejniak received the money, he passed it to LARN’s account in London. Once the money was in London, Nobre started spending it. In three days, he made 40 transfers totaling €16 million. He allegedly laundered some of the money through accounts in Switzerland, Singapore, and Cyprus.
Barclays Bank stopped the account containing €88 million after growing suspicious about the nature of the transactions. Of the original €100 million, €12 million euros had already gone missing. Nobre used the money for his lavish lifestyle and paying some of his debts.
Authorities arrested Nobre in 2011. In 2016, a jury found him guilty of one count of acquiring criminal property, five counts of transferring criminal property, and three counts of possessing articles for use in fraud. Nobre received a 14-year prison sentence. The “principal fraudster,” Rejniak was still on the run. The Crown Prosecution Service declined to bring a case against Sultana due to insufficient evidence. Later, Allseas sued Rejniak, Sultana, and Nobre in the civil courts. In June 2018, authorities found Sultana guilty at a re-trial of conspiracy to commit fraud, sentencing him to eight years in prison. Some view this as the largest fraud in Britain to be successfully prosecuted privately. “It was bizarre, but it was brought to us in an extremely smart way. We were defrauded by very clever people,” Heerema later told a Financial Times reporter. “You always hear that about fraudsters, don’t you? They’re charming people who know how to talk [others] into things. Later you say, ‘My God, how could I have?’”
A promissory note is a form of debt similar to a loan or an IOU (I Owe You) that a company issues to raise money. An investor generally lends money to a company for a specified period and in exchange receives a fixed return on the investment in the form of principal and interest. Sophisticated investors buy legitimate promissory notes because they can conduct their own research to determine if the deal is worthwhile.
Although promissory notes can be legitimate investments, those marketed broadly to individual investors are often scams. This scheme usually involves targeting people who don’t have a license to sell securities. Often those selling the notes are offered exorbitant commissions. Because of the high commissions they can earn, salespersons may unreasonably rely on information provided to them by the issuers or promoters and fail to investigate or adequately confirm the facts. Here are some red flags of promissory note fraud.
High, even double-digit interest rates. It’s worthwhile to compare the promised interest rate to current market rates for similar fixed rate investments, such as long-term Treasury bonds or the Federal Insurance Corporation insured certificates of deposit.
Risk-free, insured or guaranteed returns.
Requirement to “roll over” the investment for another term instead of withdrawing the principal and interest.
Legitimate promissory notes are usually securities that must be registered with the SEC and their sellers must be properly licensed to sell securities. Yet, despite being securities, many promissory notes are unlawfully offered by non-registered individuals. Insurance agents are frequently used because of their relationships with investors. Legitimate notes and their sellers may easily be verified by calling a state securities regulator.
Fuad Ahmed, CEO and owner of Success Trade Securities, suggested the firm was raising $5 million through the sale of promissory notes. Most notes promised to pay an annual interest rate of 12.5% on a monthly basis over three years, with some notes promising to pay interest as high as 26%. Many of the investors were current or former National Football League (NFL) and National Basketball Association (NBA) players. According to Yahoo Sports, Jade Private Wealth Management represented many of the players and referred clients to Success Trade Securities in exchange for kickbacks.
These rates of return were unrealistic and Success Trade Securities failed to use investor money for the intended purpose. In April 2013, the Financial Industry Regulatory Authority (FINRA) issued a complaint against Success Trade Securities and Fuad Ahmed charging fraud in the sales of promissory notes issued by the firm’s parent company. Ahmed and Success Trade Securities had sold $19.4 million of promissory notes issued by its parent company, Success Trade Inc., to investors between February 2009 and March 2013.
Many of the athletes were inexperienced investors, just starting their careers after college. According to Jinesh “Hodge” Brahmbhatt, a broker at Success Trade Securities, the firm targeted them because they had the potential to make high income, but little income history. Brahmbhatt operated Jade Private Wealth Management, a Virginia-based registered investment advisory firm that specialized in working with professional athletes.
Ahmed and the brokerage misrepresented or omitted material facts that would have revealed the company’s dire financial condition. The FINRA report alleged that Ahmed used the proceeds from the promissory notes sold to investors to pay interest on notes issued to previous investors, a classic Ponzi scheme. Additionally, he used the funds to pay personal expenses and to provide $82,000 in interest free loans to his brother.
Sixty-five investors, including many professional athletes, bought 152 notes, ranging from $6,500 to $1 million. Success Trade Securities fully repaid only six investors. In June 2014, FINRA ordered Ahmed to pay about $13.7 million in restitution to 59 investors. FINRA barred Brahmbhatt for life from engaging in future investment activities. According to FINRA, Brahmbhatt and Jade’s representatives sold fraudulent promissory notes to players as a quid pro quo for the brokerage firm paying its operating expenses. Success Trade Securities made a “loan” of $1.25 million to Jade.
Ahmed admitted that the parent company lost money every year except one during a 14-year period. He also misled investors about how their funds would be used, claiming they would be put toward promoting and building Success Trade’s businesses. Instead, Ahmed used the money for personal expenses and to maintain a Ponzi scheme by making interest payments to existing noteholders.
FINRA only identified the affected players by their initials. Miami Dolphins defensive end Jared Odrick was the only player who publicly filed a FINRA arbitration claim against Success Trade Securities, Ahmed, and Brahmbhatt. Attorney Jeff Sonn, representing Odrick in his case against Success Trade Securities and Jade Private Wealth Management said, “The single largest problem for athletes is losing money in private placement investments … that are not registered with the SEC. It’s incumbent upon an athlete, any individual, to understand and do the research necessary to protect his/her investments.
Various government authorities and self-regulatory organizations devote millions of dollars annually and employ an enormous workforce to stop investment fraud. As the previous examples show, much work still needs to be done. Criminal minds use increasingly sophisticated techniques to separate investors from their money. The advances in cyberspace foster new frauds and scams that are becoming more common and harder to identify. The best way to protect yourself is to become a savvy investor. Here are some tips to stay protected:
Be wary of promises that sound too good to be true. Be suspicious of investment opportunities that promise a high return with little or no risk. An investment that yields double-digit returns with no risk doesn’t exist.
Be skeptical about unsolicited phone calls offering investments, especially those from unknown and unregistered companies. Always check the credentials of anyone offering to sell you an investment, even if you know that person personally.
Don’t let anyone pressure you into making decisions about your money.
Never give your personal details to an unsolicited caller.