Name That Fraud

1.

You are a member of a local community volunteer group. A fellow member you've known for years introduces you to a new member, a local businessman, who tells you about an investment opportunity that he has connections with, and he's offering you and the members in your group the chance to invest. Other members of your group have invested with him in the past and made substantial returns. He is not registered to sell investments, as it’s just a sideline. This has the characteristics of:

A.

A boiler room.
B.

A legitimate investment opportunity. Since other members of your group have previously invested, it’s worth considering.
C.

Affinity fraud.

Correct Answer
C. Affinity fraud.

Explanation
Correct answer - C
Red Flag: Great opportunity – your friends can’t be wrong

Affinity fraud targets groups, such as social clubs and ethnic or religious communities. The scam artist plays on our instinct to trust those who are like us. In some cases, the scam artist may be an established member of the group. In other cases, they may build relationships with influential members of the group in order to gain acceptance. Many victims of affinity fraud never report it. Remember that anyone selling investments or providing investment advice must be registered, unless they have an exemption.

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2.

Over the past few weeks, you have been receiving phone calls about an investment opportunity that promises to double your investment in six months. The person you've been speaking with identifies himself as the Vice-President of Sales for a start-up company that's working on a "green" environmental technology that's about to go public. You have logged on and read the information posted to their company website, and it sounds plausible. You’d like to research it further, but your contact tells you to get in right away, as company's shares are going to take off once they start to trade. This has the characteristics of:

A.

A boiler room. The pattern of calls, high pressure sales tactics, and promises that the company will go public tipped you off.
B.

A Ponzi scheme. They are clearly taking money from initial investors to keep the scam going.
C.

A legitimate investment. Start-up companies seek venture capital, and this is no different. The company has a website, and their office is located downtown in the financial sector, so you know this is a good investment.

Correct Answer
A. A boiler room. The pattern of calls, high pressure sales tactics, and promises that the company will go public tipped you off.

Explanation
Correct answer – A
Red Flags: Guaranteed high return, no risk. Insider tips – get in now.

Many boiler room scams begin with an unsolicited phone call to buy shares in a private company that is about to be listed on a major stock exchange. They will say that once the company goes public, the value of its shares will skyrocket. Here’s the catch: the company doesn’t exist.

This scam is usually pulled off by a team of scam artists who set up a makeshift office, called a “boiler room.” To convince you the company is real, they might send you to the company’s website to check things out and send you false research reports. They use high pressure sales tactics to get you invest quickly. By the time you realize you’ve been taken, the scam artist will have closed up shop and moved on to another scam. You’ll likely never see your money again.

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3.

Two years ago you invested in what you thought was a reputable start-up company but it turned out to be a scam. You have been receiving calls lately from a company telling you that for a small fee they can help you get your money back. They know exactly how many shares you bought and when this transaction happened. This is an example of:

A.

A windfall. You ask the caller where to send the fee. You're anxious to get your money back, and figure paying a small fee is probably worth it.
B.

A double dip scam. If you pay the small fee, you will likely lose that too.
C.

Identity theft. How else would they have your personal information?

Correct Answer
B. A double dip scam. If you pay the small fee, you will likely lose that too.

Explanation
Correct Answer - B
Red Flags: Guaranteed high return, no risk.

Because you've already been scammed once, you are likely to be targeted again in a “double dip” or “repeat” scam. The caller knows the details of your original transaction because scam artists reuse and sell their victim lists.

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4.

You have recently been laid off, and the money from your pension entitlement has been transferred to a locked-in retirement account (LIRA). Times are tough, and you would like to access this money. You have been reading on-line about companies that can help investors "unlock" their retirement assets by taking advantage of a special "RRSP loan". You call the number in the advertisement and speak to someone who tells you that in order to get the RRSP loan, you have to sell the investments you now hold in your retirement account(s) and use the proceeds to buy shares in a start-up company. In return, you're promised you will receive 60-70% of the money you invested back. The remaining 30-40% will be retained by the promoter as a fee. You are told you will pay no tax and you'll hold shares in a promising new company. This could be:

A.

A great way to avoid tax and have access to your retirement funds right away. The start-up shares are a good investment to have in your RRSP since you're several years away from retirement.
B.

A retirement account scam.
C.

An exempt market scam as it deals with a start-up company.

Correct Answer
B. A retirement account scam.

Explanation
Correct Answer - B
Red Flags – Tax Free investment. Guaranteed high return, no risk.

Retirement account scams defraud investors of their retirement savings and leave victims with worthless shares. Victims don’t receive the promised RRSP loan, and they may have violated federal income tax law. As a result they will likely have to pay taxes on the money they never received.

Your registered financial adviser and accountant can tell you how to legally access money in your RRSP. In most cases, you have to reach age 55 or older before you take money, and there are often limits to how much money you can withdrawal each year. Most likely you will also have to pay tax on the money you withdraw from a retirement savings plan.

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5.

You recently received an email from a high-ranking government official in a country in turmoil asking for help. He needs your assistance to access funds that are owed to him so a sick family member can receive a much-needed operation. All you need to do is accept the deposit of funds into your bank account. He will transfer the money through your account, and in return for your help, will give you a small percentage of the money. This has the characteristics of:

A.

Identity theft. He is after your personal information.
B.

West African fraud letter.
C.

Both A and B.

Correct Answer
C. Both A and B.

Explanation
Correct Answer - C
Red Flags: Guaranteed high return, no risk. Insider tips – get in now.

A West African fraud letter does not have to be from Africa – it could be from any nation or location where there is turmoil. In fact, the location is just used to make it seem plausible. Victims receive letters, e-mail, or faxes from someone posing as a high-ranking government official, usually marked "urgent" or "in strictest confidence." The sender will tell you that because of a financial error, they have millions of dollars languishing in a bank account that they can’t touch, but with your help, they can access these funds. They may say they have a sick relative or dying child and need the money right away.

In return, you are promised a portion of the funds, usually 20 per cent. All you have to do is deposit a sum of money in the bank account as a “processing fee” and fax your bank account information. Once they have your fee and banking information, the scam artists will drain your bank account. Identity theft occurs when your personal information is used by someone other than you.

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6.

You have been getting emails on a weekly basis promoting various can’t-lose stocks. You don't recognize the sender, and the e-mail reads like it was sent to you by accident. The investment sounds promising, with high returns and no risk. This seems:

A.

A sure thing. You reply to the sender and ask for additional information on the micro-cap stock and its projected earnings.
B.

Suspicious. You reply to the sender and ask that they take your email address off their list immediately.
C.

Like a spam e-mail. You contact your local securities regulator about the email, and block the sender from contacting you again.

Correct Answer
C. Like a spam e-mail. You contact your local securities regulator about the email, and block the sender from contacting you again.

Explanation
Correct Answer - C
Red Flag: Guaranteed high return, no risk. Insider tips – get in now.
Unsolicited spam emails promote a product or service, including investments. Many of these e-mails promote “microcap” stocks that are traded on over-the-counter markets, which have fewer regulations than the major stock exchanges. While all investments have some risk, microcap stocks are considered high risk. Many of these companies are new, have limited assets and little public information available.

Be wary of unsolicited investment advice. The person sending the e-mail doesn’t know you or your financial situation. If you read the fine print, you may find that they are paid to promote the investment. They may also benefit from an increase in the stock’s value.
Unsolicited email scams are becoming more and more common as scam artists can use the internet to defraud thousands of people at one time. If you reply, you have confirmed that your e-mail address is active, and you will be spammed again and again. If you receive emails like these - do not respond, report them to your local securities regulator and block the sender.

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