Chapter 2 - EXHIBIT 2A • STUPID HUMAN INVESTMENTS
| Jurisdiction | Colorado |
Talk show hosts often make fun of everyday events, feature funny animal tricks, and otherwise entertain us. They rarely, if ever, talk about the absurd investment scams that investors get caught in. This is an untapped reserve of humor. How outrageous can the claims be while still attracting millions of dollars in investments? You might be surprised.
Most investment scams are a variation of the Ponzi pyramid scheme or the pump-and-dump scheme.
The Ponzi scheme is a pyramid scheme in which sellers attempt to make money solely by recruiting new investors into the program. Think of a chain letter that asks you to send $10 to the person at the top the list and promises that in a few short weeks, you will receive $1,000 or more. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than making the investment. The promoters generally use the money coming in from new investors to pay early stage investors, or they simply pocket the money for their own use. Eventually the scheme collapses because there are insufficient funds to pay investors their promised returns.
A pump-and-dump scheme occurs when (1) a person publishes overly optimistic information regarding a particular company, product, or segment of industry, (2) the market reacts to such information by driving up the price of the stock, and (3) the persons publishing the information sell their shares at a large profit. Remaining investors, especially those who purchased stock during the hype, take a loss in market value when the hype dies down and the stock price falls back to more normal levels.
These scams pull in experienced and inexperienced investors alike. The success of some of the scams must, in part, be due to the charismatic seller; otherwise, who would believe them? Judge the following vignettes for yourself. Each of the following is based on a real-world experience as described in the footnotes. Would you fall for this come-on? Many people have, and unfortunately more will.
SCAM # 1 — PHILIPPINE GOLD AND FERDINAND MARCOS
Let's talk about the most important things right up front: the return on investment. In this case, the return on investment will be in excess of 6,500 percent, all to be paid within approximately 90 days. You only need to make a small ($15,000) investment (blank checks and credit card authorizations are acceptable). The promoter owns two gold certificates redeemable for thousands of metric tons of gold that he obtained from the International Foundation for Community Development (Philippines), Inc., which, in turn, obtained them from the late Philippine President Ferdinand Marcos.
The certificates are backed by gold, which has been deposited in a large international bank and may be redeemed within a short period of time. The certificates were assigned to the promoter so he can raise funds for various (unnamed) humanitarian projects. The promoter eventually intends to sell or redeem the certificates or use them as security for a line of credit and use the resulting funding (billions of dollars) to provide you, the investor, with your promised return. At that time, the promoter expects to give you another opportunity to invest in a high-profit scheme. Naturally, the promoter will keep a sizeable commission on the funds he received to compensate himself for his efforts.
The promoter will use your investment and the investment of a few selected other people to pay for the expenses associated with obtaining the ultimate funding. These expenses will include the promoter's travel and living expenses while he is lining up the financing. Of course, because of the nature of the project, the promoter will need to travel around the world and must stay in luxury hotels to project the right image for the project.2
SCAM # 2 — SECRET SECURITIES AND AFFINITY FRAUD
How about the opportunity to invest in secret securities? The promoter of this investment scheme is an investment fund that claims to have a highly lucrative international bank debenture investment program that trades in overseas markets in accordance with Christian and humanitarian investment principles. The investor is promised very high returns within a couple of months of making the investment.
The principal amount of the investment is guaranteed because the promoter invests in instruments representing obligations of major world banks. These investments in the European intra-bank market are extremely lucrative. The market is so secret that those with access to the market might deny its existence and the investor's own well-experienced brokers or bankers likely have not heard of it. In fact, the seller's response to the question of how the investor found out about or got involved in the investment program is itself a secret.
Religion is an important part of the promoter's program. The promoter is, after all, a devout, Godfearing person and humanitarian seeking to offer this exclusive business opportunity only to...
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