In one gifting scam, participants gave cash gifts of $100 in order to move up through levels named freshman, sophomore, junior, and senior. There were ultimately six steps to the program, and the required investment ranged from $100 to $4,000. Once you completed the six levels, you needed to make a gift of $7,850 and you would receive a tax-free payment of $62,800.
Another gifting tree went by the name, “The Dinner Club.” This group was organized according to the four courses of a dinner party. Eight people known as appetizers filled the bottom row of the tree. They had to pay five thousand dollars apiece to the dessert person at the top of the tree, in order to be seated at the dinner party. As new people joined, the bottom rung advanced to the “soup and salad” level and on to the “entrée” rung before themselves becoming a “dessert”. If you became a “dessert”, meaning if enough people were suckered in to elevate you to that level, you were expected to receive $5,000 apiece from the latest crop of eight participants: $40,000. That’s a $35,000 profit on their original gift. Most people, though, never get to the top and lose all their money. The crooks, though, always arrange themselves in the tree so they ensure that they get their gifts.
When you examine the mathematics, a pyramid scheme looks awfully tantalizing. If you’re asked to send $10 to ten people, that’s $100 you’re out. But you add your name to the list of participants and get ten new people to join. They each send you $10, and you’re back to even. If each of those ten recruits ten additional people, then the next level of the pyramid has a hundred people. You collect $1,000. Another round produces a level of a thousand people. You get paid $10,000. The next level grows to ten thousand people. You collect $100,000. One more round brings you $1 million.
The trouble is that in order to perpetuate these pyramids, more and more people must be recruited to feed those at the upper levels. Once the supply runs out, the pyramid collapses and the people at the bottom are out their money.
And that’s why pyramids have to fail. The supply of people is not infinite. By the time one pyramid scheme reaches its eleventh level, assuming each new participant recruits ten new people, it will have exhausted the entire population of the planet. Plus, no new wealth is being created. Any money that one participant earns, another participant loses.
HANDICAPPING DEATH
The way a criminal thinks is, whenever something becomes popular as a legitimate investment is when it becomes a perfect candidate for an illegitimate investment. A case in point is what are known as viatical investments. The word viatical comes from the Latin viaticum, referring to the money and supplies given as traveling expenses to a Roman official when he departs on a journey. Viatical investments are, in essence, death futures.
A couple of decades ago, the idea was hatched of allowing terminally ill people a way to get money from their life insurance policies while they were still alive, to pay for needed medical expenses or to take one final vacation with loved ones. The way they work is that brokers arrange for investors to buy a certain percentage of the death benefits of the policies of the terminally ill, always leaving 20 percent or so for the estate. Someone given a year or two to live might have a $200,000 policy. For an investment of $100,000, investors might buy $150,000 of the face value. The ill person would get immediate cash and if he died soon, the investors would get a handsome return. How good a return, of course, depended on how well they managed to handicap death.
Policies that get viaticated are generally those of people diagnosed with AIDS, fatal cancers, and other catastrophic illnesses. It’s something of a ghoulish business, but investors look on it as helping a sick person. And, of course, there’s money to be made.
As recently as 1990, this was a small, arcane business, amounting to less than $100 million of viaticated policies. But it has grown to more than $1 billion. Consequently, criminals have taken notice and moved in, so much so that law enforcement authorities say viatical investment scams have become rampant, and rank among the top-ten investment frauds being perpetuated.
Viatical scams take different forms. Some are as blatant and straightforward as selling policies to investors on fictitious patients, or else selling legitimate policies over and over again. One viatical investment firm collected $115 million in investor money, but only $6 million was used to buy life insurance policies. The promoters found various other uses for the balance of the money. They bought twenty-five homes, thirty-four luxury cars, two helicopters, three motorcycles, and several boats.
Other viatical scams are more elaborate and cheat both the insurers and the investors. In these cases, scam artists recruit terminally ill people and help them obtain life insurance by lying on the applications about their condition. This process is known as “clean sheeting.” It doesn’t work with large policies, because medical exams and blood tests are required, but insurance companies skip those details with small policies.
These clean-sheeted policies are then immediately sold to investors. They’re also called “wet ink policies,” because the ink on the contract is barely dry when the policy is sold. Once the policyholders die, these policies are often contested as being fraudulently obtained, then canceled. Crooks in California obtained clean-sheeted policies amounting to more than $11 million before being caught.
Investors have been snapping up these policies. Thieves pitch them as a safe, high-return investment. And they add that the investor is engaging in a humanitarian act, providing desperately-needed funds to the terminally ill.
The truth of the matter is, even legitimate viatical investments are risky. Chronically ill people may live a lot longer than was estimated, cutting down on the yield to investors. New AIDS drugs and other medical breakthroughs work against your investment. In addition, many of these policies are term policies, and if the person outlives the term, there is no death benefit at all. An eighty-four-year-old California woman invested $85,000 in the hope of receiving $139,000 when a policyholder died. The expectation was that he would die within a year. Years later, he was still alive. He might outlive the woman.
WHAT TO CHECK
Given that you can lose money on these investments if they’re legitimate, imagine what it’s like to invest in a scam. There are some telltale signs to be aware of, though none are guarantees. Many legitimate viatical investments are themselves insured, but no viatical scam is, at least not with any real insurer. A legitimate investment will allow you to pay your money to a reputable escrow agent; a scam artist won’t. If it’s on the up and up, the purchase agreement should state that the insurance policy you’re investing in is past the period of contestability, generally two years from when it was issued. The best protection of all, though, is only to deal with a reputable and large viatical broker. And realize that you’re making a speculative investment no matter what.
THE MYTH OF THE INNER CIRCLE
There’s a natural inclination by people who don’t have a lot of money, to think that people who do have a lot are privy to investment opportunities that are closed to them. It wouldn’t surprise them to learn about clandestine securities peddled only to the rich, for suspicions about the government and financial institutions are widespread. Criminals are well aware of such suspicions, and exploit them with appalling consequences for investors.
In the little town of Mattoon, Illinois, population 18,500, a sixty-six-year-old retired electrician started an investment fund called the Omega Trust and Trading, which promised a fifty-to-one return. According to the fund’s literature, its head was an international banker who had worked for Fortune 500 companies (when investigators interviewed him, he couldn’t quite remember their names) and was one of a handful of people in the world who had the know-all and ability to conduct secret multimillion-dollar trades.
It was not an original thought. Many investment schemes tell people there’s a secret banking system in which “prime banks” and the wealthy participate. The returns are well beyond what ordinary people can realize, as much as 70 percent a week. Ordinary people can share
in the bounty if they pool their money and allow someone connected to this system to invest it for them.
A common pitch is, you’re asked to put money into a trust account backed by a guarantee (often fake) from a “prime bank,” “top-100 world bank,” or “top-25 European bank.” You’re told that your money will be leveraged to buy prime bank instruments, which can generate enormous returns. In fact, your money goes offshore, never to return. Another pitch: You pay the promoter a fee in return for a promise that you will be “leased” a much larger sum of money to invest in prime bank instruments at great interest rates.
In the Omega trust, investors were told their capital would be invested in foreign bank debentures. Money was invested from all over the country, as well as from Australia and China. The mastermind of the scheme laundered the money by handing out interest-free loans to local residents and by starting businesses.
There is no such thing as bank debentures. No secret banking system exists, at least not on this planet.
One of the giveaways in Mattoon was when residents began buying new trucks and cars and opening businesses, even though some of them had jobs that paid minimum wage. In the fall of 2000, law enforcement authorities charged a group of Mattoon residents and others with perpetrating an investment scheme that duped more than ten thousand people throughout the world of more than $12.5 million.
RED FLAGS
Obviously, you just can’t be too careful with your money. Before you part with it, look at all investments on the SEC database to be sure they’re registered. All American companies with more than five hundred investors and $10 million in assets must be registered with the SEC. Smaller companies have to file information with the SEC, or with the state securities regulators where they’re based. To check if a broker is licensed, go to the website of the National Association of Securities Dealers Regulation. One thing the Internet has done is made it easier to do research on a company, so go to reliable sites and check analyst reports. There’s no need to rush into something.
I would never invest in anything described as “risk-free” or “guaranteed,” particularly offshore investments. It’s an automatic red flag if the promoters say the state Attorney General has approved it. Check with the Attorney General’s office and find out for yourself. Take note of how you’re asked to pay. If a broker wants your bank account number to speed things along, forget it. If you’re told to send money to a P.O. Box or someplace offshore, forget that, too.
The bigger the promised return on an investment, the higher the likelihood that it’s a scam. But just because a return is reasonable, don’t assume the investment is real. One of the biggest scams in recent years is fraudulent promissory notes sold to the elderly. Promissory notes are a short-term debt companies use to borrow cash. Con artists exploit a loophole in securities laws that exempt some nine-month promissory notes from regulatory scrutiny. The con artist starts a marketing firm and recruits unwitting insurance agents to sell the notes. Unlike so many investment schemes with their 100-percent-plus returns, these typically promise 9 to 12 percent interest, enough to attract a conservative investor without arousing suspicion. They’re touted as risk free and bonded by foreign insurance companies, which usually are fake. The local agents are often known and trusted by the investors, and are fooled as well by the con artists. Eventually, investors get notices that the company behind the notes has gone bankrupt and that’s the end of their investment.
A good rule of thumb is, the more exclusive something is positioned to be, the more likely it’s trouble. Once-in-a-lifetime opportunities are usually once-in-a-lifetime chances to lose all your savings. If something is billed as getting “imminent” regulatory approval, that means it will never get regulatory approval. When I see ads on television promoting some new elixir or wonderful product, the words that always tell me it’s a scam are “not sold in stores.” Think about it, if someone has a great product, why wouldn’t he sell it in stores? The reason is because there’s something fishy about it.
It’s the same with investments. When I hear about an investment opportunity and am told it’s not available through brokerage houses, then that’s criminal-speak for “only available through con artists.” If you really could make 100 percent on your money in a week, you wouldn’t need to find out about it in an e-mail from a total stranger. You can bet Merrill Lynch and Paine Webber would be selling it, too.
11
[STEALING YOUR SOUL]
For Michelle Brown, there was life before identity theft and then there was life after identity theft. Life after was a torment.
Brown, the young California woman I began this book with, couldn’t understand why someone had stolen her identity. Why her, of all people? And how did it happen? One day she told her property manager about how someone was going around using her name and her credit, and that the police and credit bureaus had mentioned that identity thieves are sometimes a relative or someone you know. Did she have sisters who might have something against her, a close friend with a grudge? She had been offended. She had two sisters, but she knew neither of them was the one, and no friend was that malevolent.
Her property manager listened to her carefully, and then he said, “I know who’s doing it.”
Or he thought he did. A woman he knew vaguely, Heddi Ille, had a history of committing credit fraud. He figured it might well be she.
The police looked into it, and they concluded that it was indeed she. Heddi Ille was a woman in her early thirties, about five-foot-seven and weighing 200 pounds. She looked nothing like Michelle Brown. And she was mixed up with drugs. For months, the police pursued her, but it wasn’t until more than a year after she had stolen Michelle Brown’s identity that she was caught, and then it was only because someone had turned her in. To add to the insult, Ille was arrested under the name Michelle Brown. On her record, that name was listed as an alias.
Heddi Ille had never met Michelle Brown, and knew virtually nothing about her. Like most crooks, she had wanted one thing: a vehicle that allowed her to steal. One day, she had happened to sneak a look at the rental applications at the apartment complex where Michelle Brown was living, and had chosen her information to work with. She was a similar age, and that may have been all that mattered. That one document was all it took.
In their arrogance, thieves rarely consider the consequences for the victim. They’re in it strictly for the money. For a long time, Michelle Brown wondered if she would ever become whole again. It required a massive effort for her to get her credit straightened out. “Identity theft leaves a very dark and filthy cloud around the victim,” she said. Even now, she is extremely circumspect. She has eliminated all but one credit card. She refuses to write checks when she buys something in a store. She worries that her name will be on a list of delinquents and she’ll be hustled off by security guards. Her mail comes to a private mailbox. For her birthday, a friend gave her a shredder, and she now shreds all credit card solicitations and any other material containing personal information.
She carries around official papers that confirm who she is, though she’s afraid to travel overseas, particularly to any third-world country, out of fear she’ll be mistaken for the jailed Ille and be imprisoned. Even in this country, she shudders every time she sees a police car. She drives safely under the speed limit and never forgets to signal if she’s making a turn. The last thing she wants is to be stopped and somehow mistaken for the other Michelle Brown, the one who ought to be in prison.
Two years after she started, Heddi Ille was convicted of perjury, grand theft, and possession of stolen property, though, as so often happens, not of identity theft. Not only was she initially booked as Michelle Brown, but also when she sent letters to friends from federal prison she wrote that name on the return address, until the real Michelle Brown objected. She felt Heddi Ille had stolen quite enough from her for long enough.
THE CRIME OF THE FUTURE
I’ve saved identity theft for last, because I’m convinced it’s the c
rime we have the most to fear going forward. To my mind, identity theft is the crime of the future. And I think of it as the mother of all scams, because it steals everything, a person’s very being.
In so many ways, it’s the scariest and most seductive white-collar crime of all, and we’ve barely scratched the surface. It’ll probably be ten years from now before identity theft is in full swing, but we’ve already seen its striking escalation. At the beginning, someone stole your identity because he wanted to get a credit card in your name. These days, he’ll say, wait a minute, I’ll get a car loan in your name, wait a minute, I’ll get a mortgage in your name, wait a minute, I’ll assume your entire identity and get a job in your name and you’ll have to pay the taxes.
Physical attributes like DNA are unassailable and unique to you. No criminal can steal them. But we have become the various numbers that have been assigned us, and, with modern technology, that makes us increasingly vulnerable. All a thief has to do is get hold of a single set of digits—your bank account, your credit card number, or especially your Social Security number—and he can take up residence in your life. If you have great credit, he suddenly has great credit.
Anyone with a Social Security number can become a victim—even a newborn baby or someone who’s dead. Some identity thieves can pick your pocket for months and even years before they’re detected. They know just how to keep a victim’s suspicions at bay.
A Virginia couple was puzzled when a friend said he couldn’t reach them because their number was unlisted. They knew they were in the book, but figured it was a lame excuse for not inviting them to a party. When they heard the same thing from another friend, they checked with the phone company. It said the husband had asked that the number be unlisted. They shrugged that off as some mix-up, until they got a call to verify that they wanted their new Visa card mailed to a different address. They had ordered no card and had no new address. They quickly got a credit report and found that someone had already obtained another card in their name and a cash advance against it. Then they got it. The identity thief had requested that their number be unlisted so creditors couldn’t reach the couple.
The Art of the Steal Page 21
