The Insight Awards: Exposing Scams

As I reviewed the events of 2010, I noticed that many of the most helpful stories of the year did not seem to attract much notice.  I decided to give an “Insight Award” to bloggers who provided the most help to individual investors.

I am starting with an important topic:  Avoiding Scams.

We must always deal with scams. Whether it’s on a new phone plan or one of these Common Duct Cleaning Scams, as humans our temptation is greater and we tend to fall into these traps. Whenever I write about a topic like this I get comments and emails saying that the article is irrelevant.  The person writing the comment explains how obvious the trap really is.  Why would anyone reveal personal information to an unknown person in Nigeria?

Why indeed?

The scams I am mentioning attracted many investors — people who want to believe that you can get huge rewards without taking any risk.  The biggest problem is that the victims do not read “A Dash” or any of the sources cited here.  The people victimized in these scams had major losses, sometimes an entire fortune. 

Despite this sense of futility, here are the nominees for the Insight Award for Exposing Scams.

David Merkel and “Structured Products”

Regular readers of “A Dash” know that we are long-time Merkel fans.  In this article from June, Yield, the Oldest Scam in the Books, David explains how the scam artist preys upon the victim:

There are two ways to fleece (cheat) someone: appeal to their greed, or appeal to their fear.  But the most effective approach that I know of is to appeal to elderly investors who did not save enough, and are finding it difficult to make ends meet.  They don’t want to take big chances, but they do need the yield.

David’s article explains the flaw in some of the “guaranteed yield” programs.  They are so many of them that specific refutation is impossible.  Meanwhile, I know several investors who have been victimized by these programs.  Not surprisingly, they all carry a high commission, paid upfront.

Lisa Caccioppoli and the Scam Overview

Minyanville offers a wide variety of commentary and helpful advice.  This article from Lisa Caccioppoli highlights several of the big scams that threaten the individual investor.   She writes as follows:

Clinging to a promise of high returns or a chance to replenish a retirement account, the desperate (or shall we say, hopeful?) all too often end up grabbing opportunities that turn out to be straight-up frauds. And as we all should have learned from a crash course in Ponzinomics in 2008, the most cliché rule is still the most spot-on: If it sounds too good to be true, it probably is.

 She goes on to analyze five scam themes, all of which deserve your attention.

“The Worm” and Penny Stocks

Here at “A Dash” I typically do not discuss the penny stock world.  There is a climate of something for nothing–a name-calling discussion among anonymous “pumpers” and “bashers.”  The stock prices are low, so percentage gains do not require a major move.

The temptation is very great, especially for investors who are trying to recover from losses.

I am also reluctant, for a variety of strong reasons, to feature anonymous writers.

Despite these reservations I want to suggest skepticism about penny stocks and I do so by highlighting “The Worm” whom I do not know.  The Worm accurately analyzed scams in 2010, both on his blog and on the discussion boards.  Anyone thinking of making a major investment in penny stocks should be monitoring “The Worm” and similar sources.  It is a different world, and one that I do not recommend.  If you are contemplating a speculative move into a penny stock, you might want to study some of the past scams first.  Reading archives from the Worm is a good place to start.

Gold Scams — Nomination Open

I could not find a good gold scam expose’ among my regular sources.  Please take careful note.  There are some very legitimate ways to invest in gold.  I have often reported my own investments for myself and for clients in gold stocks and ETFs.

In sharp contrast, I see television and newspaper ads that obviously prey upon the weak and fearful.  The ads talk about private minted coins with dollar denominations of $50 and throw in a silver coin supposedly worth $20.  The entire charge is twenty bucks plus shipping and handling.  The actual gold in this “gold clad” coin is not worth much and the aftermarket is nonexistent.  This is so tempting for the uninformed.

No one writes up the scams, perhaps because writing anything negative about gold is very unpopular.

Many of the “legitimate” gold sites are on the edge of the rules.  The programs featured on talk radio and financial TV are not complete frauds, but they have high commissions, low liquidity, and instant losses if you try to sell.  There is an obvious network of investment funds selling fear and advertising gold.  No one points this out, so the nomination for this important class is open.

Decision and Reader Participation

I realize that I may have missed some strong entrants in the scam derby, so I invite additional nominations or other categories of scam investments.  You can help other investors avoid losing money.

I am also reviewing some other categories, including the best technical forecast and the best fundamental forecast.  Suggestions are most welcome.

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  • muck dog December 28, 2010  

    Big scam: “Rated #1 app in the app store.”
    Pfft. 99-cents down the drain!!!
    But seriously, there are some stock charting and prediction apps in there that I’d be wary off.
    And right now, I think my biggest worry is the gold stuff. Lots of sites hawking gold with large profit margins for the seller.

  • David Merkel December 29, 2010  

    Dear Jeff,
    Especially now, when it is hard for people to earn income without risk, because high quality short rates are low, the risks from receiving and above-average yield are high. Many take a lot of duration or credit risk and do not know it.
    Readers, avoid the structured notes that Wall Street purveys, unless that is the exact risk that you want to take, which should be rare.

  • Jeff December 29, 2010  

    Hey Jeff,
    In “Them Crooked Vultures” we pondered the impact that the scamsters may have on pending securities regulation and the ability for startups and early-stage companies to finance their businesses.
    Jeff @ Venture Populist

  • Jim G December 29, 2010  

    Jeff – another great post as always. With all due respect as I know you touch on this subject fairly often, but there are many investing sites (and aggregators) who pass themselves off as “experts” or “having special insights.” Many, not all, posts on S E deserve special caution.

  • Jim G December 30, 2010  

    Oops – meant S A (Seeking Alpha).

  • Jim December 30, 2010  

    Thanks for this article. Might I add a book I just read called “Digging for Disclosure” by Kenneth Springer. This book goes into great detail on many ways the unwary get swindled and how to protect yourself.
    Best, Jim

  • oldprof December 31, 2010  

    Thanks to Jeff, Jim, and Jim G for the additional suggestions and links!

  • tom brakke January 6, 2011  

    Here’s a posting about scammers running amok.

  • oldprof January 6, 2011  

    Tom — Thanks for the link to the helpful article. It is a good story, and everyone will enjoy your humorous touch.

  • Ricardo Delgado November 11, 2011  

    Thank you for this I will be back with my stories of scams done to me now is so common and sophisticated that even big companies like yellow book, Marroni Chevrolet of Miami, at&t Uverse , Direct TVmany and more are using these unscrupulous individuals to sell you their services with false promises or they don’t get their commissions after all, they will say we did not instruct them to do that.
    I wonder where do they get their training in the first place and ho gets the money for what they sell.
    I this economy the target list grows to even people like me that are aware of scams, but they master their trade for years and patiently wait for your weakest moments then they strike, sometimes using people you know without them knowing that they are been used to scam you.