Hard times bring out scam artists - Madoff and Palm Beach Socialites

Hard times bring out scam artists
By CLAUDIA BUCK - McClatchy Newspapers

When it comes to investment fraud, the perpetrators chase the news.

After 9/11, it was phony anti-terrorism technology. During the housing boom, it was real estate scams. A year ago, it was "green technology" swindles. Today, amid a financially stressed economy, it's "prime bank" and other high-yield, quick-money quackery.

"They always seem to mirror economic times. They exploit whatever's current," said Kevin Baker, head of the FBI's white-collar crime squad in Sacramento, Calif.

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And while none approach the heft of the current Bernard Madoff scandal that has wiped out billions from trusting investors around the world, Baker says Ponzi schemes and other investing scams are running so rampant that his 25 or so agents can't keep up.

Baker's agents go after only the most egregious cases, typically those that have cost victims at least $1 million in total losses. That includes several local cases now under active investigation.

The FBI doesn't maintain data on investment fraud as it does on mortgage fraud, which is often reported by banks and lenders. But in the Sacramento field office, which covers Central California between Bakersfield and Redding, Baker said reports of investment fraud have "significantly and noticeably increased since the economy has weakened."

Likewise, officials at the California's Department of Corporations say the rocky economy is playing into the hands of fraudsters.

"People who aren't normally susceptible to pitches for (risky financial) products may be more so than a year ago," said Andrew Roth, who oversees financial fraud education for the department. "It's more true of seniors and close-to-retirement folks because they have less time to weather the financial storm."

That's why many can fall prey to "high-yield" scams that try to entice investors with promises of better-than-a-bank returns.

The FBI says scammers use the same methods, regardless of whether they're peddling real estate, gold bars or new technology. These include slick promotional brochures, touting great returns; official-looking prospectuses, financial filings and pending patents; and aggressive salespeople, known as "promoters," who are paid up to 40 percent in commission, making them highly motivated.

In one case, Baker said, a potential investor came to the Sacramento offices of a phony investment company, asking to see evidence of its "facial recognition" software. To accommodate him, the fraudsters scrambled to download some crude software off the Internet and line up a conference room. They were convincing. The investor, apparently the only one who bothered to request a demonstration, handed over $200,000.

To avoid becoming a victim, here are some tips from law enforcement, public officials and investing watchdogs: be skeptical; do your research on the individual and the companies; get second opinions.

"A crooked adviser can turn your nest egg into a goose egg overnight and leave you destitute," said Don Blandin, CEO and president of Investor Protection Trust, a Washington, D.C.-based nonprofit that promotes investor education.