Currency Trading Fraud: The New Scam

[Butterfly]

For those of you trying to go into online FX transaction to make up for that high Thai Baht, be warned

The Villains of Currency
Investors' Excitement
Allows Fraudsters
To Get Even the Savvy
By JOANNA SLATER
January 6, 2007; Page B1

Cashing in on the volatile world of buying and selling currencies just became riskier.

Scam artists are increasingly using currency-trading schemes to ensnare even experienced investors, regulators say. The scams take many forms, soliciting individuals over the telephone or wooing them at hotel presentations.

One widespread scheme promises investors fat profits if they jump in on a time-sensitive opportunity to trade currencies. The money then disappears or gets eaten up in unprofitable trades.

Such frauds exploit a growing awareness among the investing public that the global foreign-exchange market -- worth roughly $2 trillion a day -- is an important financial arena. They also benefit from a legal loophole: Not all of the people who solicit investors to trade currencies are regulated, making them difficult to monitor.

Schemes like these are "the fraud du jour," says Michael Dunn, a commissioner at the Commodity Futures Trading Commission, the government body responsible for regulating a portion of currency trading. In recent years, foreign-exchange fraud cases have expanded to take up 28% of the body's current litigation. "This is a real problem out there," says Mr. Dunn.

Over the past five years, more than 25,000 investors have been burned by these frauds, which employ a variety of tactics to lure individuals. Some firms set up booths at investor fairs or rely on printed brochures or pitches over the telephone. Other schemes target particular ethnic groups or spread by word of mouth.

That's how Vicki Myers learned about White Pine Trust Corp., a San Diego foreign-currency fund. Before deciding whether to invest, Ms. Myers visited the company's office. The firm had trading screens, glossy brochures, and, it claimed, an outstanding track record. Impressed, Ms. Myers and her husband invested $58,000 in retirement funds and other savings.

After the fund's Web site stopped working and no one returned her calls, she drove back to the office in 2004, only to find it abandoned. The money was likely gone, she realized. The fund's founder is now in prison after pleading guilty to wire fraud.

"It made me sick," recalls the 57-year-old, who is a marketing director at a residence for the elderly. She estimates that about half of her husband's retirement savings disappeared in the fraud.

The scams tap into an increasing curiosity among individuals about the world of currencies, long the domain of banks, companies, and other institutions.

"The strength and weakness in the dollar is being talked about in the headlines on a daily basis," says Muhammad Rasoul, chief operating officer of Global Forex Trading, a registered foreign-exchange firm based in Michigan that caters to individual customers. "You're going to have people trying to take advantage of those who aren't as familiar" with currencies.

To combat such practices, Mr. Rasoul advocates closing the loopholes that allow some currency-market players to escape regulation and help unscrupulous operators to thrive.

Knowing how to identify legitimate foreign-exchange players is particularly important since the number of firms catering to individual investors has exploded in recent years. Increasing numbers of small investors are trying their hand at buying and selling actual money, thanks to electronic-trading platforms that require low minimum investments.

It's a risky proposition that features unpredictable swings in prices that can wipe out gains. The scams rarely mention such hazards. They target not only financial novices and the elderly, but also investors with an advanced grasp of how markets work.

A good example is the con that ensnared Ms. Myers, which managed to solicit more than $30 million from investors.

The fund's founder, Richard Matthews Jr., pleaded guilty to wire fraud in 2005 in federal court in San Diego, and is in prison while a receiver liquidates the ill-gotten gains from the scam, which included a 12-acre island in Belize, property in California, and a yacht.

Investors in the scheme may recover approximately 20% of their original investment, according to the receiver.

The frauds themselves differ in type and scope. A garden-variety scam might work like this: Fraudsters rent a telemarketing "boiler room" complete with phones and cubicles, and start cold-calling numbers from a list of leads available for purchase. They promise large guaranteed returns, hail their track record, and ask that a minimum investment be wired to a particular bank. If an investor bites, the calls continue, saying more money is needed to take advantage of an urgent trading opportunity.

When the investor asks for the money back, the response is that the market has shifted; then a month or two later the company closes. "The next day they're up and running under a new name," says Mr. Dunn of the CFTC. Florida is a particular hotspot for such schemes, he says.

Another tactic is to target members of a particular community. In San Francisco, for example, a firm placed a classified ad in a local Chinese-language newspaper -- promising well-paid work with health insurance. People who responded to the ad were given a minimal amount of training in how to trade currencies. Then they were asked to invest $20,000 of their own money and to encourage friends and relatives to open accounts. Nearly all of the $1.78 million invested by at least 45 people was lost.

One fact that helps to explain the prevalence of such currency scams is that they sometimes slip through the regulatory cracks. The CFTC has the authority to crack down on fraud in futures contracts, which are agreements to buy or sell a given commodity (or in this case, a particular currency) on specific dates. Futures contracts are a basic way to speculate on currencies. In a recent foreign-exchange case, CFTC v. Zelener, in the 7th U.S. Circuit Court of Appeals in Chicago, the judges ruled that although customers were defrauded, the contracts involved weren't explicitly futures. As a result, the judges said the carefully worded contracts in the case put the wrongdoers beyond the mandate of the CFTC. "In effect, it gave a blueprint for fraudsters on how to escape our jurisdiction," says Mr. Dunn of the CFTC.

Last year, Congress examined ways to close the Zelener loophole and is expected to reconsider the issue soon.

Another issue exploited by fraudsters relates to how currency contracts get sold to the average investor. The current law provides a fair degree of latitude for companies selling over-the-counter currency futures: for example, they don't have to register with a regulatory body, as long as they're affiliated with a company that has done so. Their employees can also escape regulatory scrutiny.

The result, at times, is high-pressure sales tactics by people who were previously involved in other forms of commodity fraud, says Daniel Roth, president of the National Futures Association, a self-regulating body for the industry.

"Essentially you have a completely unregulated sales force that is in some cases preying on retail customers," says Mr. Roth. "I can't believe that's what Congress intended."

Some registered firms take steps to protect themselves. Mr. Rasoul of Global Forex Trading says his firm won't take customer referrals from unregulated agents who may be using questionable practices to bring in business. "We're not interested in dealing with people who don't have some kind of responsibility over them," he says.

[Spin]

The scams take many forms, soliciting individuals over the telephone or wooing them at hotel presentations.

I stopped reading when i got to this.

Only idiots fall for this sort of thing

[Skulldigger]

You mean you're unwooable?

Woo, woo, woo, Helicopter... Woo, woo, woo...

[Gazza]

Not a new scam as it was going on in Thailand around the mid 90's. There was a boiler room using a garment company as a front for their premises on Asoke. Oriflame Tower to be more location specific.

But yes, people should be made aware of or reminded of these scams.

[kingwilly]

Not a new scam as it was going on in Thailand around the mid 90's. There was a boiler room using a garment company as a front for their premises on Asoke. Oriflame Tower to be more location specific.

But yes, people should be made aware of or reminded of these scams.

Oh shit, Oriflame Towers on Asoke road?????????!!!!


i invested $500,000 with them a few years ago! does this mean I've wasted my money?? I thought that they were legit and all - cos they has some pretty brochures and said they were registered with all the relevant authorities.....

[keda]

Extracted from, Scambuster, with kind permission from moi.

Self Evaluation Test - to determine how vulnerable you are.

Note: This test will only work if you are entirely honest with yourself.

Monday: A trusted friend who is knowledgeable in such matters, electrifies you with a fantastic investment opportunity. A computer firm is about to make it big, and this will give you an excellent return on your investment. He believes the downside is low, because it is secured against a product that is already produced - and sold! He knows of no other comparable investment with a solid, gilt-edged foundation. The clincher is his assurance that the company has several sales contracts already negotiated and signed.

Do you:
a - sign up immediately;
b - probe for more precise, documented and verifiable information;
c - say you're not interested.


Tuesday: The same friend tells you of a number of mutual friends that have already put money into this opportunity. Of course he has already invested, and has also received incredible returns on his own investment, which works out at an astounding 4% to 5% per week. You decide to contact your mutual friends to verify the good news; each in turn tells you they have invested, already in profit, and that you should not pass up this brilliant investment opportunity.

Do you:
a - sign up immediately;
b - probe for more information before you commit yourself;
c - remain uninterested.


Wednesday: Your friend provides you with the company's latest audited financial statements. It looks good. The company has had a proven track record over the past several years.

Do you:
a - sign up immediately;
b - ask for more information;
c - remain uninterested.


Thursday: He takes you to the company's offices. The operation appears well organised. You meet the director and like him straight away. The warehouse is filled with boxes of computers, ready for shipping. You leave impressed with everything you have seen and heard, and also with documentation attesting to the company's stability.


Do you:
a - return immediately to sign up;
b - decide it's a great opportunity, but you're still not quite ready to sign up;
c - remain sceptical.


Friday: As you have a chunk of spare cash to invest anyway, you visit an investment seminar, during which the company is mentioned and recommended as a high return/low risk investment.

Do you:
a - sign up immediately, with regrets that you didn't earlier;
b - feel you should go ahead, but still hesitate to commit your funds;
c - decide it's too good to be true, and back off.


Saturday: You overhear some respected dining companions discussing this excellent investment. Many of them have already invested large amounts of money, and reaped huge dividends. You feel rather stupid for resisting what is an obvious moneymaking proposition.

Do you:
a - itch to sign up;
b - want to sign up, but still not quite ready;
c - back off.


Sunday: You mention this to your accountant when you meet on the tennis court, to discuss possible investments. He has already heard about this company and taken up credit, bank and trade references. The company has an excellent working relationship with the bank, and has recently been granted a loan of $4m for expansion. He is enthusiastic about the company, its stability, viability and the way it is run. He definitely recommends it, and tells you in confidence that he intends to take the plunge first thing tomorrow, Monday morning.

Do you:
a - call the company immediately to make an appointment to sign up;
b - dither;
c - still feel it's too good to be genuine.


Now, at which stage did you actually sign up?

Your scambusting score: give yourself
three points for each a) decision;
two points for each b) decision;
one point for each c) decision;

After your very first a) decision, as you are now invested, add three points for each remaining question.

If you scored 7

You are unlikely to ever speculate in business or investments. If you backed a horse, it would be only after it had already won. You are ultra conservative, and should look to invest your spare money in nothing less secure than government bonds. Returns might be low, but your money is safe.

If you scored from 8 to 13

You are willing to take chances, but sensibly and only after you have done your research. You are unlikely to be a victim of a major rip off, but keep a closer eye on your small change.

If you scored 14 to 18

You are impulsive and an inveterate gambler. You should make it a habit to step back and more closely examine whatever you are offered.

If you scored 19 to 21

You are an easy touch and a prime candidate for any rip-off doing the rounds in your neighbourhood. You have probably been jerked off so many times that you should not be allowed anywhere near money - for your own good.


Now let's injure a few egos out there.


Sucko Time

The hypothetical questions above are based on one of the most flamboyant Ponzi schemes ever uncovered (at the time of writing, early 1990s), in Westminster, Colorado, USA.

The company, M&L Business Machines, conned some 3,000 known and tens of thousands of unknown investors out of more than $500m. The company promised investors higher than normal returns on their investments, much like the recent BCCI money laundering cum international banking con.

Invested funds were used to finance the cost of M&L's computer operation, and also to attract more investors by that most fabulous form of advertising - word of mouth. This was achieved by actually paying out the promised dividends to existing investors, most of whom eagerly reinvested.

The computer boxes in their warehouse were filled with foam, bricks and earth. The audited accounts were phoney, as were bank and trade references.

M&L operated this scam for more than five years before the balloon burst. Since they were actually paying out their earlier investors, many new ones were recruited through personal recommendations.

This Ponzi only came to light when private investigators became suspicious by M&L's offer of phenomenal returns to their investors. Note that the endorsements from family, friends and business associates were all made in good faith and were instrumental in each sucker's decision-making process.

Now, which major factor, would you say, should have alerted prospective investors?

Answer: Precisely the one that attracted them - Greed!

[Agent_Smith]

Just proves that you should be one of the first few to invest in a Ponzi scheme and then get out. Like winning a jackpot after only investing a few coins--just walk away.

[keda]

There's money to be made on Ponzis and also Pyramids, at the top end, but it takes an awful lot of debris at the lower end to pay for it.