The Coming Wave of Scams

The headlines seemed to be filled with investment frauds and scams. Bear markets tend to reveal Ponzi schemes and other frauds. But do not get the impression the scams are only a product of the bull market. Tough times tend to produce more scams than good times, because people are more desperate for help.

The frauds that occur in bad times can be different from those in good times. Here are some of the scams to be alert for in this bear market.

Foreclosures. Foreclosures are soaring. With more homeowners in trouble and desperate for help, there are con artists seeking to take advantage of them with phony offers of help. There are legitimate foreclosure counselors and programs, but there also are many con artists. There are key elements of foreclosure scams that help separate the frauds from the legitimate firms.

In the most basic foreclosure scam, the con artist claims to be a counselor or consultant and takes an advance fee, usually thousands of dollars, with the promise to resolve the financial issues. The homeowner is guaranteed that the mortgage will be restructured so the payments are affordable and defaults are cured.

The counselor then does little or no work and might even disappear after collecting fees from a number of people.

There are more sophisticated and costly frauds pitched to homeowners in distress that essentially involve stealing title to the home.

The lease/purchase scam has the homeowner transfer title of the home to a scam artist who is posing as an investor. The investor promises to keep the existing mortgage up to date in return for rent from the homeowner. The homeowner remains in the home and is promised the opportunity to re-purchase it after his financial position improves.

In most of these frauds, the details of the deal are onerous. It is structured so that as a practical matter the homeowner will be unable to buy back the home and is likely to be evicted (which is easier to do than a foreclosure). The written document often is different from what the homeowner was told or has additional terms. After the eviction, the investor gains full title to and possession of the home.

A less-sophisticated version has the homeowner signing documents that are supposed to be either a new mortgage or a lease/purchase deal. In fact, they are signing over title to their homes. Eventually they are evicted.

These are just a few of the scams out there. There are many variations of foreclosure scams. There also are home improvement cons that are similar.

Debt reduction/credit counseling. There are many legitimate financial counselors and others offering help to those who have borrowed too much or suffered reductions in their income. There also are those who charge exorbitant fees for the work. Other counselors have no training and give poor or shallow advice. The outright crooks have debtors pay money directly to them, and say they will ensure the bills are paid. Then, they fail to forward it to the creditors.

Be careful about selecting a credit counseling professional. It is best to receive referrals from friends or people you respect. The next best method is to check references of existing and prior clients. This method is not fool proof, since a con artist can have friends or associates pose as satisfied clients.

Employment and business scams. When the number of jobs is shrinking, con artists promise access to easy jobs or work-at-home deals. This is another area in which there are legitimate operators but many frauds. A major warning sign is a large advance fee or a requirement to purchase and store significant inventory. Anyone who promises specific results also is not being honest.

Similar deals promise unique access to government grants and other programs, tax rebates or reductions, and other access to government money. Information on real government programs is readily available through the appropriate agencies, and most of the applications and qualifications are on the Internet. It can make sense to pay an attorney or someone who is experienced with the program to save you some time learning the process. But beware of advance fees and people who promise you will receive the money.

Investment scams. Portfolios values are way down, and so are interest and dividend payments. Because income is shrinking, more investors are willing to consider strategies that promise safety and higher income. These are the types of scams that have been making headlines. The rules for avoiding these frauds are simple. Be sure an independent broker or other firm is custodian of the assets, not the money manager. Do not believe income or returns are legitimate when they dramatically exceed what is available in conventional assets. Receive an explanation of how the income or returns are earned, and be sure it makes sense.

Many investment scams claim to be insurance or banking products, such as annuities, certificates of deposit, or special types of insurance. These scams are easy to detect by checking to see if they are registered with a government banking or insurance regulator.

Identity theft. Theft of personal identification still is a major and growing problem, but the crime has changed. Cases are rising, but the loss per case is declining as people and financial institutions react more quickly.

Identity theft occurs when a criminal obtains someone’s personal information, such as Social Security number, bank account number, or credit card information. The data is used to borrow money or buy things in the victim’s name, leaving the victim to deal with the creditors. In extreme cases, mortgages are taken out in the victim’s name, sometimes against the victim’s home.

The large scale thefts of identity, especially using the Internet and other technology, are not as frequent. The technology threat still is active. But you can avoid it easily by knowing that no financial institution will send you an e-mail asking for your personal information or linking you to a web page that asks for your personal information.

The economic decline makes individuals more desperate, however, and smaller-scale ID theft is rising. Personal information is obtained from stolen wallets and other crimes of opportunity. The next most common way information is stolen is during purchases in stores or restaurants. In about 10% of cases, the victim knew the thief, though in many cases the criminal is not known.

If you are not the type to be tempted by scams, be alert for hints that friends and family members are potential victims. Listen to comments they make about money and recent purchases or investments. When the opportunity appears, ask questions about any new financial products or services, advisors, home improvements, or other money moves they are considering or taking. When you hear about a specific type of scam or fraud, mention it to friends and family so they will be alert. If you fear friends are being scammed, consider contacting their family members to let them know.

May 2009. RW