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July 25, 2007

Why Envelope Stuffing Scams Continue To Exist

Why do such simple work at home scams continue to exist? They are one of the least clever con tricks around, and seemingly for very low stakes -the average pitch is for around $30. How do these cheesy scams continue?

Here is an interesting story which may shed some light on the problem, WNDU News on Premier Solutions

Premier Solutions is the most recent incarnation of a company that started out called Home Business System... in 2005, we filed a lawsuit...to enjoin that organization from taking part in these practices where they lied about how much money you could expect to earn," said Jim DePriest with the Arkansas Attorney General's Office.

But, despite the Arkansas Attorney General's lawsuit, the letters are still coming; and when Andrews called the number given on the letter he was greeted with:

"Hello, are you making this call because you would like the opportunity to make some money? If so, you've just come across an opportunity that could help you meet your needs…" said the woman’s voice on the recording for the envelope-stuffing scam.

The scammers still have everything up and running, and unfortunately, it huts people who need the money they lose.

"The victims tend to be elderly, because that's who stays at home. Or disabled in some fashion, and people who are looking to augment what might be a fixed income by working at home, so this a venerable part of the community," DePriest said.

What is the kicker on this?

"In April, the business was fined $1.3 million for more than 12,000 counts of deceptive practices in Arkansas. That money hasn't been paid."

No money paid, nobody in jail, and the scam continues.

Now you know all you need to know -scam criminals make money.

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July 20, 2007

Do Fraud Criminals believe that they are Entitled to Cheat?

Interesting claim, as reported in the Toronto Star, Black stumbled into a common trap

"Arrogance and a sense of entitlement are common among business leaders who are, like Conrad Black, convicted of obstructing justice by destroying or hiding evidence, says a former U.S. prosecutor.

They think they can get away with it. They think they're smarter than everyone else, said Jacob Zamansky, now a New York securities lawyer who represents individuals in cases against Wall Street brokers.

Each of these high-profile people has a sense of entitlement or a certain amount of arrogance that they’re never going to get caught, Zamansky said."

In Conrad Black's case, his attempts to subvert an investigation were thwarted when he was caught on video lugging boxes of files from his office at Hollinger headquarters at 10 Toronto St.

It shows, like nothing else, a guilty state of mind, Zamansky said.

Black -a millionaire whose wealth would generally allow him to have his heavy lifting done by a personal assistant, maid, chauffeur or butler- was shown lugging 13 boxes through back door, breaking an Ontario court order in the process.

A picture's worth a thousand words on that, Zamansky said.

It's not something that a normal person would do or someone who felt they were innocent would do. It just makes the government's case easier.(my emphasis)

I agree with this observation, and would add that the insane spending habits of Mr. and Mrs. Black also show a "guilty state of mind".

Like all con criminals, Mr. Black had to be extravagent -money needed to be had for the sole purpose of showing off.

The money wasn't his, something that he could own, cherish his accomplishments which brought the wealth, and ulitmately pass on to his children.

No, the money had to be spent, like Lady MacBeth washing her hands endlessly and ultimately in vain.

Our Nation would have been better off recognizing Mr. Black's sufferings earlier.

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July 13, 2007

Ponzi Fraud: Colonendparenthesis.net

Shortly after I posted about why regulators should not post the rate of return allegedly being offered in a Ponzi scam, The Securities and Exchange Commission announced that it has filed a complaint seeking emergency relief in the United States District Court for the Eastern District of North Carolina against CEP Holdings, Inc. d/b/a www.colonendparenthesis.net (CEP), Colon End Parenthesis Trust, LLC (CEP Trust), and its owners and operators, Trevor Reed (Reed) and Clayton Kimbrell (Kimbrell).


"The Commission alleges that since approximately November 2005, Reed and Kimbrell, through CEP, have fraudulently sold approximately $12 million worth of securities in unregistered transactions to approximately 5,000 investors, promising returns of 2% per day.



The Commission alleges that Reed and Kimbrell solicited investors to purchase CEP memberships with a minimum investment of $20 through CEP's Internet website. On the homepage of this site, CEP claimed that investors could make the "% of an auto-surf without surfing." In order to invest in CEP, investors were required to open and fund an account at CEP Trust, which was also owned and controlled by Reed and Kimbrell. Reed, Kimbrell, and CEP falsely claimed to use the funds to invest in safe, "brick and mortar" type businesses, such as travel agencies and real estate. In fact, Reed and Kimbrell invested most of the money CEP raised in other high-risk, online schemes, including auto-surf programs. Reed and Kimbrell omitted to disclose to CEP investors that CEP had no record of its investments and that neither CEP nor CEP Trust have reliable financial records. Moreover, Reed and Kimbrell, through CEP, made numerous other misrepresentations and omissions of material facts concerning (1) the safety and rate of return of the investment; (2) the nature and merits of the investment; (3) CEP's compliance with Commission regulations; and (4) the size and scope of CEP's overall membership program."


Much hilarity ensured over at Naked Shorts, which reported on the story as follows.


"The world's first punctuation scam



You. cannot. make. this. stuff. up. From yesterday's edition of the US Securities and Exchange Commission naughty boys (and occasionally girls) page, the tale of something called colonendparenthesis.net. A cunning little scheme that, in just over 20 months, scammed some $12 million--at $20 a throw--out of 5,000 people, all sharing the common trait of being too stupid to have money, by promising returns of 2 percent a day."


A review of the complaint filed by the SEC reveals a different type of mystery. The 2% daily return is not the hype -it is the guarantee of getting the return of all your money back in three months, as if you were simply loaning the money.


Now here is they mystery, as Charles Ponzi explained it, how can something which is quite unsound as an investment nevertheless be made attractive as a gamble, but to essentially risk adverse individuals? The individual investors must be risk adverse if they it is important that funds were used to "invest in safe, "brick and mortar" type businesses, such as travel agencies and real estate."


It is important to understand this, if we are to effectively regulate these schemes -which schemes are essentially gambles or lotteries, and which are investments? If we want to cut down on auto-surf fraud programs, then I suggest that we simply provide the necessary lotteries as a federal level instead of treating these schemes as "unregistered investments". They aren't investments, the attractive is to a gamble -which needs to be made more transparent, without losing the attraction for consumers.

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July 10, 2007

The Modern Telephone Booth Indian - Botnets who leave Stock Tips

A.J. Liebling had a series of short stories about frauds and cons entitled "Telephone Booth Indians". One of the scams, was to phone a telephone number and pass on a "tip" about a stock about to go up in price. The scammer pretended that he was talking to a friend, and often if the stock went up the pleased "victim" rewarded the scammer. Of course this takes far too long, and in a world full of individuals willing to take something for nothing, then it is only natural and fitting that the Telephone Booth Indian be replaced, upgraded and modernized by the botnets.

Darrel T. Uselton and Jack E. Uselton: Lit. Rel. No. 20187 / July 9, 2007 The Securities and Exchange Commission filed securities fraud charges against two Texas individuals in a high tech spam campaign that involved personal computers nationwide to disseminate millions of spam emails that yielded over $4.6 million for the defendants. The scheme involved the use of so-called computer "botnets" or "proxy bot networks," which are networks comprised of personal computers that, unbeknownst to their owners, are infected with malicious viruses that forward spam or viruses to other computers on the Internet.

The Commission alleges that Darrel Uselton and his uncle, Jack Uselton, both recidivist securities law violators, illegally made more than $4.6 million during a 20-month "scalping" scheme by obtaining shares from at least 13 penny stock companies and selling those shares into an artificially active market they created through manipulative trading, spam email campaigns, direct mailers, and Internet-based promotional activities. Scalping refers to recommending that others purchase a security while secretly selling the same security in the market. In March 2007, the Commission suspended trading in the securities of 3 of the 13 penny stock companies identified in the complaint because they were the subject of repeated spam email campaigns.

The Commission's complaint, filed in U.S. District Court in Houston, alleges that the Useltons violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against each of the individual defendants, as well as a penny stock bar against the Useltons.

In related enforcement actions, the Attorney General's Office for Texas and the Harris County District Attorney's Office indicted the Useltons for engaging in organized criminal activity and money laundering. The Texas criminal authorities have also seized more than $4.2 million from bank accounts associated with the Useltons.

The Commission acknowledges the assistance of the Attorney General's Office for New York and Texas, The Harris County (Houston, Texas) District Attorney's Office, the Federal Bureau of Investigation, the Texas State Securities Board, the State of Oklahoma Department of Securities, the National Association of Securities Dealers and the National Cyber-Forensics & Training Alliance.

The Commission's investigation is continuing.

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June 20, 2007

Bubbles on the Brain?

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Earlier this month, Marc Andreessen, wrote a piece about economic bubbles entitled. "Bubbles on the brain":

"It has become commonplace in Silicon Valley and in the blogosphere to take the position that we are in another bubble -- a Web 2.0 bubble, or a dot com bubble redux.

I don't think this is true.

Let's examine the theory of a new bubble from a few different angles.

First, recall that economist Paul Samuelson once quipped, 'Economists have successfully predicted nine of the last five recessions.'

One might paraphrase this for our purposes as 'Technology industry experts have successfully predicted nine of the last five bubbles'... or perhaps more like five of the last one bubbles.

The human psyche seems to have a powerful underlying need to predict doom and gloom."


It is unfortunate that most of what Andreessen has to say is either true but not relevant, or false.

We can ignore the attempt to ground his conclusion in evolutionary pyschology, since predicting doom and gloom is largely irrelevant. We aren't interested whether the forecasters are correct or not, we want to know what are the elements that make up a speculative asset play; how to turn an unviting speculation in to an appealing investment.

And on this ground, Andreessen is completely misinformed. He starts with a misunderstanding of the rarity of asset bubbles.


"If you're going to listen to people who predict bubbles or crashes, you have to be ready to stay completely out of the market -- the stock market, and the technology industry -- almost every year of your life.

Second, historically, bubbles are very, very rare.

It's significant that in books and papers that talk about bubbles, there are simply not that many examples over the past 500 years of capitalism.

You've got the South Sea bubble, the Dutch tulip bulb bubble, the bubble in Japanese stocks in the 1980's, the dot com bubble, and a few others.

They just don't happen that often, at least in relatively developed economies."


This is just false; every ponzi fraud that ever had a modicum of real business produced a bubble. Now we can count a lot of these, starting with the Florida land scandals in the 20's and moving right through the 80's and the S&L fraud, right up to Enron. Every one was an asset bubble - and once we start counting, we will soon be in the hundreds of thousands.

Bubbles are common, which is what Andreessen should have predicted if he really thought that our attraction to them was rooted in our evolutionary past.

Andreessen is right when he says that "Third, in the technology industry, lots of startups being funded with some succeeding and many failing does not equal a bubble. It equals status quo. The whole structure of how the technology industry gets funded -- by venture capitalists, angel investors, and Wall Street -- is predicated on the baseball model. Out of ten swings at the bat, you get maybe seven strikeouts, two base hits, and if you are lucky, one home run. The base hits and the home runs pay for all the strikeouts. If you're going to call a bubble on the basis of lots of bad startups getting funded and failing, then you have to conclude that the industry is in a perpetual bubble, and has been for 40 years."

This is true, but it is not relevant. Yes, the technology portfolio has wide spread of returns -what does this have to do with a speculative asset play? A bubble occurs precisely when what is really a speculative gamble is made up to look like an investment, or at least in the eye of the marks.

It gets worse.

Andreessen goes and concludes "Fourth, getting more specific about Internet businesses -- things have changed a lot since the late 90's. It is far cheaper to start an Internet business today than it was in the late 90's."

Uh, that is a necessary condition for the creation of a bubble -cheap access to a what looks like, but aint', a capital generating opportunity. If the ticket price is too expensive, you cannot get enough of the rubes and marks in to generate the false enthuisasm, the swings of emotion and churn.

Finally, Andreessen states "And then there's Google. These companies aren't pulling in all that revenue via some kind of Ponzi scheme. This is money coming from real advertisers and real users for real services with real value."

If true, again this is irrelevant. Whether or not Google turns out to be a ponzi scheme, selling advertisers on the possibilty of future revenue, which increases the valuation of Google, which allows Google to increase the monopolist's price for its advertising, has nothing to do with whether some Web 2.0 applications, which are speculative gambles, are being dressed up legitimate investments.

I will make a prediction: when web 2.0 applications seek funding via essentially promissory notes, which are traded on a lightly regulated market, the we will see a bubble within 18 months. But the demise of this bubble will be unlikely to affect the credit markets -which is the only thing that policy makers should worry about.


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May 22, 2007

infoUSA Implicated in Scam?

The New York Times article on list brokering has taken an interesting turn. Two sources, the New York Sun and Sajaforum are reporting that infoUSA Implicated In Telemarketing Scam

The story is of interest because the original New York Times story did not report the relationship, in terms of financial support, between infoUSA and the Clinton's.

According to the New York Sun,

"A Nebraska entrepreneur facing allegations that his firm does business with scam artists targeting the elderly, Vinod Gupta, has directed more than $3 million in the past decade to political campaigns and projects connected with President Clinton and Senator Clinton.

Mr. Gupta's company, infoUSA, Inc., repeatedly rented marketing databases to unscrupulous individuals who used the lists to engage in fraud, according to the New York Times. A front-page article in the Sunday paper said the company promoted a list called "Suffering Seniors," which featured ailing older people, and other lists of "Elderly Opportunity Seekers" and those deemed to be "gullible."

infoUSA has responded by decrying the recycling of three year old news, charges which it believes have long been settled.

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February 16, 2007

When is a Bet a Sure Thing?

From the Guys and Dolls movie,

Sky Masterson: One of these days in your travels, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you're going to wind up with an ear full of cider.

One modern update:

Note how the bet was cleverly coerced.

Our modern day Guy didn't ask, who wants to bet? Nobody wants an earful of cider.

Rather he said, "How much do you have?" Answer, "A tenner". Bet's on, whether the holder of the tenner wanted to wager that much or not!

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December 21, 2006

How Not to Set Up an Internet Company

Give your prospects a free lunch, and then pitch them for 6-8 hours on your product which doesn't work.

At least that is is what Office of the Illinois Attorney General who sued two Utah Companies for Misleading Promises is alleging. According to the press release,

"StoresOnline and Galaxy Mall both promise to provide everything consumers need to get an online business started, including software to set up a web page, access to online payment mechanisms, and training courses to pull it all together. But, according to Madigan's complaint, once consumers pay thousands of dollars for these services, the two businesses fail to fulfill their promises, leaving consumers with nothing.

Madigan's complaint specifically alleges that StoresOnline and Galaxy Mall, both based in Orem, Utah, lure Illinois consumers to a free lunch, where they encourage consumers to attend a "training session" to learn how to start a successful online business. However, the "training session", for which consumers pay a nominal fee, actually is a 6 to 8-hour sales presentation for the defendants' products. During the "training session", the defendants allegedly promise consumers:

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that the products are easy to use and consumers will not need computer experience;

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that the contracts for the products provide for a three-day period during which consumers can cancel the contract and obtain a refund; and

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that the defendants will provide any assistance the consumers may need to start their online businesses.

In contrast to the sales pitch, the complaint alleges that:

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the products are not easy to use, and even consumers with computer experience were not able to set up their online stores;

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the defendants refused to cancel contracts and provide refunds, even when consumers attempted to cancel within the first three days; and

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the defendants failed to provide the promised technical support for the products"

Apparently, 15 Illinois residents losts a total of around $90,000.

While I applaud the AG for brining this action quickly, I don't have the same applause for her preventive warning. "Consumers need to be very skeptical of any marketing efforts that promise easy access to the world of internet business," Madigan said. "If a sales pitch sounds too good to be true, it probably is. Consumers must be wary of unscrupulous businesses that prey on the desire to attain easy wealth through the internet."

These residents didn't find the sales pitch too good to be true, and in general scams do not self-announce themselves as too good to be true. So why didn't these individuals see through the deception? We don't know. We do know a couple of things, however.

First, it is unlikely that these individuals were very conversant with the internet. Had they googled "storesonline scam" they would have found the June 2005 warning from Australia, which raised serious doubts about the concept. Concluding, "Regrettably, instant wealth without effort is outside the reach of us mortals." In other words, at the free lunch, when you are promised something for nothing, having another helping of food, but leave quickly.

Second, we know that these individuals probably didn't pay for their online store with Visa or Mastercard, since they would have been able to charge back the purchase.

(Ironically, Ed Magedson of Ripoff Report fame, wrote a long piece explaining what a wonderful company Galaxy Mall was and how they had changed their spots.)

Technorati Tags: illinois consumers, galaxy mall, free lunch, storesonline, orem utah, madigan, training session, promises, illinois attorney general, utah companies, payment mechanisms, successful online business, set up a web page, thousands of dollars, prospects

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November 7, 2006

Gregory Applegate Sentenced for Role in Ponzi Scheme

The Securities and Exchange Commission ("Commission") announced that on October 17, 2006, Judge Polster of the United States District Court for the Northern District of Ohio entered a Final Judgment against Gregory Applegate ("Applegate") in which Applegate consented to the entry of an order of permanent injunction enjoining him from violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Several months earlier, April 2006, the SEC announced, that Gregory Applegate had been sentenced to 5 years in prison and ordered to repay almost $3 million in restitution, in connection with his Ponzi scheme. According to the complaint,

"From about 2001 through August 2005, Applegate solicited at least 140 investors to invest at least $5.8 million in a supposed "hedge fund" and other investment vehicles. Applegate guaranteed an annual rate of return to these investors and promised to make up any losses out of his own pocket. The Complaint alleged that in reality, Applegate's "hedge fund" was a Ponzi scheme in which Applegate misappropriated investor funds, using them to finance an unrelated personal business, pay personal expenses, and reimburse or pay "investment returns" to earlier investors. To further this Ponzi scheme, Applegate mailed to investors false monthly client statements reflecting securities holdings and returns that did not exist."

How was Mr. Applegate able to "send false monthly client statements"?

Here is where the story turns more interesting than the SEC's dry recital of facts.

In a story Businessweek did last October, they state that the SEC claimed Applegate was:


"able to gain investors' trust, in part because he showed them business cards from Westerville, Ohio-based, Regis Securities, a brokerage where he had been working since January. Applegate told investors that he was running a hedge fund for Regis called Applegate Investments, and produced false monthly client statements for them, the SEC alleges". (my emphasis)

Business cards?! Jim Rockford had a fistful of business cards to establish his numerous false identities!

And what of the Regis Securities connection? Well according to the article,

"Regis Securities' president, Robert Cargin, said that Applegate's alleged scheme had been going on for years, beginning at another brokerage. "He had this program basically concealed when he joined our firm," Cargin said." (my emphasis)

So Regis Securities innocently facilitates a fraud by allowing their reputation to be used to gain trust, could this be a cause of action in tort? Should Regis have been more careful in checking what their broker was sending out? How did they supervise Mr. Applegate?

Technorati Tags: ponzi scheme, applegate, investors, personal expenses, personal business, hedge fund, investment vehicles, investment returns, investor funds, restitution, sentenced, invest

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October 19, 2006

Do You Make this Mistake in Reasoning?

Sweepstakes Scam Cheated Unsuspecting Consumers, FTC Says.

Which would you prefer to purchase:

A) a $20 lottery ticket, in which the chances of winning the big prize are 14 million to one, or

B) a $20 lottery ticket that was already won the big prize?

Think about this choice carefully: $20 for a chance at winning $A, or $20 for a sure thing of winning $A?

The answer is very simple: you ought to prefer A. Anyone selling you a winning lottery ticket for $20 is luring you with something for nothing. Take the real odds, because the sure thing is a sure loss.

According to the FTC's complaint against John Ricon and numerous other companies, Mr. Ricon has been running a version of this particular scam since 2004.

Of course Mr. Ricon doesn't offer to sell you the winnning tickert for $20.00 as that would be too obvious a ploy.

Instead, our good friend, contacts you and offers you a deal in which you "redeem" the winning ticket for $20.00 Attached to the mailout is an official looking form called the W-915 form, full of Official looking portent, although the State of Nebraska had a public warning out about this W-915 Form in February of this year. And of course fraudaid.com had a good warning also.

Reasoning that A) is preferable to B), while it appears odd and in fact contradicts one of the axioms of rational decision theory, makes a great deal of sense. Basically, you are questioning the ability of the person offering you the choice to really make good on what they are offering.

It would be wrong to think that B) is too good to be true, since some $20 ticket won a lottery somewhere. But you are not going to buy it after the fact for $20.

The other thing that makes it hard to illegal lottery is the way the choice is framed: not purchase a winning ticket, but rather redeem a winning ticket. These are exactly the same mathematical choices if you cannot pay the redemption fee out of your winnings. It does take mental work to see the two situations as the same choices, however. The scammers count upon this mental work being too hard and you erronously believing that the phantom dream is just about to be fulfilled.

Technorati Tags: lottery ticket, ricon, unsuspecting consumers, sure thing, ftc, friend contacts, ploy, good friend, sweepstakes, carefully

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September 7, 2006

Counterfeit Cheque Scam - Why it Works

I read both Ed Dickson at www.fraudwar.blogspot.com and Tom Fragala at Identity Theft Blog regularly, through their RSS feeds. They have interesting ideas and timely reporting about identity theft, and I have learned a lot reading their posts.

Why is identity theft relevant to the purchaser of a business opportunity, franchise or distributorship? Identity theft, and the related scams it enables, plays an element in all fraudulant business opportunity schemes because of the use of aliases - no one who you talk to is who they pretent they are. Second, there is a particulary virulant form of a short con running on the internet -the fake counterfeit cheque scam- which even when it fails, succeeds in obtaining banking information from you.

Ed Dickson has a long post discussing how hard it is tell whether a cheque is counterfeit. Here is part of what he has to say:

"It's often difficult to verify that a check is counterfeit. They often use valid account numbers, which verify (easily) in the computerized telephone systems that most banks use today. Quite simply, unless the bank or the account owner is aware of that their account is being counterfeited - the item will appear to be legitimate.

Furthermore -- a lot of banks have taken the stance in recent years -- that they will not verify whether a check is good, or not. It's getting harder all the time to verify checks with banks."

Reading The Art of the Steal will only confirm Ed's view.

However, here is where I may differ from Ed and Tom. They are pitching advice at individuals, urging them to be more rational and develop sophisticated due diligence steps to avoid the counterfeit cheque fraud. My advice is more straightforward - send a cheque or better, VISA, for services rendered and nothing else. Did you get goods, buy services? No? No cheque, then. Anything else is just trying to get something for nothing. which is guaranateed to be your loss.

Technorati Tags: identity theft, counterfeit, business opportunity, dickson, cheque, rss feeds, opportunity schemes, banking information, distributorship, account numbers, aliases, purchaser, scams, blogspot, franchise

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August 28, 2006

North Carolina AG Shuts door on Foreclosure Fraudsters

Roy Coooper, the AG of North Carolina announced that his office has shut down Mortgage Assistance of Carolinas, Inc. Mortgage Assistance is alleged to have preyed upon consumers whose mortgages were in default. Mortgage Assistance claimed that for an upfront fee it would negotiate with the consumer's bank and prevent the foreclosure. The AG's suit alleges that Mortgage Assistance obtain the list of consumers from reviewing the Court Documents, and that Mortgage Assistance simply pocketed the upfront fee without providing any services.

The AG's press release ends with some tips about how to avoid these type of scams. In particular, I want to focus on, a common element of in advance fee scams, the AG's advice that up-front payments for foreclosure assistance is not legal in North Carolina. The trouble with this law is that whilte it makes enforcement easy, it is at the expense of protecting consumers. Very few distraught consumers facing foreclosure are going to quibble about paying in advance for services - indeed it would strike them as odd, given their obvious credit problems, that anyone would take their case on for only a promised payment. Like the FTC Franchising Rule, this law is designed to maked enforcement easy whether or not the consumer is protected. It also is unlikley that anyone wish to provide these services would enter the marketplace under these conditions.

Technorati Tags: mortgage assistance, advance fee scams, foreclosure assistance, consumers, north carolina, upfront, distraught, court documents, negotiate, press release

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August 25, 2006

The Road from Foolishness to Fraud - Pascal's Wager

Robert L. Park's book on Voodoo science has a great deal of wisdom to offer to the prospective franchisee or distributor and their investigations about the income generating opportunity. In Science, the "no free lunch rule" from the social world is recast as "conservation of energy", or "you cannot get something for nothing".

Instead of the income generating opportunities that promise an endless source of residual income for no work, in the scientific world we have an parade of perpetual motion machines. Dr. Park writes fluidly about some of these characters, Joe Newman, Cold Fusion, and James Patterson. He also maintains a website here.

Dr. Park has an excellent insight about what the attraction is to these hare-brained schemes. I want to flesh this out in some detail because it demonstrates an important flaw in our reasoning methods. Dr. Park discusses the case of Randell Mill's BlackLight Power, one of the Cold Fusion castoffs. Despite having a theory in which there was "a state below ground state", Mill's company got funding from two utility companies for a total of $10 million. According to Dr. Park, in a conversation with the business editor of the Princeton Packet, "The woman listened ... and asked 'But isn't possible that the laws of physics are wrong in this case, and Randell Mills is right?' ... A better way to phrase the question is 'What are the odds that Randell Mills is right?' To a very high degree of accuracy, the odds are zero. It's Pascal's wager, again." (my emphasis)

What is Pascal's wager, and why is it relevant? It a nutshell, it is the type of argument that runs like this: well, I know that A is highly unlikely to be true, but if I only invest a small amount $Z, the pay-off might be huge.

What is wrong with this form of argument, and if it is wrong or a fallacy, why is it an attractive fallacy?

People are very poor at strategic reasoning, contemplating how to act in a universe that is planning to react to their choice. Consider the following two bets or games, where the numbers represent dollars returned.

G1 S1 S2
A 100 -1
B -1 0

G2 S1 S2
A 2 -1
B -1 0

How much would you pay to play G1 and how much you pay to play G2, given that you know nothing about the probabilities of S1 and S2? You might reason this way. Well in G1, if I played A and S1 and S2 were equal, then I would get on average at little less than $50, while in G2 I would get about 50 cents. So probably G1 is worth at least 90 times more than G2. Whereas, I might pay very little to play G2, I might spend much more to play G2.

As attractive as this line of reasoning is, it is false if we assume that whatever is choosing S1 or S2 is watching you make your choice, ie a market. The zero sum value of G2, is -25 cents. But the value of G1 is -1 cent! G1 is not even a profitable game to play, despite that lovely looming left hand corner in which you get a return of $100. Why isn't G1 valuable? In a zero sum game, where people are trying to outwit you, S2 is going to be the state of nature in proportion to S1 in the exact ratio of 101:1. S2 is going to played to limit your gains to zero, and S1 will be played rarely -but positively just in case you always played B.

This is what trips people up: in a zero sum game, once you have the pay-off matrix, you have an excellent estimate of the states of nature. But in a decision theoretic version of the problem, the probabilities for the state of nature are not dependent on the pay-off matrix. Reasoning as if they are produces errors in judgment.


Technorati Tags: cold fusion, dr park, voodoo science, james patterson, perpetual motion machines, blacklight power, ground state, residual income, robert l park, endless source, free lunch, joe newman, conservation of energy, randell, franchisee

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August 24, 2006

Mortgage Scam Victims too Greedy?

Bob Aaron is a well respected Toronto Real Estate lawyer, who often writes for the Toronto Star, which has the largest circulation of the Toronto newspapers. He provides useful and timely advice to individuals and his website contains links to his articles. So it was with some surprise that I read: Greedy consumers fuelled mortgage scam, in which Bob Aaron appeared to be blaming victims for falling for well planned mortgage relief scam.

In the article, Bob Aaron writes:

"I'm not sure whether I have any sympathy for them. I'm debating whether Augugliaro or the greedy consumers should shoulder the losses created by the scheme.

I understand that many consumers are not financially astute, but I'm wondering how much of a role greed played in the whole Brixdale scam.

There is simply no logic to the possibility that a long-term mortgage could be paid off in a few months -- and provide participants with an additional promised $250,000 bonus at the end.

If I were the New York attorney general, I would have directed Augugliaro's restitution money -- if he pays it -- to charity rather than the injured participants. Mostly, they were the authors of their own misfortune." (my emphasis)

This is a common inference among regulators, lawyers and politicians who are entrusted with preventing scams and frauds. Well, well, well once again isn't this a fine mess - did you forget to check whether it was too good to be true, Ollie? Faced with a choice of trying to understand how ordinary reasonable economic agents could fall for the phantom dream dangled by the con criminals, or coming to the easy conclusion that the dumb buggers deserve not to be protected by our consumer laws, few take the time to work out how the deception was achieved.

Finally, if consumer protection laws aren't supposed to protect those who are the authors of their own misfortune, why would we need any consumer protection laws at all?

Technorati Tags: toronto newspapers, term mortgage, toronto real estate, real estate lawyer, consumers, brixdale, greedy, timely advice, astute, greed, sympathy, circulation, logic, surprise

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August 23, 2006

Are All Internet Business Opportunities Flops?

Net Based Business Opportunities: Are They Just Flop-Oportunities? After a diet of steady skepticism, it is easy to believe that virtually no internet based opportunity exists, unless it is a scam or a fraud. But consider carefully the warning by the FTC, in this brochure:

"Whether it's recruiting people to sell so-called Internet-access devices, placing kiosks with Internet access in public places, or dealing in other Internet-related activities, consumers are being lured to the vast commercial potential of the Web by business promoters.

However, the Federal Trade Commission (FTC) says that many of these business opportunities are scams that promise more than they can possibly deliver.

The scam artists lure would-be entrepreneurs with false promises of big earnings for little effort. They pitch their fraudulent offerings on the Web; in e-mail solicitations; through infomercials, classified ads and newspaper and magazine "advertorials"; and in flyers, telemarketing pitches, seminars, and direct-mail solicitations." (my emphasis)

This is the critical element of a scam or fraud: the promise of something for nothing, or for very little effort. If there is just one due diligence method you learn, internalize this one. When you come across a business opportunity: are you being told that a) this is something anyone can do, b) the profits are locked in or guaranteed, and c) it is easy. Just something for nothing: perpetual motion machines don't exist and neither do perpetual money machines.

Technorati Tags: mail solicitations, business promoters, ftc, false promises, business opportunities, internet access, scam artists, infomercials, kiosks, skepticism, pitches, internet based, scams, telemarketing, flyers, federal trade commission

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August 22, 2006

Looks to Good to Be True?

Is the FBI consumer site useful? Well, not according to Tom Fragala, who is underwhelmed by www.lookstoogoodtobetrue.com The name is underwhelming, and having visited the site, my initial impression is that Mr. Fragla is correct. Consider this advice:

" Every day, American consumers receive offers that just sound too good to be true. In the past, these offers came through the mail or by telephone. Now the con artists and swindlers have found a new avenue to pitch their frauds -- the Internet. The on-line scams know no national borders or boundaries; they respect no investigative jurisdictions. But, as with all scammers, they have one objective - to separate you from your money"!

Too good to be true to who? Too good after or before the fact? Scams and frauds do not announce themselves that they are too good to be true, in fact it is logically impossible for this to happen.

So why do regulators continue to parrot this myth? Because it is easy then to feel smug and self satisfied when confronted by a group of victms, that you took an oath to protect and failed, repeatedly failed over and over again.

Technorati Tags: receive offers, frauds, scams, national borders, american consumers, con artists, mail, initial impression, scammers, smug, parrot, regulators, myth, boundaries, fbi, pitch, respect

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August 21, 2006

How can a Talking Frog prevent Fraud?

The FTC has a talking frog on one of its Business Opportunities webpages. This is one of the web pages that you would go to, if the FTC's new Business Opportunity Rule is passed for advice about due diligence.

What does the talking frog do? How does this mythical beast endow ordinary humanity with powers of investigation?

The FTC's talking frog advises a princess. Various of her courtiers are bringing her business opportunities for her appraisal. The frog provides a single word of commentary: "ribbet" which sounds like "rip-off". It is unclear whether the frog is analyzing the business opportunities, or is simply being a frog coincidentally coming to a "conclusion" that is correct. The Clever Hans effect. (Clever Hans refers to a horse which could apparently add.)

So the FTC's line of defence is: the appropriate way to tell whether a work at home business opportunity, a networking opportunity, or some other business opportunity is a "rip-off" is to listenly closely to the advice of a magical frog - who also completes his transformation into prince when kissed.

The FTC site would be laughable, except for it reveals a dark truth about the regulators: they really do believe that identifying and avoiding a business opportunity fraud is easy and straightforward -which I suppose it might be in a land equipped with talking frogs. This is why the regulators treat victims of commercial fraud with barely concealed contempt: you should have just consulted the talking frog, or the parrot which chimes "too good to be true, too good to be to true", in order to have avoided being a victim. No group of victims of crimes are treated with less respect that those victimized by con criminals.


Technorati Tags: frog, work at home business opportunity, ftc, clever hans, business opportunities, mythical beast, due diligence, apparently, work at home business, new business, networking opportunity, line of defence, webpages, princess, conclusion

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August 19, 2006

Looking For Energetic, Reliable and Honest People?

Looking for Energetic, Reliable and Honest People: Why?At the turn of the century, in Chicago, the Yellow Kid would advertise for "reliable and honest individuals looking for a business opportunity". He reasoned that he needed someone who was shady, looking for something for nothing. He was looking for mooches, much like the Ascot International scammers.

Who answers ads for "energetic, reliable, and honest people"?

Someone who wants their public self image to be energetic, reliable and honest - but is thereby also signaling to the outside world that they are neither energetic, reliable nor honest. Energetic people don't respond to business opportunity ads, they have better things to do. Only people who require their public self image to be energetic, reliable and honest will respond. Having testified to the world as to their honesty, they then feel that they can backslide in the honesty department - which makes them ripe for mooch bait.


Technorati Tags: honest people, energetic people, business opportunity ads, public self image, ascot international, honesty, scammers, shady, ripe

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August 9, 2006

The Secret to selling a $1,000 Car for $5,000.

Conman - Biography of the Yellow Kid

The Yellow Kid knew the secret: borrow $5,000 using the $1,000 collateral in your car for a bet that you intend to lose! Now what sense does this make? Why would you deliberately place a losing bet and then forfeit your collateral also? And how you borrow $5,000 with only $1,000 as collateral?

Here is how scheme works, I have taken the liberty to make the scheme modern, substituting options for horse races and houses for horse rigs.

Step one: Locate any banker at medium sized bank, who believes in tips.

Step two: Ask to borrow 5X against the collateral in your house because you know, for example, that a certain company has primed its options to key employees and is about to release good news - which will raise the stock's price. Intimate that you got this information from a disgruntled HR employee. Call the date that the good news is going to be released "Date Y".

Step three: To obtain the bank manager's approval, promise to repay the 5X out of the winnings, and also give him the collateral in house as a bonus for assisting the scheme. It is a cannot lose proposition. Nobody is going to borrow 5X to make a losing bet, are they? Well are they?

Step four: Prior to Y, bleed the bank manager for more money: to pay off the HR employee, the broker, and a few other prosaic villains who must be enabling the scheme.

Step five: Post Y, sadly announce to the banker that something must have gone wrong, that you are cleaned out because the stock failed to move. Turn over the collateral.

How does anyone make money on this losing bet? Aren't I down 6X?

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July 28, 2006

When it is your turn to lose.

Over at Buzzle.com, Craig Ritsema has written an interesting piece on the counterfeit cheque scam. Several people have reported being scammed by counterfeit cheque scam when it deployed with the fake lottery winning. Another account can be read here. Of course www.webnetpresence.com, which I wrote about before, is still trying alert consumers to this fraud.

But Craig Ritsema's piece add something extra to the analysis of when it is your turn to lose. Sense of entitlement.

Here is what he has to say:

"My own personal experience with an online scam happened a number of years ago. I had a used car for sale and a friend recommended purchasing an online ad. This sounded like a good idea and did not cost much so I did it.

Response to the ad was not immediate but over time it did generate some interest with a few calls and some emails. Nothing real serious though until one gentleman sent me an email explaining he was real interested and wanted to know a few more details. I was pretty interested because it seemed like price was not an issue.

We began an email dialogue and after several exchanges came the "pitch": He was interested in purchasing the car but was unable to pick it up. Since he traveled considerably and was currently in the UK he would send a bank check for the full amount plus the cost to ship it. When the check arrived, I would then immediately deposit the check and write another to a shipping broker who would call to pickup the vehicle.

My initial reaction was that I'd sold the vehicle. At the time, my understanding of bank checks was that it was similar to a money order and was as good as gold. I didn't really see how I could lose." (my emphasis)

Of course the proposed transaction is a fraud, but how did Ritsema figure out the pitch and how to avoid it?

Technorati Tags: email, counterfeit, cheque, buzzle, car for sale, personal experience, entitlement

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July 23, 2006

What will be the new long con targeting charities?

Gregory Stumbo, the Attorney General, of the Commonwealth of Kentucky has taken pains to advise charities to be aware of a new variation of the counterfeit cheque scam. In an alert dated July 21s, 2006, Stumbo claims that "The charitable organizations typically receive an email asking for an address to which a donation can be sent. Soon, a check for thousands of dollars arrives, but the charity is asked to wire a portion of the donation to a foreign country to assist with a payment owed by the "contributor."

For example, a Kentucky non-profit recently received a check for $9,000. However, the contributor sent an email asking that $4,200 of the payment be wired to Nigeria. The email stated that the "extra funds on the check is meant to cover the payment of the service of the publisher of a magazine company whose services I employed to help me feature the memoirs and memories of the captured moments during my wedding celebration three months ago."

The email continued, "As soon as you receive the check today, deduct your own funds for the payment and help transfer the rest…as they are expecting to receive the funds from you today so they can proceed with their arrangements regarding what I requested of them." It is requested that the money be wired to an address in Nigeria.

"This is a new twist on the old counterfeit cashier's check scam," said Attorney General Stumbo. "Scam artists are now sending counterfeit checks to needy charitable organizations and requesting that a portion be forwarded to a foreign address immediately. In the past, consumers who fall prey to similar scams not only lose money by wiring the funds, but then are pursued by banks to return the funds or be prosecuted," explained Stumbo. "This is why educating consumers is a top priority of my Office. Once stolen, this money is very difficult to recover." (my emphasis)

This is a new variation on this short con, so named because there is very little to the setup and the profit is quick and dirty. Like all short cons, this will migrate into a long con. Can you guess how that will work?

Technorati Tags: commonwealth of kentucky, email, captured moments, wedding celebration, charitable organizations, counterfeit, memoirs, charities, cheque, variation, wired, advise, nigeria, charity

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July 21, 2006

New Twist on Counterfeit Cheque Fraud - You've won the lottey!

There is a new twist or variation on the counterfeit cheque scam, originating from Super Natural B.C. and targeting Australians, according to WA Scam Net. Recall that in the counterfeit cheque scam you are "paid" to cash large overseas cheques and remit to the send 90% of value of the cheque, the 10% being your fee. The counterfeit cheque is also altered so that it takes four to six weeks to clear, and then the fraud is discovered. But now the bank looks to you to cover the entire amount of the cheque. And if you think it is clever to spend the entire amount, you may face fraud charges. The scam works well on those who want something for nothing; and they give their credit reputation and hard earned cash to a scammer. In return, they get nothing.

So how have the scammers changed their pitch? According to Department of Consumer and Employment Protection:

"The scammers are not based in Australia. They hark from North America. The Australian Lottery Corporation uses a mailing address in Victoria, British Columbia, Canada and provides a North American telephone number.

According to the UK Office of Fair Trading, the Australian Lottery Corporation letter states that the recipient has won $750,000 but must first pay for taxes and insurance. Recipients are advised to call an agent for more information.

A $4,880 cheque personally made out to the recipient, and allegedly drawn on a reputable American bank, is also attached to the mailing as part of the alleged winnings to cover the "necessary payments" the consumer needs to make. The cheque is counterfeit but can take up to six weeks to work through the banking system. The consumer could be liable for any funds they spend while waiting for the cheque to clear."

A very shrewd addition to the lottery scam, which is designed to bilk individuals out of their life savings by paying for fees to collect their winnings. The addition of the counterfeit cheque is a nice touch - but limits how long the scammers have to beat the mark as once the cheque bounces the game is over. Perhaps the number they phone is a 900 number?

Technorati Tags: cheque, counterfeit, fraud charges, scammers, australian lottery

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July 20, 2006

Backdating Stock Options - The Perfect Way to Bet on a Horse Race?

Although the back dating of options appears to most of us to be akin to betting on a horse race after the race has run or just shortly before the finish line, I suspect that the legal implications of this latest financial scandal may be not be large, despite the SEC's criminal charges against the former CEO of Brocade.

The fraud is really a tax fraud: giving an employee on option worth money because of the back dating, but reporting to the IRS that the option was worthless because it wasn't in the money. This treatment of options no longer is available, and given that much of the option back dating in the tech industry may have been part of the vicious battle to retain talent, there may not be a real scandal here. But we will see.

Technorati Tags: financial scandal, tax fraud, dating, worth money, finish line, options, irs, option worth, horse race, criminal charges, legal implications, brocade, akin, vicious, betting, ceo, sec

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July 19, 2006

Locating Services - No such number, no such zone

On June 28th, 2006, the FTC filed a lawsuit against a locating company, which "promised customers they would secure "profitable locations" in "high volume" or "high traffic" areas. One pitch promised locations in "sports bars, night clubs, grocery stores . . . convenience stores . . . gift stores in large hotels . . . restaurants . . . golf courses and country clubs . . ." The companies charged consumers $150-$6000, depending on the number and types of locations they were hired to find. In fact, the companies often did little or nothing for their customers. Many times they failed to find any locations for vending machines and display racks, or did not find as many as they had been hired to find."

Now what makes this just a silly business? Why on its face can no such "location finding" business exist?

Technorati Tags: vending machines, bars night clubs, ftc, convenience stores, gift stores, grocery stores, country clubs, display racks, hotels restaurants, traffic areas, sports bars, payphones, atms, golf courses

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July 10, 2006

The Psychological Attraction behind Network Marketing

In an amusing and enlightening description of the attraction of MLM, Kim Klaver writes about attending a recruitment meeting for a MLM product:

"It was a Tuesday evening years ago, and my friend and I watched in awe as the young man in front of the room showed everyone his month's checks - a little over $90,000.

I immediately thought, "Boy, if HE can do that, I MUST be able to do that!

My friend agreed. "Yes!" she said, "You can do that too! Probably better!" The acquaintance who'd brought us beamed.

So far, my brain was fully engaged. My reaction was totally typical of me then (and now).

It's during the first days of the training that my brain had to be manually shut off. And it went without a whimper. Here's what they taught us:

1. It's easy, anyone can do it. Look at me, a former waiter.

2. Talk to anything that moves. Anyone who can fog a mirror.

3. The product sells itself. " (my emphasis)

Keep in mind, Ms. Klaver, according to her blogger profile, is an accomplished salesperson, a Harvard graduate and was selling real estate at the time. She does not fit the profile of someone who could not see what was too good to be true.

Let us suppose that the former waiter is not lying, not a shill, and really did accomplish his selling prowese. What does the $90,000 a month suggest to you? It is easy? This product sells it self?

Technorati Tags: harvard graduate, brain, kim klaver, acquaintance, salesperson, waiter, awe, amusing, fog, mlm, checks, mirror

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Cheque Cashing Scheme Lands Victim in Jail

On July 3rd, 2006 the Department of Justice announced that "a probation and parole supervisor, Mark Davis-McCrary, has pleaded guilty to bank fraud after depositing a $66,775 counterfeit check into his DOJ Credit Union account and then withdrawing more than $61,000 from the account, United States Attorney Kenneth L. Wainstein and Joseph Persichini, Jr., Acting Assistant Director in Charge of the FBI's Washington Field Office."

This was the standard cashier's cheque fraud, with the "victim" trying to be a little too clever. According to the facts "presented at the plea hearing, on November 2, 2005, Davis-McCrary responded to an email solicitation at his place of employment, where he worked as a probation and parole supervisor, by agreeing to provide assistance in collecting funds, cashing a check and distributing the proceeds of that check on behalf of an unknown individual purporting to be a Dr. Raymond Akeem, Managing Director of the Addax & Oryx Petroleum Group, Ltd. ("Addax"). As part of the agreement, Davis-McCrary would receive 10 percent of the check proceeds while the remaining 90 percent would go to Addax. On December 12, 2005, Davis-McCrary deposited a counterfeit check in the amount of $66,775.00 into a checking account he maintained at Justice Federal Credit Union ("JFCU") at the Department of Justice ("DOJ") branch, located at 950 Pennsylvania Avenue, NW, in the District of Columbia. Prior to that deposit, Davis-McCrary's JFCU account had a negative balance of $522.44." (my emphasis)

Seeking to be clever, Mr. Davis-McCrary instead withdrew more than $61,000 from his account after the funds were made provisionally available. Of course the cheque was a fraud, and now "Davis-McCrary is scheduled to be sentenced on September 29, 2006, and faces a statutory maximum of 30 years of imprisonment and payment of restitution of more than $61,000."

Technorati Tags: parole supervisor, probation and parole, cheque fraud, bank fraud, mark davis, email, fbi, united states attorney, petroleum group, akeem, addax, dr raymond, oryx, doj, counterfeit, department of justice, cashing a check

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July 6, 2006

The danger of fake cashier cheques

The Attorney General of Texas recently released a warning about fake cashier cheques, which reads in part,

"Texas consumers have been warned repeatedly by my office and other law enforcement to beware of counterfeit cashier's checks in connection with advance fee frauds, international lotteries, and scams against charities. Recently, in a troubling new twist, Texas financial institutions and consumers have alerted my office to the existence of high quality counterfeit U.S. Postal money orders that are being used to defraud consumers into cashing them and wiring part of the money abroad.

As you know, perpetrators of advance fee frauds and similar sweepstakes schemes attempt to trick the victim into thinking a sweepstakes or lottery prize has been sent to them by wiring a phony cashier's check. Finding that consumers have caught on to the counterfeit check scam, scammers are now using phony U.S. Postal money orders instead of cashier's checks.

Many consumers are wise not to pay until they see the money that has been promised to them, but the phony U.S. Postal money order disarms this precaution. They have in their hand what appears to be a very sound financial instrument. They believe the money order is valid. The victim then lets down his or her guard, believing that the scammer has actually sent the money, and sends funds to the crook for the fees or taxes associated with their "winnings" only to find out later that the money order was bad.

In another variation, we have heard from people who call us after trying to sell a big-ticket item such as a car or boat. Most often, the item was listed online, but in some cases it was listed in the newspaper or a specialty magazine. The consumer is contacted by a buyer who agrees to pay the asking price, but offers to pay with a cashier's check or U.S. Postal money order made out for an amount that is considerably higher than the agreed amount of the sale. Buyers offer various stories to explain why the check or money order is so large, such as saying that an earlier deal for a similar item for which the large money order was issued has since fallen through. The scam artist then asks the consumer to wire back the difference. The victim deposits the check or money order in a personal bank account, withdraws the cash, often relying upon part of the amount credited by the bank upon deposit of the bogus money order, and wires it to the buyer. The seller is then notified by the bank days later that he or she has passed a counterfeit check or money order and is liable for the overage.

The reason these ploys work so well is that most people place great confidence in cashier's checks and money orders. Cashier's checks and money orders are generally considered much safer than personal checks, since they are issued by financial institutions that have already verified the existence of sufficient funds.

These counterfeits are so good sometimes that even bank tellers have been fooled. Frequently, the consumer has taken the precaution of asking the bank teller to verify that the cashier's check or U.S. Postal money order is valid, and in some cases, the cashier's check even appears to be drawn on the very bank that is being asked to cash it.

Banks and other financial institutions generally will not absorb the loss if consumers fall victim to this scam. In some cases, victims have even faced criminal charges for inadvertently cashing these counterfeit checks or money orders". (my emphasis)

Here is a tip from the US Postal Service on how to identify real US Postal Orders, which appears to be very hard to duplicate or counterfeit -contrary to the assertion of the AG from Texas. I wonder who is correct?

But is the AG correct in identifying the reason why this scam or fraud works so well, ie misplaced confidence? (There is currently a warning about stolen cashier cheques from Great Western Bank, Omaha, Nebraska.)

Technorati Tags: texas consumers, attorney general of texas, postal money orders, cashier, counterfeit, advance fee, frauds, phony, sweepstakes, checks, international lotteries, lottery prize, scammers, perpetrators, scams, financial institutions, cheques

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June 19, 2006

Debt Management Telemarketers Settle FTC Charges

On June 15th, 2006 the FTC announced that a "credit counseling service and related companies and individuals have agreed to pay $926,754 in consumer redress and civil penalties to settle Federal Trade Commission charges that they made false claims about their debt management program and violated the FTC's Do Not Call Rule."

What is interesting about this fraud is that the "Credit Foundation of America, Inc. (CFA), and its associates sold debt management services nationwide through unsolicited, pre-recorded messages left on home telephones, falsely claiming that consumers were pre-approved for a program to consolidate their credit card debts to a single monthly payment at a much lower interest rate." (my emphasis) And obviously many consumers took the back and got caught in this advance fee scam, where you pay something for nothing.

What is the message for due diligence here? Well, I have been urging people to purchase answering machines as a protective measure against telemarketers. Ten or fifteen years ago, most of our social networks were small and we could count on answering the telephone machine as being response to a friend or at least an acquaintance. Now, the telephone network can be accessed by any clown, armed with a mental bludgeon to knock down your defences and steal your money

But even using an answering machine is not enough as the CFA example shows, they left pre-recorded messages -no doubt of good hope, and credit cheer.

I too have fallen for returning a 800 number call, when the correct badges of authority, as Cialdini calls them, are present. Recently, I was told "by my bank" that my debit card had been stolen and they were enquiring about some "bogus" charges. I immediately phoned the 800 number and gave out all sorts of private information to confirm it was really "my bank account". How did I know what number I was phoning, what foreign call centre, or cell phone I was going to end up being connected to?

So, how do you think that all this turned out?

Technorati Tags: credit counseling service, debt management program, debt management services, credit card debts, pre recorded messages, trade commission charges, ftc, consumers, pre approved, advance fee, answering machines, redress

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June 10, 2006

Russo Partnership

The curious part of the SEC's allegations against Frank Russo is the failure to name the "California Company" which Mr. Russo alleged transferred assets to. According to the complaint, Mr. Russo and an friend of this opened this company in 1993. Well, it is fairly straight forward to do a google cache search and find that Mr. Russo was the CFO for a California company, Veritasiti, and that the CEO is Mr. David G. Kinney. Veritasiti also is the registrant of two websites, mediadata.com and familymediaguide.com. Both of these companies do have active websites. There is another interesting fact, or rather strange fact. Mr. Russo has been granted access to approximately 9,000 a month for living expenses and up to $75,000 in legal fees, according to the SEC order.

(At least one newspaper commentator has referred to the 10% return as too good to be true. I don't see this, the alleged representation was a 10% return with no fees, and anything over 10% split 50/50. There doesn't seem to be an allegation of a guaranteed return of 10%.)

But what would I be suspicious of?

Technorati Tags: google cache, frank russo, california company, sec, straight forward, curious part, kinney, registrant, cfo, allegations, ceo, split, strange


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June 6, 2006

Bad Choice of Shills - The Texas AG

Here is a really bad idea for a biz op scammer: pretend that the local Attorney General is giving testimonials supporting your scheme. The local Attorney General of Texas. Today, Sun Travel Country found out just how really bad this idea was when it and its owner Jerry Macdonald were fined $64 million in a jury trial. According to the press release,

"Sun Country, also known as Vavro, McDonald, Kennedy and Associates, L.L.C., and Travel Partners, L.L.C., had offices in Arlington, Carrollton and Houston. It was sued by the Attorney General in February 2003 after investigators became aware of the company's claims to consumers that the Attorney General and the Better Business Bureau endorsed its business practices as a travel agency.

Sun Countrys principals David G. Vavro, Jerry L. McDonald Sr. and Jerry L. McDonald Jr., were also named in the suit and found liable.

The company's telemarketing pitches falsely offered "completely free" vacation packages to lure consumers to a 90-minute presentation describing the company's "discount" travel services. The telemarketers, however, omitted information about a variety of fees, deposits, airline and hotel taxes and other costs linked to these "free" vacations, plus the company placed tight restrictions on when these trips could be taken.

The "free" vacation offers were only valid for one year, and reservation requests had to be submitted by consumers at least 90 days in advance of the departure dates. The company disclosed neither of these restrictions until after the presentations and consumers had signed up".

The actual findings of the jury can be read here.

Technorati Tags: sun travel, sun country, travel country, travel partners, travel agency, better business bureau, attorney general of texas, mcdonald, arlington carrollton, consumers, idea, local, business practices, biz op, scammer, jury trial, free vacation, pitches, telemarketing

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June 5, 2006

Bad Advice - If it looks too good to be true.

One of the worst, although well meaning, advice regarding scams or frauds is: if it sounds too good to be true, it is. This is utterly pointless as a warning, ineffective as due diligence, and patronizing. Nothing sounds too good to be true until after the scam or fraud is discovered. When did Enron sound too good to be true? After the fact, we discover quite easily why we should not have fallen prey to the sirens of the biz op scammer - but it is before the fact that we need to be attentive. There is no simple one line answer for effective due diligence against fraud -but because fraud grows despite our efforts to contain it, regulators face cognitive dissonance. For a regulator, someone in charge of building markets for reputations, their failure leads them to conclude the that there is a simple cognitive solution: just recognize those things that are too good to be true.

Here is the paradox: it would be too good to be true if a scam or fraud announced in clear and loud sounds that they were too good to be true. And so, following the common folk wisdom, it is false that scams and frauds announce that they are too good to be true. This is why the advice is useless and why it will, despite this, will continue to be offered up as a pancea against fraud.


Technorati Tags: cognitive dissonance, due diligence, fraud, biz op, sounds, patronizing, enron, line answer, scammer, frauds, sirens, scams, pointless, paradox, regulators, prey, recognize, leads

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June 1, 2006

Universo Foneclub - Pyramid Scheme aim at Religious Brazillians in Boston

The SEC has announced that they have obtained a temporary restraining order against Universo Foneclub alleging that the Foneclub was pyramid scheme. According to their press release: "The Commission's papers charge Sanderley R. De Vasconcelos and Victor Sales with promoting a pyramid scheme known as "FoneClub" that targets Brazilians and Brazilian-Americans living in the area of Framingham, Massachusetts. The Commission alleged in its complaint that the defendants falsely promised members of the Brazilian community that they would earn substantial sums of money by paying approximately $2,000 to $5,000 to become members of a company referred to as the FoneClub that purportedly sells prepaid telephone calling cards through a multi-level marketing structure. However, the complaint alleged that the defendants, who have emphasized to potential investors that neither they nor the company will earn profits from the sale of phone cards, are in reality luring victims into a pyramid scheme in which its members only make money through the recruitment of new members. The complaint alleged that the defendants emphasized in their sales pitch, which was given in Portuguese, that God wanted the Brazilian community to prosper financially and that the FoneClub would provide the opportunity for it to do so." (my emphasis)

According to the SEC complaint, the defendants actually told the individuals they were recruiting that there was no way to make money by selling the FoneClub products and they could only make money by bringing in new marks, or sorry, new recruits. I suppose that they cannot be prosecuted for deception, stupidity explains why this scam lasted only from April, 2006. I suppose that many of the Brazilians wanted to know which members of the their community God wanted to prosper financially?

Here is some corporation background on the company and directors. Here are the directors in Universo Foneclub, which merged with Universo Gospel US Inc, earlier this year. None of the directors of the later company have been charged by the SEC, and only two of the directors of Universo Foneclub have been charged.

Congratulations to the SEC and all involved for shutting this down within several months of its existence.

Technorati Tags: pyramid scheme, phone cards, calling cards, promised members, multi level marketing, framingham massachusetts, brazilian community, brazilians, vasconcelos, restraining order, sums, universo, press release, victor

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May 30, 2006

Bayou II - Getting Paid out From an Insolvent Scheme

The Wall Street Journal's Law Blog commented on a news wire service story about the receiver for the bankrupt Bayou funds trying to recover money from investors who were paid out from the insolvent scheme. According to the news wire service, "Bayou filed lawsuits against former investors who allegedly received fictitious profits and an inequitably large return of their principal investments. Marwil said that he expects that "Bayou will file additional suits against the remaining former investors to recover proceeds of fraudulent conveyances for the benefit of innocent investors who have received little, if anything, from Bayou." (my emphasis)

The WSJ Law Blog, complains, perhaps only in jest that "So imagine you're a former investor in Bayou who had no idea the fund was a fraud but luckily cashed out of your investment just before the house of cards collapsed. You received a nice return on your investment and used it to, say, make that down payment on the country house you always wanted. Now, investors who got burned are coming after you, asking you to give your principal investment and profits back so they can be redistributed equally to all Bayou investors. Oy."

This is demonstrates yet another aspect of improper due diligence in what turns out to be a scam or fraud. If you don't lose your money right off the bat, then the aggrieved bankrupt estate is going to come after you on the theory that the estate was insolvent when it transferred the money to you, so back it goes to be shared with the all the other unfortunate souls. It will be interesting to see how this plays out in the Courts.

In the case of Neulan Midkiff, the receiver actually got money not just from and innocent investor, but from an innocent bystander. Neulan Midkiff purchased a home for a $1 million, but financed it with ill gotten gains, and renovated it with money equally tainted. Ultimately, Neulan Midkiff defaulted on his payments to the vendor, being in jail and all. The innocent vendor had to pay the receiver back almost $300,000 to get their house back - now that is really annoying.

fraudulent conveyances, blog, house of cards, country house, principal investments, insolvent, bankrupt, collapsed, lawsuits

, Bayou Funds

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May 29, 2006

Fake Cashier Cheques and Charity Scam

The Attorney General of Illinois published an alert of a fake cashier cheque scam. According to the press release, "Madigan said individuals who accepted the bogus position received cashiers' checks sent in the mail from a location in Atlanta, Georgia. The victims were instructed to deposit the cashiers' checks into their personal bank accounts and wait until the funds were made available, then withdraw a portion of the money and send it using Western Union to an account in the Ukraine. The victims found out a few days later that the deposited cashiers' checks were fraudulent and that the deposited money would be removed from their bank accounts, but by this time they already had withdrawn funds from their accounts and sent them to the fake charity account in the Ukraine. The victims reported losing between $500 and $2,000 in this scheme."

There are two consumer websites devoted to tracking to down the websites engaged in this scam, http://www.peopleschronicle.org/ and http://www.webnetpresence.com/ According to these two websites, the scam is now being operated from this website: http://www.eliciahome.org/index.php A whosis on the latter website reveals this.

Why does this particular scam or fraud work, given that it is directed through a seemingly genuine website such as careerbuilders?

Technorati Tags: cashiers checks, personal bank accounts, withdrawn funds, western union, charity account, consumer websites, cashier, bogus, fraudulent

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May 22, 2006

New Prime Bank Fraud - Geoffrey A. Gish; Weston Rutledge Financial Services, Inc

On May 17th, the SEC announced that it had taken action against Geoffrey Gish and Weston Rutledge Financial Services, among others. It is alleged that between February, 2004 and May, 2006 Mr. Gish had stolen at least $8.8 million from at least 100 individuals. The method Mr. Gish used was a prime bank scheme, which was operated as a ponzi scheme. This scheme last less than 2 years, which is reflected by the unusally high payouts, 60% in a year.

The SEC alleges that Mr. Gish enriched himself by diverting $100,000 from the corporate bank accounts. The entire complaint can be read here. According to the complanint, Mr. Gish simply directed his staff to create the various returns on spreadsheet. How would the Yellow Kid have covered his tracks for this sort of scheme?

Technorati Tags: gish, ponzi scheme, stealing money, yellow kid, sec, prime bank, bank accounts, horse race, rutledge, enriched, weston, spreadsheet, convince, financial services

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May 17, 2006

Horse Racing Fixes, Faxes and Frauds

The Yellow Kid was reputed to be one of the master con criminals between 1900-1950, who allegedly masterminded criminal confidence games which raked in millions of dollars. As told by W.T. Brannon, Yellow Kid's exploits demonstrate a shrewd understanding of the streak of larceny that runs in a man's heart. Fixed horse races seemed to have captivated the general public, who were often looking to capture a piece of the action - something for nothing.

Many of the Kid's short cons involved purporting to sell inside information, sell after a fashion. In one fraud, the Kid and his accomplice stole money in the following manner. The Kid's accomplice had a fake newspaper which showed the Kid as a big time successful horse race gambler. The accomplice's job was to introduce the mark to the Kid. Graciously, for a big time gambler, the Kid would engage the mark in superficial talk but gradually confirm the mark's thought that "why, horse races are fixed, after all". But since the Kid could not betray his sources and give the mark a sure fire tip, he could however "allow" the mark to place a bet with him for the fifth or sixth race, say of a mere $5,000.

Are such shorts cons a part of our distant past?

Technorati Tags: horse races, horse race, accomplice, yellow kid, confidence games, gambler, fake newspaper, brannon, larceny, shrewd, exploits, criminals, stole, fraud, fashion

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April 28, 2006

Gregory Applegate Scam II

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One of the best tests for detecting fraud is the 'something for nothing' test. If you are being offered a deal in which you get something for nothing, then you are very likely going to be scammed. This is entirely different from the useless adage: if it looks to good to be true, it is! This adage is useless because it is entirely after the fact.

According to Court documents, Applegate:


"Promised investors their return would be 8 percent and that he would take no commission. Instead, his payment would come from any profit above 8 percent. If the investment did not reach 8 percent, he promised to refund their money. "

What is wrong with this deal?

Technorati Tags: risk free investment, treasury bond, treasury rate, money making machine, adage, applegate, court documents, borrow, legitimate, fraud, invest, investors, tests

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April 24, 2006

Fraud Discovery Institute's Checklist Program

The Fraud Discovery Institute has an interesting approach to detecting white collar fraud: combine the practical skills of a former fraudster with professionals who specialize in fraud detection, lawyers and examiners. The underlying premise behind Mr. Barry Minkow's enterprise is that the existing educational materials have not and will not prevent corporate fraud, but his checklist program will. He states that there are always three elements to a fraud: a) failure to disclose material facts, b) diversion, and c) drawing big conclusions from little evidence. Apparently, his checklist program is designed to identify these features in an interactive method.

I have not reviewed the checklist program, but I did listen to Mr. Minkow's introduction to it, you can listen to it here. As an example, Mr. Minkow suggests that his checklist program would have prevented the auditors from signing off on the New Era Philanthropy Ponzi scheme, a scheme masterminded by John G. Bennett.

The New Era scheme, as discussed by Stephen Pressman saw:

"In the early 1990s, hundreds of nonprofits gave large sums of money to Bennett. Some were prominent nonprofit organizations such as the American Red Cross, the Salvation Army, and elite academic institutions such as Harvard, Princeton, and Brown Universities. When New Era folded, these institutions all lost the money they had on deposit. John Brown University in Siloan Springs, AK, lost $2 million, close to 4 percent of its endowment. The big loser, however, appears to be Lancaster Bible College in Lancaster, PA, which had $16.9 million deposited with New Era."

How did this scheme work? In the early 80's Bennett set up a corporation which advised which non-profits or charitable organizations corporations should give donations to. It was called the "Center for New Era Philanthropy". By the late 80's, Bennett had turned to "fund raising" for the non-profits; he promised them returns of 100% within six months. Bennett claimed that he had access to a group of secret investors who would match the non-profits "investment" with the Center. The group of investors was secret because they wanted to donate anonymously - efforts to contact them would lead to them to withdraw their support for the Center.

Very bright, knowledgable and serious individuals accepted Bennett's explanation at face value. Mr. Minkow argues that this "diversion" or wall of secrecy is a huge red flag and must be investigated further or real due diligence cannot proceed.

Is Mr. Minkow right or is this just a case of reasoning after the facts, having acquired that wonderful hindsight vision which comes to all investors when they discover they have been defrauded?

Technorati Tags: white collar fraud, corporate fraud, fraud detection, ponzi scheme, barry minkow, era philanthropy, apparently, discovery institute, new era, diversion, premise, disclose, conclusions

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April 18, 2006

Capital First Fund - Almost a Ponzi Scheme?

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One of themes I have raised about Ponzi schemes that our naive inutitions about induction trip us up when evaluating opportunities that turn out to be Ponzi schemes. First, we generally don't have a good idea about how much proof we need, past returns, for it to be legitimate that an opportunity can generate the stated return. This is because the scammer or fraud artist could simply be returning our capital to us, calling it a "profit". For example, a business opportunity that paid a "return" of 12% a year with a paid in amount of $120 could run for 10 years "demonstrating" that the opportunity could return 12% before it went bankrupt. Second, we often underestimate how much we flip our investment back into the business opportunity when we are "shown" that we have "made" 12% on our "investment".

According to the SEC, Capital First Fund, an unregistered security purchasing distressed debt, "solved" the first problem. How did the do it?

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April 6, 2006

Autosurf Programs

Audri and Jim Lanford, who run scambusters.org, had a thoughtful comment on 12dailypro and autosurf programs in general.

"Why People Autosurf

The primary reason people autosurf is to earn cash or credits. Some autosurf sites require people to add their own money, which combines some kind of job (watching the ads) with a type of 'investment' or 'membership.'

The second reason people autosurf is to get traffic to their own websites. Some autosurf programs will show your website to other members in direct proportion to how many times you view other websites. For example, you might earn one credit to have your website shown for every two websites you view. Websites that are purely for traffic and require no monetary investment are called 'traffic exchange' programs and are not Ponzi scams." (my emphasis)

What would the point be of driving traffic to your site when you know that it is very likely that the "traffic" is just driving by with their windows blacked out? One word.

Technorati Tags: autosurf programs, reason people, traffic exchange, scambusters, ponzi scams, exchange programs, monetary investment, earn cash, thoughtful, proportion, combines, ads

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April 4, 2006

Unlimited Cash Ends After 5 Years

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A business opportunities scam, Unlimited Cash, was shut down after five years by the SEC.
"On April 4, 2006, the Securities and Exchange Commission filed securities fraud charges in Dallas federal court, against three individuals and their companies for conducting a fraudulent and unregistered offering of investment contracts involving 'Ad Toppers', computer monitors purportedly used to display advertisements in public locations."

This ponzi scheme again is the securitization of the classic business opportunities scam or fraud. Much like the ETS Payphone ponzi scheme, investors "bought" Ad Toppers to place over vending machines, ATM, and other kiosks and then leased them back to the same company that they bought them from, for a promised or guaranteed 16% return. Each unit apparently cost and investor $4,000, primarily from retired individuals.

According to the SEC complaint:

"Using sales agents around the country, including defendants Clifton Curtis Sneed, Jr. and his company Sneed Financial Service, LLC ('SFS') (together, the 'Sneed Defendants'), the UCI Defendants lured investors into the Ad Topper program through material misrepresentations and omissions. The UCI Defendants described the Ad Topper program as a lucrative and safe investment that would generate at least 16% annual returns, and characterized DNE and UCI as strong companies with successful track records. They also claimed that returns would come from revenue generated by sales of advertising that would be displayed on the Ad Toppers. They further represented that, after three years, investors could recover their original investment in the Ad Toppers by selling the machines back to DNE for the original purchase price.

These claims were false. Most importantly, virtually all 'returns' paid to investors came from new investor funds, not from advertising sales. The UCI Defendants failed to disclose to investors that many Ad Toppers never were placed in their promised locations; that a single machine was often sold to multiple investors; that UCI had filed for bankruptcy protection during the offering; and that UCI paid sales agents undisclosed commissions ranging from 16% to 23%."

This ponzi scheme ran approximately the amount of time it took to return an investor's $4,000 at $56/month, five years.

What was the appropriate due diligence, for the average investor who paid $4,000 and expected a 16% return?

Technorati Tags: ponzi scheme, securities fraud, fraud charges, securities and exchange commission, business opportunities, toppers, sec, classic business, investment contracts, computer monitors, vending machines, securitization, sneed, payphone, kiosks, ets, apparently

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April 3, 2006

Texas Hedge Fund Fraudster Convicted by Jury

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On March 1, after a three week trial a jury found "Conrad P. Seghers liable for violating the antifraud provisions of the federal securities laws.", according to a recent SEC press release. Apparently, over $70 million was raised from approximately 30 investors over a period of a little over a year, June 2000 to September 2001.
"As alleged in the complaint, Seghers and Dickey fraudulently offered the Funds' securities by failing to disclose to investors the substantial losses the Funds incurred and that Seghers was overstating the Funds' assets. Seghers caused the Funds' assets to be overstated by amounts ranging from 13% to 84% per month."

This is a very curious case, as reported.

Technorati Tags: investors, sec, apparently, investment decisions, integral management, curious case, management llc, incurred, conrad, disclose, provisions, press release, liable

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March 29, 2006

Criminal Sentencing in ETS Payphones Business Opportunities Fraud

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On March 8th, the Judgment in the criminal case USA v. Charles E. Edwards was filed in the US District Court Northern Georgia, Atlanta Division. Mr. Edwards, 67, was sentenced to 13 years imprisonment and ordered to repay approximately $300,000,000 to his investors. On September 29, 2005 it was announced that a jury had convicted Charles E. Edwards on 83 counts of wire fraud, money laundering, and conspiracy to commit money laundering.
"The evidence showed that from 1996 through September 2000, EDWARDS, the founder of ETS Payphones, Inc. (ETS), raised capital to grow his coin-operated payphone business by using a network of independent insurance agents to sell payphones to investors throughout the United States for $5,000 to $7,000 per phone. EDWARDS convinced investors to buy payphones and lease them back to ETS for what EDWARDS claimed would be a recession-proof, guaranteed profit of approximately 14% per year. EDWARDS promised he would buy back their phones upon request, when, in fact, the company did not have the financial ability to do so. The scheme defrauded approximately 12,000 nationwide investors out of more than $400 million." (my emphasis)
"United States Attorney David E. Nahmias said of [the September 2005] verdict, "As the witnesses and the evidence proved at trial, this was a tragic case of fraud that victimized over 12,000 people, most of whom were retired and living on fixed incomes. The victims thought they were investing in a legitimate business, but it was in fact a Ponzi scheme, that netted EDWARDS over $21 million. We hope that the jury's verdict has brought some measure of justice to the many victims of this fraud."

How could anyone of the investors have determined that this was a Ponzi scheme? What simple due diligence could they had done which may have detected this scam or fraud? (Which apparently although too good to be true, didn't sound too good to be true. Thankfully.)

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March 28, 2006

Horizon Prime Bank Fraud and Insurance

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In the first interim report from the receiver Hays Financial Consulting with respect to the Horizon Establishment/Travis Correll Prime Bank Fraud there are a number of interesting revelations. One stands out as very important.

"Importantly, it appears that many investors were advised and shown a document that they believed indicated that this investment was insured by a $1 billion bond issued by Nationwide Deposit Trust Insurance Company (Nationwide). The Receiver has recovered a copy of a one-page redacted document from the records in his possession that appears to indicate that a policy was issued by Nationwide to an unknown insured providing insurance coverage for Emergency/Catastrophe. However, this document has been redacted so that critical information is missing. In addition, it may have been modified. The Receiver is currently in communication with Nationwide, but it is highly unlikely that such a bond actually exists to protect any investor funds."

An insurance bond works on the imagination in much the same way as the guarantee does in a business opportunties scam or fraud - it dulls due diligence. After all, Nationwide Deposit Trust Insurance Company is real, isn't it? Who can understand insurance policies anyways?

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Business Opportunities Loader Convicted

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Richard Balber was sentenced to 37 months' imprisonment, 3 years of supervised release, and ordered to pay $1,556,631.92 in restitution, according to the United States Attorney for the Southern District of Florida, in connection with the business opportunities scam AmeriP.O.S.
" Richard Balber was an AmeriP.O.S. salesman known as a "loader". His job was to entice existing distributors to purchase additional terminals. If another salesman successfully closed a business opportunity sale, Balber contacted the distributor within a few days or weeks for the purpose of soliciting an additional investment. Balber falsely claimed that another person had cancelled a large order of terminals for personal reasons and that, as a result, AmeriP.O.S. could offer additional terminals to the distributor for a substantially reduced rate. Balber pled guilty to conspiracy to commit an offense against the United States - mail fraud -in violation of 18 U.S.C. § 371, on April 6, 2005."

Why does loading work?

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March 27, 2006

Neulan D. Midkiff Charged with Contempt

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On March 21, 2006 the SEC filed a contempt motion against Neulan D. Midkiff in connection with the alleged prime bank ponzi scheme.

The SEC appointed receiver in this action is Hays Financial Consulting and the relevant court documents, along with other newspaper stories are here.

Consider the analysis of why this scheme worked, by the SEC and the Receiver:

"The SEC assistant director said it is such scams that continue to keep officials busy.

"I am amazed pretty regularly by the number of fraudulent schemes and the number of investors they are able to entice,' Addleman said.

She said when it comes to making investments, investors should keep this old adage in mind: “If it sounds too go to be true, it may well be,” she said.

Hays, the Atlanta-based receiver, agrees.

He said investors should seriously question the validity of an investment plan that offers 10 percent a month in risk free income. 'Even seven percent,' Hays said.

In the Correll case, Hays says he is finding that many of the investors are middle-aged folks with respectable incomes. He believes their reason for investing is simple.

'It is just greed,' Hays said. 'People wanting a higher return.'

Well, here is another thing that is too good to be true: I am from the SEC and I am here to help.

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March 22, 2006

The Wire - Updated

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Anchor Books has re-released David W. Maurer's classic "The Big Con", parts of which were used in the movie "The Sting". In the late 1880's and 1890's unemployed telegraph operators would travel the country touting their ability to tap telegraph wires for horse race results, "hold-up" or "delay" those results allowing a bet to be put down before the results were then "released". Maurer is of the opinion that some operators were able to perform this technical wizardry, but that the real money was in the selling of complicated equipment to the local rubes.

Of course these days who could believe that that it was possible to obtain the horse race results before anyone else with sufficient time to lay down a large bet? Real time and technology would make it impossible, would it not? No.

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March 16, 2006

Derek Turner and Myths of Due Diligence

Derek Turner's saga finally ended with the fraud artist being sentenced for 20 years for the $80 million scam, which he admitted to last year.

Generally, the attidude of the regulator towards the victims of white collar crime is that the victim is also to blame for falling for something "too good to be true."

In this scam,


"The most recent reports indicate that one of Australia's most popular celebrity doctors, James Wright, lost more than $51 million to Turner.

According to a document outlining the doctor's testimony and agreed to by prosecutors and the defence, Dr Knight met Turner in 1992 when Turner approached him about being a spokesman for a business.

In 1999, Dr Knight agreed to invest with Turner after being told he had developed a "sophisticated technique of trading in various equity indices and commodities in a manner that generated very healthy returns with substantial liquidity, minimal risk and no leverage."

Does Dr. James Wright sound like some irrational greedy fool, who didn't know how to spot something too good to be true?

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March 14, 2006

Langley Partners & Short Selling

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The SEC reports taking action against several hedge funds engaged in naked short selling in connection with PIPES, or Private Investment in Public Entity. Apparently, the hedge funds involved were issued restricted stock at a discount as an incentive to invest in the company. The hedge funds were not supposed to trade the stock, and the SEC alleges that the hedge funds immediately sold the stock short -locking in the profit between the discount and market price with certainty.

This is similar to the wire fraud involving horse racing, at the turn of the century. Bookies used wire services to get a jump on the real results of a horse race - to either accept losing bets, or to deny a customer placing a winning bet. Nice business.

What does this have to do with business opportunities scams and frauds? And due diligence?

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March 13, 2006

Something for Nothing

IC3The Internet Crime Complaint Center is reporting a new, and possibly effective, twist on the tired Nigerian advance fee scam or the 419 scam. Apparently,

"the recipient is directed to open a bank account at a Suffolk England Bank and is provided a link to the bank's Web site. After clicking the link, the victim is directed to a professional-looking bank Web site which appears to be that of Suffolk England Bank; however, it is actually a replica of the true bank site. Within hours after opening the account, a balance of millions of dollars appears to have been deposited in the victim's account." (my emphasis)

Of course there are several immediate problems with this link. First, a search of the exact term "Suffolk England Bank" on Google has only (3) hits, two of them being the IC3's warning. Second, the Google search for the terms Suffolk England Bank returns in the top two places these warnings. So even a moderate amount of curiousty about the Suffolk England Bank and the ability to type should suffice.

But, despite this, this advanced advanced fee scam will probably catch more than a few people unwares. Why, if it is so easy to disprove?

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March 9, 2006

Due Diligence and Parody of Reasoning II

Due Diligence should be thought of as checklist, or audit, or series of steps to verify facts about business opportunities for sale. Fraud can be avoided with by using serious due dilgence, or fraud can be courted using a parody of due diligence. As an example of the latter, I offer the following example:

There is a little outfit on the net purporting to perform due diligence on "program", high yield, autosurf, and like "programs". This forum, in September of 2005, announced their results of their "due dilgence" on 12daily Pro. The results are fascinating.

The announcement that 12daily Pro has passed OIC's first due diligence is here. The post runs for some 32 pages, as of March 8, 2006.

The actual due diligence is here. In effect, the gentlemen at OIC have determined someone answers the phone at 12daily Pro's landline, there are addresses on file from the whois directory, lifeclicks is an incorporated company, and there is some information on the net about Charis Johnson. Why is any of this at all convincing - given that on its face, the information is trivial?

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March 1, 2006

12Daily Investigation V and the SEC Warning

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The Wall Street Journal reports that the SEC has issued a general warning against all autosurf programs.

The SEC's "alert" in my opinion is pointless, and in some cases will do more harm than good. Business opportunities frauds will use the alert as "proof" the that SEC has said that autosurf programs are legal. This will become common knowledge around net: "first there were bad programs, but now the SEC regulates autosurf programs and they are all legal."

It is also pointless in its generality. Here is the SEC's advice:

* If it sounds too good to be true, it probably is. Compare promised yields with current returns on well-known stock indexes. Any investment opportunity that claims you'll get substantially more could be highly risky --- and that means you might lose money.

* Check out the company before you invest. Contact the secretary of state where the company is incorporated to find out whether the company is a corporation in good standing. Also call your state securities regulator to see whether the company, its officers, or the promoters of the opportunity have a history of complaints or fraud. If a supposedly upright business lists only a P.O. box, you'll want to do a lot of work before sending your money!

* Steer Clear of Testimonials. Watch out if the company's promotional materials, contain "testimonials" from supposedly satisfied customers, especially if all the "testimonials" are full of praise.

* "Guaranteed returns" aren't. Every investment carries some degree of risk, and the level of risk typically correlates with the return you can expect to receive. Low risk generally means low yields, and high yields typically involve high risk. If your money is perfectly safe, you'll most likely get a low return. High returns represent potential rewards for folks who are willing to take big risks. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are "guaranteed" or "can't miss." Don't believe it.

As academic philosophers like to say, everything the SEC says which is true doesn't matter, and what does matter the SEC is wrong about.

Continue reading "12Daily Investigation V and the SEC Warning" »

Posted by michael webster at 7:36 AM | | Comments (0) | TrackBacks (1)

February 22, 2006

12DailyPro Investigation III

A review of the 12DailyPro search results for "12DailyPro Investigation" is revealing.

Many people appear to be angry with Stormpay, whom it is said contributed to 12DailyPro's inability to pay out its members. Some individuals claim that Stormpay is bankrupt.

I do not know whether this is factual or not, but it is worthwhile to recall what Mr. Ponzi's banking arrangements were in the early 1900's. His company, Securities Exchange, a delightful bit of ironic foreshadowing, took and deposited its "investors" funds at three or four local banks. The local American banks at the time often faced credit runs.

Here is a highly simplified examaple: If a Bank's deposits are $100, and it has a reserve of $10, then it can lend up to $90 - generally for long term and less liquid loans, which provide the Bank with more interest than they have to pay out on the $100. A credit run occurs when people believe, rightly or wrongly, that the Bank is not solvent. The bank's creditors, ie those who have bank accounts, start demanding their money back. The Bank can pay them by using its reserves, but if the demand is too great, the Bank will have to liquidate its loans to obtain cash. If it has to liquidate too many of its assets quickly, then like any firesale the price the Bank gets may be less than $100. The account holders sense this desperation and demand even more money, quicker.

What has a Bank run got to do with a Ponzi Scheme?

Continue reading "12DailyPro Investigation III" »

Posted by michael webster at 11:35 AM | | Comments (0) | TrackBacks (0)

February 17, 2006

Internet Vending or Kiosks

I have written before about the FTC shutting down two Internet Vending or Kiosk business opportunities frauds, Transnet Wireless et. al. and Bikini Vending et. al.. In the Bikini Vending fraud "consumers learned about the business opportunity through telephone, mail, or in-person solicitations from local insurance agents and financial planners the defendants recruited and trained as sales agents. Using promotional materials received from the defendants, the sales agents promised consumers secured profitable locations, a guaranteed monthly income." In the Transnet Wireless case, "the defendants ran television and radio ads selling the terminals, making claims lilke "You simply receive a monthly check for all the wireless revenue generated at your location. . . There is unlimited income potential. . . Prime locations are available now". (my emphasis added)

Clearly the promoters of these business opportunties scams knew, like all realtors, that location is key. At least key in the mind of the potential distributor.

Why should ads like this raise alarm bells? What is the law's response?

Continue reading "Internet Vending or Kiosks" »

Posted by michael webster at 12:49 PM | | Comments (0) | TrackBacks (0)

February 16, 2006

12DailyPro Investigation

To follow this story, please click herenew.gif

FBI Seal.gif

On February 13th, the Wall Street Journal announced that the SEC and FBI had began an investigation of 12DailyPro. According to the article, "the 12dailyPro site is under investigation by the FBI, the Securities and Exchange Commission and at least two states, said people familiar with the investigation. In recent days, amid those probes, the main payment processor for 12dailyPro, StormPay Inc., has frozen the funds it was supposed to pay to members.

One law-enforcement official involved in the probe said "a significant number of people" likely lost millions of dollars in the aggregate. The site recently claimed it had 300,000 members from around the world, some putting in $6,000 at a time. The Web site of 12dailyPro still was operating as of yesterday.

Based in Charlotte, N.C., 12dailyPro is run by a woman named Charis Johnson, who managed the site through a North Carolina-registered company she also operated called LifeClicks LLC.

In a statement issued yesterday through her attorney, Ms. Johnson blamed a commercial dispute with StormPay for the unavailability of funds owed to 12dailyPro members. Ms. Johnson said StormPay demanded it be the exclusive provider of payment services for 12dailyPro, then soon after froze the accounts and funds after "falsely accusing us of misrepresenting our business model."

She said 12dailyPro had never missed a payment to members until the problems with StormPay arose. LifeClick's lawyers are "evaluating our legal options," she said, adding that the company is "cooperating fully with all investigations."

StormPay officials said they cut off payments after being alerted to possible fraud at 12dailyPro. In a recent interview, StormPay Chief Executive Steve Girsky said, "We have done nothing wrong." Asked if he believed 12dailyPro was a legitimate operation, he said his company initially had no reason to question it, but "upon further investigation we had a hard time making these returns work."

Today the FBI officially announced its investigation.

A story which we will watch with interest. To follow this story, please click herenew.gif

Posted by michael webster at 3:54 PM | | Comments (0) | TrackBacks (0)

February 13, 2006

Donald Dunn's Book on Charles Ponzi

Donald Dunn's Ponzi Book.jpg

Donald Dunn's book on Charles Ponzi is a terrific read! A terrific read several times over, as I am now finishing it for the fourth time. The work repays careful re-reading, and it is almost a shame that it reads so engagingly on first impression, because one may not re-read it. I savoured the psychological insights into how Ponzi made this classic fraud work.

What was also intriguing was the explanation of Ponzi's understanding of how to manipulate credit reputation and the psychology of bank runs combined with his understanding of how to use the bankruptcy laws, as described in the early chapters. I had not realized the extent to which Ponzi had attempted to undermine the banking industry, both in Montreal and Boston. (This is why I hold that there is no significant difference between Enron and Ponzi, except as a matter of scale. Although with Enron there was a real company; but the cheat remains the same: lie to your creditors about the extent of the viability of your business scheme.)

What can we learn today from Donald Dunn's book?

Continue reading "Donald Dunn's Book on Charles Ponzi" »

Posted by michael webster at 8:50 PM | | Comments (0) | TrackBacks (3)

AmeriPOS - Point of Sale Terminals - Unregistered Securities

DOJ Seal.jpg

Two more criminal convictions and restitution orders were obtained by the U.S. Attorney of the Southern District of Florida and Postal Inspector in Charge, United States Postal Inspection Service in the AmeriPOS scam.

AmeriPos was a Florida Company, which "falsely claimed that a business opportunity purchaser, known as a "distributor," would earn substantial profits when members of the public purchased products, such as pre-paid debit cards, pre-paid phone cards, and pre-paid Internet services, from the distributor's P.O.S. terminals. Borzillo, Cohen, and others fraudulently induced over 1,500 consumers to invest a total of approximately $20 million in AmeriP.O.S."

The AmeriPOS system was similar to Cashlinks, another Florida business opporuntities scam prosecuted by the SEC. The basic idea is the same: offer investors a "portfolio" of ATM and Point of Sale Terminals and "guarantee" a return of 18% or higher.

One of the culprits in AmeriPOS, a Michael Borzillo, falsely represented himself as a successful AmeriPOS distributor, when in fact he was part of the company. This is a common feature of a business opportunties scam, fake references from indidviduals who are shills. Again, why does this work?

Continue reading "AmeriPOS - Point of Sale Terminals - Unregistered Securities" »

Posted by michael webster at 11:13 AM | | Comments (0) | TrackBacks (0)

February 6, 2006

Secrets? Or logical error?

One of the most prevalent logical errors is the following inference: success is best explained by the possession of some secret. Google "secret" and see how many websites are advertising some secret to riches. Most success is the result of talent, that while rare is not a secret. But still we persist thinking that there must be some secrets which if unlocked would bring us great wealth.

A perfect example of this was a scheme shut down by the SEC last summer:

"On July 18, 2005, the Securities and Exchange Commission sued two stock promoters and Sierra, an employee of a fax blasting company, for securities fraud. In its action, the Commission alleged that the three had participated in a scam designed to mislead investors into believing they had inadvertently received a confidential stock tip faxed from a stockbroker to his client. The handwritten fax had the appearance of an urgent message from a financial planner intended only for his client, "Dr. Mitchel," urging the purchase of a stock that was about to triple in price. In fact, neither the financial planner nor "Dr. Mitchel" exists. The fax was sent to more than one million recipients across the country by stock promoters who made over half a million dollars unloading their shares on duped investors."

The stock promoters were recently convicted, but there was no mention of an addition penalty for promoting fallicious reasoning.

Posted by michael webster at 9:12 PM | | Comments (0) | TrackBacks (1)

SEC Closes POS Leaseback Program

The SEC announced that it had shut down scheme operating out of Florida involving the leasing of POS terminals. The SEC alleged that: since April 2003 the defendants have fraudulently sold to approximately 278 investors at least $15 million in unregistered securities in a program in which an investor purchases a terminal from one of the defendants and then leases the terminal to another defendant for placement in a retail store to generate service fee revenue."

This is the securitization version of the classic business opportunity fraud.

Why does a scheme like this work?

Continue reading "SEC Closes POS Leaseback Program" »

Posted by michael webster at 8:32 PM | | Comments (0) | TrackBacks (0)

January 24, 2006

SEC's ongoing prosecution of a Prime Bank fraud

The SEC is continuing to press contempt charges against Randall T. Treadwell in connection with the alleged Prime Bank Ponzi scheme known as "Learn Waterhouse".

The SEC does have a web-page which identifies the logical elements of a Prime Bank fraud, which optimistically describes "how a prime bank fraud works".

The sellers frequently tell potential investors that they have special access to programs that otherwise would be reserved for top financiers on Wall Street, or in London, Geneva or other world financial centers. Investors are also told that profits of 100% or more are possible with little risk.

On the face of this, it sounds absurd. What elements are in play here?

Continue reading "SEC's ongoing prosecution of a Prime Bank fraud" »

Posted by michael webster at 4:53 PM | | Comments (0) | TrackBacks (0)

Guarantees: Legal v Psychological

The FTC has brought an action against a telemarketing company who allegedly mislead consumers about the possibility of obtaining jobs with the US Post Office.

There is a recurring theme in business opportunities scams: the use of guarantees. In this particular scheme, the telemarketer allegedly gave the consumers a written guarantee:


[the Defendants] are so confident that consumers will pass the exam by using [their] product. Consumers also receive an application for employment, and a booklet entitled "Postal Exam Prep Guide ... For the Current Postal Battery Exam 460 & 470 (Exam Guide).

The Exam Guide also states on its cover, "Guaranteed Results" Get Your Money Back If You Don't Pass the Test!"

What is interesting about this "guarantee" is that it should signal danger or more risk, but evidently consumers are lulled into thinking that the "guarantee' makes this a no-lose proposition. Why does this work?

Continue reading "Guarantees: Legal v Psychological" »

Posted by michael webster at 4:06 PM | | Comments (0) | TrackBacks (1)

January 11, 2006

AmeriDebt

"The Federal Trade Commission today put a successful end to the largest case against deceptive credit counseling and debt management brought by the agency. The FTC announced a settlement with Andris Pukke, founder of AmeriDebt, Inc., and with a related company owned by Pukke, DebtWorks, Inc. The agreement, if approved by a federal court in Maryland, would require Pukke to give up virtually all of his assets for a consumer redress program for victims of the deception, a fund that ultimately could total as much as $35 million."

How does a fraud like this last for five or six years? I suspect that underlying the fraud there must have been a real business model, which may have been too hard to operate.

Continue reading "AmeriDebt" »

Posted by michael webster at 4:07 PM |

January 6, 2006

Cross-Border Advance Fee Fraud

The FTC has recently sued a number of Canadian telemarketers, in Toronto and Calgary, who according to the complaint: target individuals with bad credity, offer them a credit card fo $249.00, immediately debit their bank account for that amount and then send them an application for a debit card or pre-paid card affiliated with Visa or Mastercard. It appears that the telemarketers obtained registered do not call numbers as leads.

Why does this advance fee scam work?

Continue reading "Cross-Border Advance Fee Fraud" »

Posted by michael webster at 2:59 PM |

December 6, 2005

Due Diligence: Why it fails.

Why is so hard to avoid fraud in buying a business opportunity or a franchise?

I have spent over six years interviewing several hundred people in the U.S.A. and Canada who have lost their entire investment when purchasing a business opportunity. The investments range from payphones, vending machines, and various distributorships/franchises.

There are common flaws to their due diligence.

For example, I always ask if they contacted their local BBB or some other BBB. Over 85% proudly state that this was part of their "due diligence".

They report that since the BBB didn't have anything bad on the company, then they felt comfortable with investing. I have explained elsewhere why this is a poor approach, contacting the BBB is unlikely to detect fraud.

Continue reading "Due Diligence: Why it fails." »

Posted by michael webster at 3:33 AM |

May 12, 2005

New Internet Mall Scheme

A new internet mall scheme was grounded by the FTC.

"Operators of online malls that disguised themselves as legitimate business opportunities have settled Federal Trade Commission charges that they were actually illegal pyramid schemes, in violation of federal law. Seven individuals and four businesses will be barred from making false or misleading statements about earnings or income and engaging in illegal pyramid operations. Four also will be barred from participating in any multilevel marketing businesses. The defendants are subject to suspended judgments totaling $12 million.

The Internet mall businesses operated independently, but they shared attributes: both operations promised substantial incomes; both touted products, but investors didn’t really earn money by selling them, but by bringing in other investors; and most investors lost money."
http://www.ftc.gov/opa/2003/03/skybiz.htm

Continue reading "New Internet Mall Scheme" »

Posted by michael webster at 4:37 PM |

May 10, 2005

Fuel MAX and Super FuelMax Grounded

"Operators who sent illegal spam and made deceptive claims for a bogus fuel-saving product that doesn’t save fuel have settled Federal Trade Commission charges that their e-mail and Web sites violated federal laws. The settlements bar violations of the FTC Act and the CAN-SPAM Act, and bars the defendants from making or assisting others to make deceptive product claims."

Posted by michael webster at 4:33 PM |

April 6, 2005

Kiosk Distributors Action by FTC

Disbtributors of an internet kiosk ran into some problems with their scheme. "The FTC alleged that the venture was like a Ponzi scam since some purchasers received monthly payments not from the revenue generated by the kiosk usage, but paid to the first purchasers by using the initial payments from new purchasers, leaving the majority of buyers holding worthless interests in nonexistent kiosks."

Posted by michael webster at 5:15 PM |

March 6, 2005

One allure of the Ponzi Scheme

The Ponzi scheme can be described very simply. An investor pays $x in return for getting a large "yield" or return on his money, but the return comes from later "investors" buying the same opportunity.

Virtually every news story on ponzi schemes fail to explain why the schemes are so attractive- greed is the only explanation.

But greed is not a complete answer. There is at least one more complete explanation: our naive induction schemes are bad, incorrectly generalizing from a past series of events.

Here is a little test to take. If I said that I could manage $100.00 for you and give you a 10% return on your money, how months of getting this return would you need to believe me? Call that number "N".

Now, suppose I said that I didn't even need the $100.00, I would give you your 10% return, if you would contract with me to pay the $100.00 after N months? Is this a better or more sure idea?

Technorati Tags: ponzi schemes, ponzi scheme, greed, money, correct answer, naive induction

Continue reading "One allure of the Ponzi Scheme" »

Posted by michael webster at 4:55 PM |

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