As a follow-up on an earlier post about scams, I wanted to dig a little deeper and give you an example of some common sales approaches for investment products which seems to be more prevalent when our stock investments and real estate investments are not performing that well. Given how a lot of our investment portfolios are more turbulent than the sinking Titanic, there are a lot of potential investors interested in these investment products. These types of products work well because they appeal to our sense of impatience, our need “to have it all now” and the fact we do not have to pay too much attention to the details (the sales approach actually wants you to forget about the details). I ended up on a couple of these email lists and the pattern is the same.

I have several caveats- I do not know for certain whether this is an investment scam but my spidey senses go off when I read about this great “opportunity.” For all I know, people could have made their investment back many times over but something just feels wrong about this product. Perhaps, I am a cynic.

I modified the below to be generic but kept the key sales points (as a general rule, I dislike paying lawyers to defend me against lawsuits). I hope you understand the gist of how this product works and the sales approach. The text is in italics and bold and my comments are in normal text.

THE INVITATION

Usually by email:

We are holding another of our great seminars at [insert random location] to discuss a great investment opportunity. We can explain the details at the meeting. Everything will be reveal there and we don’t want to write a long email. Members, please bring a guest.

THIS IS AN INVITATION ONLY EVENT SO PLEASE BRING YOUR GUESTS. WE LIMIT THIS GREAT OPPORTUNITY TO QUALIFIED MEMBERS AND THEIR GUESTS. WE DO NOT ADVERTISE SO PLEASE PASS THIS ON TO THOSE YOU FEEL WOULD BENEFIT FROM THIS OPPORTUNITY. YOU WERE ESPECIALLY SELECTED TO BE PART OF THIS LIFE-ALTERING NIGHT.

[location details and contact number inserted]

FIRST WARNING FLAG- LACK OF DETAILS. When you become a lawyer, several things happen to you. Your pact with the devil is now complete (just kidding) and your name gets sold to every investment advisor, insurance company and investment consortium in town. In every single approach, whether by email, phone, letter or fax, the pitching company always tells you want they are selling (insurance, some great new mutual fund, tax shelters, limited partnership units etc.) and how you can benefit. The investment industry has critics but, to its credit, it is regulated to disclose a reasonable amount of information (some say there is too little disclsoure but that is a topic for another day).

If the invitation immediately makes some mention not to mind the details, I mind the details. It goes against the rule for disclosure in the investment industry. Something is wrong already- the lack of disclosure sticks out like a sore thumb.

SECOND WARNING FLAG- EXCLUSIVITY. It makes us feel special like we are part of a secret investment society. However, the downside to exclusivity is, if something goes wrong, who can you complain to? You are supposed to be part of an exclusive club which means keeping your mouth shut so if, indeed you invested in a scam, you are rather isolated.

THIRD WARNING FLAG- “MEMBERS” and “INVITE A GUEST”: Investments do not have members. Investments have investors and purchasers. In isolation, bring a guest should not raise alarm bells but once there is mention that there are members who should bring guests, contextually speaking, it is starting to look like a ponzi scheme.

THE PRODUCT

There is usually some blurb about the opportunity as follows:

I wanted to share a special opportunity to invest in a passive income vehicle that let me lead a life of financial independence.

Invest $10,000 and, within 30 days, get $500 back a week. You can ask for your money back within 30 days. Everybody wins. If you refer 5 friends, your investment can make 7% per month with opportunities to make more. The opportunities are endless and you can live the life you always wanted.

All the key terms are there- passive income, financial independence, win/win (this term seems to be hijacked by used car salespeople)- combined with the right comfort terms- “ask for your money back.”

BUT HOW EXACTLY AM I MAKING MONEY? As confusing as some conventional investment products may be, they do tell you how your money will be invested; perhaps in investment jargon but it is disclosed nonetheless. In these products, sometimes, there is some vague reference to the fact that money is invested by some Mr. X who resides in some far off jurisdiction (usually some island you have never heard of) in long/short positions on the NIKKI index with a currency hedge against the Argentinian peso and arbitrage on the price of beef in England vs. U.S.A. In other words, the investment is so complicated, it deflects all questions about detail (again, avoid the details) because how many of us could ask an intelligent question on that investment approach?

What worries me is the mention of referring friends- when an investment product requires friends to drive returns, it could be a sign of a ponzi or pyramid scheme. What is cleaver about some of the better approaches is the focus on a modest rate of return (people focus on the 7% and not the “per month” part; add it up and even on a non-compound basis, in my example, that is an 84% return). The person referring you probably is at or near the top of the scheme so they made out ok. You, you are just the poor sod they are taking money from (sometimes unknowingly).

As I said, some of these products may be legitimate and are being sold to avoid regulatory compliance (which makes it dangerous to the investor because there are no rights of recession stated and how exactly do you go after the sellers?) others may be nothing but scams. Look for the common patterns. In isolation, they may mean nothing but, taken together, I get very nervous. Specifically, look for these in combination:

1. Invitation Only
2. Lack of detail on how the money is used
3. Appeal to exclusivity and the fast buck
4. Multiple references to bringing friends and a differentiation between guests and members
5. A rate of return that increases as you refer more people in
6. A modicum of comfort words or phrases (“you can get your money back”)
7. The appeal is purely emotional (“gain financial independence…,” “you have qualified…”)

Lawyers, accountants and investment advisors have good sense of what exactly is above board and what isn’t. If nothing else, vet the invitation and product by them to see if it passes the “smell test.”

What do you think- scam or not?