New Zealanders are increasingly the targets of investment fraudsters. AARON HING* outlines some common stings, and how to beat them.
Pump and dump
A "broker" urges the victim to buy a stock quickly or sell it before the price goes down.
Often, the "broker" will claim to have inside knowledge about
some impending, unpublicised development within the company, which will result in the share price posting huge gains.
In reality, the so-called brokers will be the ones to gain the most, through selling their stock once they have pumped up the price by enticing gullible investors into a buying frenzy.
Once the fraudsters sell their holdings and stop hyping the stock, the share price typically plummets and investors lose a large proportion of their investment.
Overseas brokers
Unsolicited telephone calls from overseas brokers are becoming increasingly common. Most of these calls originate from Southeast Asia, typically Hong Kong, Singapore and the Philippines.
The scam works the same way as the pump and dump, although in some cases the companies promoted no longer exist.
Most commonly, overseas brokers use mailing lists bought from third parties. They then make cold calls to prospective clients, offering them a free subscription to a financial magazine.
The "magazine" will turn out to be a company newsletter. New clients will get a follow-up call inviting them to take part in an exciting investment opportunity - if they act fast.
Many people quickly buy shares and then experience long delays before receiving their share certificates.
That delay gives the brokers time to dupe more people.
These brokers do not comply with New Zealand securities laws and will generally not be registered in their own countries. They operate outside New Zealand's legal jurisdiction and generally cannot be prosecuted in their own countries as they have no local clients.
The New Zealand Securities Commission has issued a warning about overseas investment advisers and sharebrokers.
Internet fraud
Online bulletin boards are a popular forum where investors can share financial information. But many messages will turn out to be bogus.
Fraudsters will often pump up a company stock price by pretending to reveal inside information about forthcoming announcements, new products or lucrative contracts. The major advantage for a fraudster is that a bulletin board lets him or her hide behind multiple aliases.
Pyramid schemes
These are illegal in New Zealand but they still keep appearing, albeit in different shapes and forms.
No new money is created in pyramid schemes. Investors who get in early take their profits from investors who join later.
At some point, no new investors can be found and as a result, the last investors, who are at the bottom of the pyramid, lose their money.
Advance fee
The most common type of advanced fee fraud is the Nigerian letter scam, although letters are now originating from across the globe.
The personalised letters are supposedly sent by some top government official or member of a royal family.
The scammers will claim that there are millions of dollars held up in their country and they need your help in moving the funds.
In return, the recipient will be promised a percentage of the funds as a fee for services rendered.
Once agreed to, the scammers will request a fee to help with the associated cost of shifting the money. This fee may be to help with processing or to bribe Government officials. The fraudsters usually disappear once the victim pays the fee.
Lotteries and prize draws
Lottery and prize draw schemes are becoming extremely popular with scam artists.
A recipient will receive either a letter in the mail or a telephone call informing him that he has been selected from thousands of people and has won a fabulous prize.
All the "winner" has to do is pay a small fee. The fee may be for "administration" and "processing costs," or the scammer may state that the recipient needs to travel to the country of origin in order to receive the prize.
A large proportion of these offers originate from Canada and authorities there are investigating. Note that many overseas lotteries are marketed in New Zealand but are illegal.
What to look out for
* If contacted by an overseas share sales person using high-pressure sales techniques and promising high returns, hang up immediately.
* If you send money overseas you might lose the protection of New Zealand law and you will find it extremely difficult to confirm whether the money has been invested on your behalf.
* Investors need to be cautious if dealing with new firms that are unknown to them, especially if those firms are based overseas.
* Always demand printed information on the firm and investment; beware of so-called brokers telling you that you must act extremely quickly.
* Establish that your source of financial information is bona fide. Don't rely on internet chat-room discussions in order to make your investment decisions.
* Be wary of exaggerated returns, often made alongside statements that there is limited risk involved. Generally, the higher the return offered for an investment, the higher the risk involved.
* Most importantly, see your financial adviser, who can establish the legitimacy of investment offers and determine if they are appropriate to your financial needs.
* Aaron Hing is head of financial advice for Spicers Portfolio Management.
Sources: Ministry of Consumer Affairs, New Zealand Securities Commission.
New Zealanders are increasingly the targets of investment fraudsters. AARON HING* outlines some common stings, and how to beat them.
Pump and dump
A "broker" urges the victim to buy a stock quickly or sell it before the price goes down.
Often, the "broker" will claim to have inside knowledge about
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