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Opportunity of a Lifetime?: More than likely it is too good to be true

By Sonjui L. Kumar Email By Sonjui L. Kumar
July 2011
Opportunity of a Lifetime?: More than likely it is too good to be true

“If it sounds too good to be true, it probably is.”  Trite but still accurate. Business fraud is on the rise and thousands of people every year are duped by individuals offering opportunities, investments, businesses and the promise of a better future.  Unfortunately the weakened economy has spurred more people and industries to target your hard-earned savings in misleading and fraudulent ways. Here are some common practices and themes to watch out for:
            Unrealistic returns. Fraudulent investments often emphasize the terrific potential return of the investment they are promoting.  You may be asked, “Why invest in the stock market or put your money in a CD when you can make triple the amount by investing with me?” The presenter will often stress that there is very little or no risk.  Low-risk, high-return investments are a sure sign that you are about to be taken for a long ride.   Some of these schemes may even produce a payout for a short period of time, since they often involve taking money from one set of investors and paying it out to another. After the Bernie Madoff scandal, we should all be alert to this type of scheme
            Immediacy.  Be wary of opportunities that are about to end today; it’s a good sign that your money will likely not be around tomorrow. You may be asked to buy stock or land or a business within a few days. The person may cite some very sympathetic reasons for the rush, such as a terminal illness of a family member, a need to leave the country quickly or an unexpected death. If anyone needs a decision quickly, it’s usually because they don’t want you to think too long about yours. Always give yourself time to evaluate the opportunity, ask questions and consult with professionals.  
            Affinity or Group Scams.  An affinity scam is when a person exploits the trust and friendship of a group of people who have something in common.  A person associated with a group will take advantage of their similarities to the victims, targeting religious institutions, fraternal organizations, and of course a common race or ethnicity. Using these shared characteristics, the scammers build a false sense of camaraderie to have you invest in their deal.   A shared ethnic or religious background is no reason to trust one person over another and the opportunity should be thoroughly evaluated regardless of the people involved.  
            Inside information. A common fraud is to claim access to inside information on an industry or a particular company.  The person may disclose to you that they have knowledge of something about to be announced that will be revolutionize a product.  All you have to do is buy the stock, limited partnership interests, membership units now when it’s still cheap and wait for the big announcement to cash in.  The same story has probably been shared with a number of people which results in an artificial inflation of whatever is being sold. The supposed insider is then able to sell their own shares at a substantial profit.  When that announcement is never made, the stock price falls and you are left with a useless investment.
            Unsolicited Online deals.  You may have heard of or received emails from Nigerian officials asking for help in transferring millions of dollars out of their country.  All you have to do is give access your bank account for one day and you will receive a large commission for your trouble.  Many variations of this scheme are still circulating via the internet. You may be asked by a friend to help someone they know who has run into trouble overseas and all they need is a legitimate U.S. bank account to send money to. Some may request a product or service that you are offering, claiming that it is needed by a multi-national corporation. The claims and offers may seem very authentic and may be backed up by news articles or investment newsletters. Be wary of any deal that falls into your lap digitally. Most companies or businesses do not spend large sums of money without extensive referrals. A great site to check out the latest internet schemes is www.snopes.com (“the definitive Internet reference source for urban legends, folklore, myths, rumors, and misinformation”).
            Ultra Complex Investment Deal.  Another opportunity to beware is a deal so complex, and so large, that no one can understand it. These schemes may be aimed at sophisticated investors and wealthy individuals who are reluctant to admit that the investment is beyond their capacity.  It usually involves an investment of money in a business deal, land transaction or trading opportunities overseas. Presenters are often armed with complicated charts and descriptions of the deals.  They may even include opinion letters from attorneys and CPAs. Bottom line, if you don’t understand how it works, it is probably not right for you.  
            A number of resources are available to help separate fact from fiction. In addition to the Snopes site, the FBI posts current lists of scams that are being reported. Don’t be afraid to ask questions and always watch out for anything that provides an easy way to earn money.

[Business Insights is hosted by Kumar, Prabhu, Patel & Banerjee, LLC. Sonjui L. Kumar is a founding member and partner of the firm. Her practice includes general corporate law, complex commercial transactions, and trust and estate planning.] 


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