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Six investment scams

PROPERTY consumer advocate Neil Jenman paints a sorry picture of what he terms "investment ghettos", where house after house is owned by disenchanted investors who have been ripped-off in an investment scam that is gathering pace.

Jenman says the scam is to sell house-and-land packages to investors at greatly inflated prices with the package arrangement intended to disguise the true value of the properties.

And, in turn, the houses are almost inevitably neglected by tenants with cars jacked up on front lawns and windows broken.

"Houses that may be just three or four years' old look as if they were built 15 years ago," Jenman says. "There are rows and rows of them."

The investors in these house-and-land packages have been sold a false get-rich dream by property spruikers. And the spruikers' targets range from battlers to doctors and lawyers, says Jenman.

Commercial and residential property scams, unregistered investment schemes pushed by unlicensed investment advisers and illegal early-access to superannuation schemes are being relentlessly promoted.

The Australian Securities and Investments Commission (ASIC) warns that typical characteristics of numerous investment scams are promises of extraordinarily high, low-risk returns; claims of new techniques to provide an edge over others; and pressure to make an urgent decision or miss out.

Here are just six of the scams or suspected scams being targetted at investors:

1. House-and land package stings

Jenman says the prices of these so-called investment packages are sometimes hiked up by $40,000 to $100,000 (and even more in some cases) above the real market price.

Jenman gives the example of a house-and-land being sold by one of these promoters for $420,000 when the market price is really $350,000. There are hundreds of these properties being sold, he stresses. "Whole suburbs are being setup in this way."

These investment scams are often promoted at wealth seminars and through telemarketing.

"A clue to being possibly ripped off is if the person selling the package is located a long way from the location of the house and land," says Jenman.

And the promoters are often reluctant to reveal the all-up price of the property being sold.

Although the scams trap investors across the socio-economic scale, Jenman says "it is the battlers who bother me most". He is looking into the case of a couple whose home was worth $400,000 with a $100,000 mortgage.

This couple then borrowed against their home and other sources of finance to buy a land-and-house investment package they thought was worth $650,000 but its market value was really just $340,000. And they had also paid $60,000 in fees and other expenses.

The couple is left deeply in dept after losing all of the equity in their home.

2. Fictitious high-yield investment schemes

Motivational speaker Christopher Koch of Point Cook, Victoria was jailed last month for 13 years and two months after being found guilty on 15 counts of obtaining property by deception and seven counts of obtaining a financial advantage by deception.

Koch promoted what he falsely claimed was an international investment scheme paying returns of 50-150% over periods as short as 90 days.

According to ASIC, Koch used most of the $1 million-plus rake-off for his own purposes.

The exploits of Koch carry some key general warnings for investors including: beware of what you are told by motivational, get-rich-quick spruikers and beware of offers which are too good to be true. The returns promised by Koch were ridiculously high.

3. Ponzi schemes

Ponzi schemes – perhaps the most notorious type of fraudulent investment scheme – will inevitably make a comeback and flourish in Australia and overseas when investors stung by the global financial crisis inevitably become more confident and greedy, warns financial crime specialist Dr David Chaiken.

Chaiken, whose resume includes spending seven years assisting the Philippine Government track the Marcos millions, told SmartCompany that the classic sign of a possible ponzi scheme is the promise of extremely high returns.

However Chaiken, now a senior lecturer with the faculty of economics and business at the University of Sydney, points out that the operator of the biggest all-time ponzi scheme, Bernie Madoff, had been careful not to promote breathtakingly high returns.

In short, ponzi scams defraud investors by not investing their money in the investment markets, as promised. Instead, these fictitious investment schemes rely on a continual flow of new investments to finance the promoter's lifestyle and to pay regular income to existing investors.

But as soon as the flow of new money dries up, as had occurred in the GFC, ponzi schemes are typically exposed as frauds and investors discover that their capital has been stolen.

"Inherently ponzi schemes have a limited life," says Chaiken. This is because of the reliance on new investors. But Madoff's rip-off was one of the few exceptions to this limited-life rule, surviving for years.

Long before the crimes of Madoff were uncovered, a reporter from Barron's magazine in the US asked how he managed to achieve such investment returns. Madoff gave an answer that should not be acceptable to any investor at any time: "It's a proprietary strategy. I can't go into it in great detail."

ASIC advises investors to stay right away from investments that they can't understand (see here) and to be suspicious of investments offering returns that seem too good to be true (see here).

4. Unregistered property schemes

ASIC has just announced that it is moving to appoint receivers to five more unregistered property schemes associated with Melbourne company director Mark Ronald Letten.

ASIC alleges that Letten promoted and sold investments in the commercial property schemes that should have been registered under the Corporations Act.

It is generally illegal to market managed investment schemes that have not been registered with ASIC. The fact that an investment scheme is unregistered should be enough for investors to stay right away.

5. Unlicensed financial services businesses and unlicensed financial advisers

These hold twin dangers for investors. First, the investment advice may be worse than useless; it may destroy your personal wealth. Second, there is a high risk that investors are being encouraged to buy questionable investments.

In the past few months alone, ASIC has snared several individuals allegedly selling financial products without an Australian Financial Services licence and providing financial advice without a licence.

In a classic case last month, ASIC barred Barry Frank Jennings of Berry, NSW from providing financial services for five years. ASIC says its investigations showed that Jennings had provided services on behalf of Future Trading Corporation for three years. But neither Jennings nor the company held an Australian Financial Services licence.

Investors can easily check on ASIC's website whether financial advisers and financial services businesses are licensed (see here).

6. Illegal early-access to super scheme

The Tax Office's 2010-11 compliance program warns that pressure will be maintained on promoters and participants in one of the most serial offences against superannuation law: trying to cash-in on preserved super savings before retirement.

Last financial year, the ATO – acting in its dual roles of tax collector and regulator of self-managed super funds – audited more than 1,100 individuals and 65 promoters, raising more than $65 million in liabilities. In some years, many thousands of promoters and super funds are investigated by the ATO and a number are referred to ASIC for further investigation and possible prosecution.

A much-favoured tactic used by promoters of early-access schemes is to convince often unsuspecting fund members to rollover their super from big super funds, which are under the strict supervision of trustee boards, into new DIY funds. And in the second stage of the scam, the DIY funds illegally pay out the entire super savings to members – with the promoters typically taking a huge rake-off.

Sometimes the promoters become even greedier and simply pinch the entire super after it leaves the big super funds.

Superannuation law specifies that preserved super benefits must be kept in super until members permanently retire after reaching 55. From July 1999, new super contributions and investment earnings must be preserved until retirement.

There is a particularly sad twist to illegal early-access super schemes. Many of the participants who pay so much to crooked promoters would be able to legally gain access to their super before retirement in limited instances of extreme financial hardship or on compassionate grounds.

This article first appeared on SmartCompany.com.au, Australia’s premier site for business advice, news, forums and blogs.

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