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Crooks work hard to separate investors from their money

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It's not hard to imagine feeling like a fool for falling for an investment scam.

But if there's one thing Manitoba's chief investment regulator wants to make clear, it's victims of investment fraud are not fools.

"It's a myth to think that only dummies get scammed, because there are a lot of different ways to run a scam," says Don Murray, chairman of the Manitoba Securities Commission (MSC). "The people who run them use technology to their advantage, and quite often they use people in the community they're targeting -- victims themselves who end up unwittingly assisting the scammers."

Murray will be talking about the latest fraudulent investment schemes this coming week at the Spring Investor Forum hosted by MGI Securities at Niakwa Country Club.

He is a featured speaker at the event this Thursday, along with Manitoba small-business investment expert Kevin Hooke, Chiedu Odiatu, a vice-president at Mackenzie Financial, talking about fixed-income investing, and one of Manitoba Finance's most senior economists, Jim Hrichishen, who will provide an economic outlook for the province.

Earlier this month, Murray, the province's top investment-industry watchdog, sat down with the Free Press to discuss the latest investment swindles and the high-profile conviction of investment adviser Jack Wladyka, who defrauded his clients of about $6 million and was recently sentenced to 10 years in prison.

In many cases, Murray says, fraudulent investment schemes -- big and small -- have one thing in common: familiarity.

Take Wladyka. He was able to open accounts, over which he had signing authority, in his employer's name -- Dundee Wealth Management -- at two financial institutions. He shouldn't have been able to do that, but he could, simply because he was the branch manger at the investment firm.

Some of his victims were friends. Others trusted him because he held a position that led them to assume he was beyond reproach. No one suspected he would do what he did -- claiming to buy, on behalf of his clients, guaranteed investment certificates (GICs) that were anything but.

Instead of purchasing these very low-risk investments, he deposited his clients' money in the accounts he set up and used the funds for his own purposes.

Murray, MSC chairman for the last 14 years, says Wladyka is a "rare bird" when it comes to investment fraud. That's because he was licensed to sell investment products and registered with the regulator.

"For the most part, people who are registered actually take their jobs very seriously and put their clients' interests first," he says.

Most investment scams involve deals that aren't offered by an actual financial institution or by an adviser licensed by a professional body and registered with the MSC. In fact, an unregulated investment offered by an unlicensed dealer is a glaring indication an investment opportunity bears a fishy aroma. But you wouldn't know that unless you do some fact-checking.

"If someone comes to you selling an investment idea, contact the securities commission first to make sure that person is registered to sell that product," Murray says.

Yet this safeguard wouldn't have worked with Wladyka.

"Dealing with him was not something that anyone would have thought twice about," Murray says.

"Even if they did check him out with the MSC, he would have checked out all right because he was registered."

What was also somewhat different about Wladyka was his victims got their money back. Dundee Wealth Management and TD Canada Trust repaid clients who lost money.

Generally, fraud victims aren't that fortunate.

"In most cases, the guys are crooks, and crooks don't step up."

Although the Wladyka case is uncommon, the MSC often deals with a number of other investment frauds in which investors lose tens of thousands -- sometimes hundreds of thousands -- of dollars.

Here are a few of the more recent investment frauds making the rounds:

 

Affinity fraud

Although the Wladyka case involved an element of familiarity -- he was a respected member of his community -- it's often not the fraudsters who are familiar to their victims. Instead, the criminals will target tightly knit groups such as churches or ethnic communities, where trust among members is high.

All that's needed is for one member to fall for the bad deal. Quite often, the scam will spread like a virus through the community because other members will invest too, based on the word of a trusted insider.

"We had one fellow from a town in southern Manitoba where there was a fairly common religious bond and he was contacted by some scammers," Murray says.

Like many affinity scams, early investors make some money, so they'll recommend what they believe is a lucrative investment to others in their group. It's basically a Ponzi scheme, in which early investors are paid with money coming in from later investors, but at the heart of the deal, there is no investment.

Murray says in this particular instance, the individual avoided being charged under the Manitoba Securities Act, a provincial regulation, or the Criminal Code, a federal regulation.

"That fellow ended up having to come to a couple of our public presentations to tell his story, which was still highly embarrassing to him, but it was better than being charged," Murray says.

"I don't know if he was able to get off as easily with his friends and neighbours who lost money."


The recovery-room scam

This ruse is a more refined version of the Nigerian-letter scam, in which victims are asked to pay an up-front fee to have a substantial sum of money sent their way. Fraudsters somehow get their hands on shareholder lists for publicly traded companies with shares that have become almost worthless. They contact the shareholders, claiming to represent a company that wants to buy their shares at above market value to use the shares for tax-loss purposes.

Murray says a recent example actually involved a criminal organization based in the Philippines and using a Winnipeg contact number and address as its head office. But it wasn't Manitoba investors who were the target. Instead, the criminals were going after shareholders in the United Kingdom. They happened to contact a former Canadian who recognized the address.

In this instance, the pitch from the so-called investment firm was it would buy his worthless shares at an inflated price, but he would have to send them an advance fee first.

"The fee, of course, was all they were after," Murray says. The Canadian in the U.K. felt something was amiss and contacted the MSC. Investigators followed up, and the Winnipeg address turned out to be a parking lot.

Another recent case involved an investor in northern Manitoba who was contacted by criminals claiming to represent an investment company from New York that wanted to buy a substantial amount of his shares in a nearly worthless company -- again at an above-market price.

"This was actually a double scam," Murray says.

The first part involved the victim supposedly transferring ownership of the worthless shares to the fraudulent company, and as compensation, he bought from the company blue-chip shares in a U.S. automaker at a deep discount. The idea was he could sell those blue-chip shares and make a tidy profit. Of course, the blue-chip shares never came.

That's when the second part of the scam came into play. The firm told him the shares were held up by bureaucrats and he needed to send money to cover administrative costs and taxes -- for which he would be reimbursed -- to complete the transaction.

"He paid the fees, but those blue-chip shares never came," Murray says. "All told, he lost about $100,000."


The RRSP/LIRA stripping scam

The advertising pitch for this scheme is you can access your RRSP or locked-in retirement accounts (LIRAs) today without paying taxes.

How it works is a fake company persuades victims to withdraw their RRSP or LIRA funds to purchase shares in the company -- allegedly RRSP-eligible. Their money is then transferred to a legitimate trust company.

"The trust company isn't part of any nefarious plot, but the scheme does usually involve an accountant who provides a letter to the trust company, stating a certain investment qualifies as an RRSP investment and to be held in a locked-in account," Murray says.

In turn, the fake company will transfer company shares (the "qualified investment") to the trust company in exchange for the victims' funds. Then it lends the victims between 60 and 70 per cent of their once-registered money while the remainder supposedly stays in the RRSP or LIRA with the trust company.

If the plot isn't discovered, the victims pay interest on the loan and even make payments on the principal to the fake company.

In the end, however, all that's really happened is the victims have withdrawn their registered savings, given the fake investment firm a 30 to 40 per cent cut in fees and then lent themselves back the remainder.

"At the end of the day, what's in their LIRA or RRSP with the trust is worthless."

Making matters worse, they have a tax bill because they've withdrawn from their RRSP or LIRA, and those withdrawals are taxable income.

 

Investment crowd-funding

Most people would know better to invest in a company advertising on Craigslist.

But MSC investigators actually do find these ads from time to time.

"These come from a time-honoured thing called crowd-funding, where people have been saying, 'Look, I'm trying to get money together to put out a music album,' " Murray says. "'If you send me $25 and your address, I'll send you a copy of my CD when it's done.' "

Raising money to make an album or some other small venture isn't the MSC's concern, nor is it criminal. But using Craigslist or Kijiji to sell shares in an alleged corporation, for example, definitely is.

Of course, there really are no shares. The con men pocket the money.

Murray says this scam isn't yet a major problem for regulators. But they anticipate it might well be soon, because the U.S. Congress recently passed the JOBS (Jumpstart Our Business Start-ups) Act.

This legislation includes a provision for small businesses to raise up to $1 million in capital annually through crowd-funding.

"It's a real concern for regulators, because it's like asking fraud artists to come in and take their best shot," he says.

The exact rules have yet to be worked out but, at the very least, Murray says the legislation will mean regulators have to keep tabs on one more class of investment.

"And regulators everywhere already have enough to juggle."

 

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition May 26, 2012 B12

History

Updated on Monday, May 28, 2012 at 11:38 AM CDT: Dundee Wealth Management repaid clients who lost money. An earlier version of this story included incorrect information.

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