Perfect pitch hits all the wrong notes

By MARK FRYER

What should you do if your broker successfully predicts share price rises, gets you in on the ground floor with new offers, always returns your calls and promptly delivers any promised documents?

Start worrying.

You may have discovered the perfect broker but, if your first contact came in a call from out of the blue, you may also be a victim of an international scam that is taking investors for millions of dollars.

"Cold calling" by so-called "brokers" from overseas is nothing new, and has claimed many New Zealand victims over the years. But an Australian report out this month shows how big the problem is, and reveals that the scamsters are becomingly increasingly sophisticated.

Indeed, what distinguishes many of the cold callers these days is the level of service they provide, according to the report from the Australian Securities and Investments Commission (ASIC), which regulates Australian investment markets.

The "brokers" frequently send out impressive brochures, offer references from happy customers, have slick websites, and are generally prepared to spend lots of time on the phone talking to their "clients".

If you got this sort of service from a real broker, you'd think you were made.

But since 1999, cold callers have extracted at least A$400 million from Australian investors, says the ASIC, which calls that a conservative estimate.

In that time the agency has had 7300 calls from people complaining about cold-calling scams. About 80 per cent of those callers have lost money, with individual losses running from A$1500 to A$3 million.

The ASIC has identified at least 82 cold calling firms, although many of those may represent one group of scamsters using several names.

There's no way of knowing if the problem is as big here, but many of the companies which the ASIC has identified have certainly been active on this side of the Tasman as well. In this country, the Securities Commission website lists 70 companies which have targeted New Zealand investors and which, says the commission, don't appear to be complying with New Zealand law.

Most are based in Asia, but they come from most other parts of the globe as well.

Over the past two years the scamsters have extracted at least $14 million from New Zealand investors, says the Securities Commission, although that only represents the cases it knows about.

There was a "huge upsurge" in cold calling last year, says Norman Miller, the commission's senior executive (operations), culminating in raids by Thai authorities on several brokers last July.

"Since then their activities have quietened down a bit but it's our impression that they've started to pick up again ... people who have bought shares are now being approached by new brokers saying they want to buy their shares but they have to pay more money to do so. We suspect that's part of the original fraud."

The ASIC says many of the scams are not simple "hit and run" operations. Instead, victims frequently make multiple investments before finally realising they've been had.

The scams are also becoming increasingly international, reducing the already-low chance of retrieving any of your money. As the ASIC says, "an Australian investor may, on the advice of an English-sounding but Thai-based broker, who claims to be in Japan, send money to a bank account in Hong Kong to invest in a company operating out of China but trading in a US market".

The scam typically begins with a call from out of the blue, from someone calling themselves a broker. Frequently they will claim to be operating from an international financial centre such as London, New York or Tokyo.

In fact, the caller is more likely to be sitting in an office in an Asian country such as Thailand, Indonesia or the Philippines, even though the people doing the talking typically don't have Asian accents. After some initial chat designed to put you at ease, the caller may suggest an investment in shares.

The usual sales pitch is that the "broker" knows of a company that is about to make an announcement that will send its share price sky-high. Buy now and you can get in on the ground floor.

If you show any interest they may offer to send you brochures, direct you to websites where you can research the offer yourself, even suggest other investors you can call to ensure that everything is kosher.

If you succumb, you may never see your money or the promised shares. But what makes these scams harder to distinguish from legitimate offers is that many investors do in fact receive the promised shares - though they won't be as rewarding as promised.

I N MOST cases, says the ASIC, the scamsters are selling shares in companies which trade on the "over the counter" (OTC) market in the United States.

The OTC market is a little like the "grey market" that exists in this country. Yes, the shares do exist and so do the companies that issue them, but the market is lightly regulated and there is very little trading in many of the stocks.

Companies whose shares trade on this exchange don't have to meet the rules you'd expect from an exchange - things like minimum size and a certain number of shareholders - and may not be required to file audited accounts. Even if the businesses are perfectly legitimate, they are typically tiny startup companies with a bright idea and not much else.

Because they are so seldom traded, some OTC shares can be easily manipulated. A cold caller who tells you that company XYZ's share price is about to rise can make sure it does, just by buying a few shares. If you're impressed, you may be more inclined to invest next time he offers a sure deal.

The ASIC says there is even evidence that some OTC companies have been set up by the cold callers themselves.

Cold callers frequently claim that OTC shares are listed on the better-known Nasdaq exchange, and suggest that their targets check things out for themselves on the Nasdaq website. But that site simply displays the prices of OTC shares; it doesn't imply that they are listed on the Nasdaq exchange and have to comply with its rules.

When victims of these scams give up and decide to sell, they may discover that their "brokers" are suddenly impossible to contact. They may also find that US regulations mean their shares are subject to restrictions which make them very difficult to sell.

In the cold light of day, the scamsters' pitch fails the most basic common-sense test - if these people have a sure-fire winner, why are they calling a complete stranger to tell them about it?

But the fact is, the pitch works.

The ASIC surveyed a group of people who had been contacted by the cold callers, about half of whom had succumbed, losing about A$60,000 on average.

Some said they found the offers plausible because they were so used to being deluged with calls from other businesses.

Some were persuaded by "referees" suggested by the "broker". But, says the ASIC, in many cases the cold caller simply sets up a local number and redirects the calls back to head office, where someone is ready to pose as a happy customer. Some of the referees are genuine investors who haven't yet discovered that they have been duped.

Other investors said the quality of the paperwork lulled them into a false sense of security.

A random sample of people who called the ASIC to complain about such scams shows they are overwhelmingly male, relatively well-educated and tend to be in managerial jobs or have their own businesses. Whether that represents those who were scammed, or just those who bothered to complain, is impossible to ascertain.

WHAT YOU CAN DO

If you want to find out more, or think you have already been contacted by an overseas-based cold caller, check the Securities Commission website.

The site lists known cold callers, but remember that just because a firm is not on the list does not necessarily mean it is legitimate; people in this business change names frequently.

In Australia, the ASIC's website for investors also lists known cold callers and has advice on how to deal with them - click on "cold calling: overseas offers by phone".

If you are thinking about buying US shares, which is what the cold callers are typically offering, have a look at the US Securities and Exchange Commission website, which includes an online booklet on the things to look for.

Or save yourself some time.

If someone calls you with a share deal that's too good to miss, just hang up.

* To contact Personal Finance Editor Mark Fryer write to: Weekend Herald, PO Box 32, Auckland. Email: mark_fryer@nzherald.co.nz

Ph: (09) 373-6400 ext 8833. Fax: (09) 373-6423.