The Truth About Multi-Level Marketing
6uccessLine (spelled with a “6” rather than with an “s)” is a gateway for multi-level marketing. The site says, “Get Paid Working from Home! All you have to do is take a FREE Video Tour and afterwards, we'll call you to see if you have any questions. It's that simple! Just fill out the form above.”
It continues, “Jump onboard the next big Internet wave. Get paid up to five times each and every month. Be mentored by millionaires who have walked the walk. Start living the lifestyle you’ve always dreamed.” If that was not enticing enough, there are testimonials. “Since joining this company at age of 20-years old, I have been empowered to positively impact and motivate people while enjoying a great income and lifestyle from networking.” Yip, that’s the exact quote. The web site’s privacy disclaimer leads right back to the same page. The only way to proceed is to submit your personal information.
“Our opportunity provides the following: Work when you want, where you want, with who you want and even how you want! Get paid monthly residual income, month after month, year after year! Promote yourself up the ranks at your pace! Work part-time or full-time! Time-freedom you never had!” They go on to provide you with services they use. “Our services include the following: Digital Phone Service Wireless/Cellular, Local Calling Service, Long Distance Service, Internet Service.” Gee, I use them too, don’t you?
Other statements fall directly into the pyramid scheme format: “Not only can you work here in the U.S., but you can also build your business all over the world. Who would have thought that a multi-billionaire (Donald Trump) would be recommending people who are looking to be their own boss and start their own business to seriously check out the network marketing industry? Well, it's the truth. Because of the low cost - high return, people who have a strong burning desire can become very successful in a relatively short period of time.”
So what is this “network marketing industry?” If you Google those three words you get 300,000 hits. Most are similar to the one I just presented: join and make a mint without working hard. Fast Company, one of the participants explains what it does this way: “
“Network marketing, or multi-level marketing, is one of the fastest-growing business models of the past few decades. The most prominent examples of direct selling companies include Amway, Avon, Mary Kay, Nu Skin, and Herbalife. In 2003, U.S. total direct selling sales totaled more than $29 billion. Any business model that has achieved this kind of success probably has lessons that all business people can learn from. We define this family of business models as a method of distribution in which people are paid for sales volume generated by people they have recruited into the distribution network.”
“A significant number of network marketers have negative experiences with the industry. That is why 70% of all people who have ever been a direct selling representative are no longer in the industry. One of the things that make the sector most attractive, the low barrier to entry, also creates some its greatest dangers. Many people get into it without the necessary skills to run a successful business. Successful salespeople penetrate an untouched market, and then work to gain a high market share in that market. This is easier to do if everyone in it knows all the players. Why? Because word of mouth in that type of network will spread more rapidly about the value of your product or service.”
"If you think of the whole process like dating, we bring someone to our Web site, and then we ask them to have sex immediately. There has to be some courtship first." One of the delicate aspects of network marketing is that people leverage their personal relationships to sell a product. Although that leverage makes some people queasy, the success of the network marketing model shows that many people do comfortably build multiplex relationships: Their friends are their customers.”
Wikipedia puts it quite simply, “It is sometimes difficult to distinguish legal and reputable multi-level marketing companies from illegal pyramid or Ponzi schemes. MLM businesses operate in the United States in all 50 states and in more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses.
The key distinction between these illegal schemes and legitimate MLM businesses is that with legitimate companies a meaningful income can be earned solely from the sales of the product or service to customers who are not themselves enrolled in the scheme. While some of these MLM businesses also offer commissions from recruiting new members, this is not essential to successful operation of the business by any individual member. The distinguishing characteristic is whether the money in the scheme comes primarily from the participants themselves (pyramid scheme) or from sales of products or services to customers who aren't participants in the scheme (legitimate businesses).
The distinction, though, is far murkier. The FTC has found that the vast majority of products sold by multi-level marketing companies fall into a narrow range. They include unproven nostrums that are sold by testimonial rather than by proven scientific studies. Many also sell trinkets as if they are special more expensive objects. Those that have products of value, sell them for a far higher cost than compatible products, thus providing a nice profit for the company and a reasonable income for the lower level salespeople.
Jon M. Taylor, who has an MBA and a Ph.D in business marketing, has spent over 20 years studying multi-level marketing. He states, “Law-enforcement agencies seldom require honest and understandable disclosure of essential information to MLM prospects. I have examined the compensation plans of more than 250 leading MLMs and found that virtually all hide the near-zero odds of making a profit, and in fact almost certain loss. Here are the typical ways they exaggerate to new recruits.”
Misrepresentations and the Truth
They Say -- Presented as a great “income opportunity,” with huge incomes reported for many.
The Truth -- A few are at the top of a pyramid of participants are enriched at the expense of a multitude of downline participants, about 99% of whom lose money.
They Say -- “Everyone can do this” – and earn a good income.
The Truth -- Holding up top earners as examples of what others can do is deceptive. It is unfair to sell tickets when – for nearly everyone – the ship has left the port.
They Say -- Average earnings statements on official reports make MLM’s appear highly profitable.
The Truth -- Reports of average incomes are full of deceptions – (Example - 20 on one page for Nu Skin’s report of “Actual Average Incomes.” The FTC Order for Nu Skin to cease misrepresenting earnings of distributors.)
They Say -- Products can be resold at retail prices for a handsome profit
The Truth -- Products are high priced and sold primarily to recruits to “do the business,” rather than to persons outside the network of participants.
They Say -- Presented as a legitimate business – “not a pyramid scheme”
The Truth -- Product-based MLM companies have been found to be the most extreme of all the types, with the highest loss rates far worse than most games of chance in casinos.
They Say -- Work for only an hour or two a day, and build up a “residual income” that will allow you the “time freedom” to quit your job and spend more time with your family or do whatever you want.
The Truth -- To profit at a recruiting MLM, one must work long hours and be willing to continue to recruit to replace dropouts. One must also be willing to deceive large numbers of recruits into believing it is a legitimate income opportunity. Recruits are only fattening their upline’s commissions. And is there anything immoral about hard work for honest rewards?
They Say -- “The job market is not secure.” The stock market is even shakier. MLM offers a much more secure and permanent (residual) income.”
The Truth -- Multi-level marketing is far more risky than either the stock market or the job market. It even makes gambling look like a safe investment by comparison. Residual income for almost all MLM recruits is a myth.
They Say -- Standard jobs are not rewarded fairly. In MLM, you can set your own standard for earnings.
The Truth -- Fair? Most multi-level marketing compensation plans are weighted heavily towards those who got in early or scrambled to get to the top of a pyramid of participants.
They Say -- “If not legal, the program would have been shut down long ago.” MLM’s have survived legal challenges. The fact that they are still around tells you they are legitimate.
The Truth -- Consumer protection officials are reactive, not proactive. Since victims rarely file complaints, law enforcement seldom acts against even the worst schemes. Victims don’t complain because they blame themselves, and they fear self-incrimination or consequences from or to their upline or downline.
They Say -- If you fail at this program, it is because you failed to properly “work the system.” The Truth -- The system itself is inherently flawed – an endless chain recruitment of participants as primary customers. The vast majority will always lose money.
They Say -- “In any business, one must invest time and money to be successful.” (Committed MLM participants may continue investing thousands, and even tens of thousands of dollars, over years before running out of money or giving up.)
The Truth -- The more one invests in time, money and effort, the more he/she loses – unless willing to deceive enough people to rise to the top of a pyramid of victims. In legitimate companies, sales persons are not expected to stock up on inventory or subscribe to monthly purchases. But in recruiting MLM’s, incentivized purchases (required to participate in commissions and/or advancement) are often merely disguised or laundered investments in a pyramid scheme.
They Say -- Take advantage of “momentum” and “windows of opportunity.”
The Truth -- This kind of appeal has been used for 20 years. The momentum cannot continue indefinitely, leaving those who come in later in a loss position, which is 99% of recruits.
They Say -- The demand for these products is growing at a rapid rate. “They literally sell themselves.”
The Truth -- The sale of products is distributor-driven, not market driven. Most products are sold to new participants to get in on this “ground floor opportunity.”
They Say -- Unlike franchises, business startups, or sales of existing businesses, you can start an MLM business with very little capital.
The Truth -- Multi-level marketing typically bleed new recruits of their funds by inducing them to buy products on a subscription basis, to pay for ongoing training, and otherwise draining them of their resources until they run out of money or give up.
They Say -- You will belong to a great support team. In MLM, you have a whole network of people willing to help you succeed and be your friends.
The Truth -- Some Multi-level marketing companies operate like a cult with an “us vs. them” mentality. Watch how quickly the team ostracizes you when you quit or discover contrary information about the legitimacy of the program.
They Say -- Our products are unique and consumable – perfect for repeat business.
The Truth -- MLM products are typically “potions and lotions.” The secret formulas are a cover for the fact that they are priced too high to compete in standard markets.
They Say -- Products are less expensive because you cut out the middleman.
The Truth -- MLM creates thousands of middlemen, with few real customers outside a bloated network of “distributors”. Typically, they are very expensive, not competitively priced.
They Say -- Our “tools for success” are unbeatable. Sign up for our seminars and conferences, and buy our books and tapes to assure your success in this business.
The Truth -- Hardly anyone makes money selling products, so a lucrative source of income for those at the top is the sale of “success tools” to supposedly assure the success of their downline – who are in fact only further victimized when they buy these motivational items.
They Say -- Some very reputable people are involved in MLM.
The Truth -- This credibility argument is used with many scams. Notables can be bought.
They Say -- Some MLM companies invest in very worthy (and visible) causes.
The Truth -- The mafia supported local charities. And because a bank robber donates some of his take to charity, does that excuse the robbery?
They Say -- You will be helping your friends and family by recruiting them into your downline.
The Truth -- For potential personal gain, you are exploiting those you care about the most. In other words you are squandering your social capital.
Monday, March 30, 2009
Monday, March 23, 2009
Consumer Safety & Awareness Part 13
History of Pyramid Scams
The Consumer Awareness Institute classifies several scams as pyramids. They include multi-level marketing, network and consumer direct marketing, as well as the typical pyramid schemes. Included in the multi-level marketing category are Shaklee, Herbalife, Amway, Avon, Mary Kay, Nu Skin, Sunrider, and Vector marketing. Wikipedia lists over 40 active companies in this group.
The earliest recognized pyramid schemes were chain letters. The initiator sent out an unknown number of postal letters stating something like, “This is a good luck letter. Put your name on the bottom of the list and send it to 5 people, plus the person on the top of the list.” If everyone followed through, eventually it would go to 5, then 25, then 225, then 625, and finally over 3,000 people.
If the scam was to, “Send $1 to the person at the top and put your name at the bottom of the list,” and if everyone followed through, the scheme would net around $3,000. The United States Post Office prosecutes pyramid schemes senders for mail fraud.
Many pyramid schemes involve selling products of little or no value. In the 1950s and 1960s, many such activities involved signing up at least 5 people you know to get important, priceless information on how to make money legally from such things as government or armed forces surplus auctions, confiscated goods, or some financial investments. You had to send their names in with $10 to get the information, as well as notify them that they can also participate. In most cases there was time pressure as it was a limited offer. If 500 people fell for the scam, the originator was $5,000 richer, which in those times was a year’s salary for the average worker.
Charles Ponzi, an Italian immigrant to America in 1903, who had been arrested in Canada for various fraudulent activities, made a fortune after World War I illegally trading international currency. In 1919 he established a company, the Security Exchange Commission, and advertised that investments in his company would receive a guaranteed return of 100% in three months. Thus, if you invested $100, 90 days later you would receive $200. He accepted amounts of from $10 to $50,000 from individuals.
Using new money that he received from those who heard about this amazing return, he paid off the initial investors, giving them the harvest he promised. The success of the Security Exchange Commission became well advertised and people flocked to send him money. His scheme only lasted nine months, but he accumulated over $15 million, a huge sum for 1920. He served time in jail and was deported back to Italy in 1934 where he eventually died nearly penniless.
In the 1960s, William J. Armantrout founded Modern Floor Fashions to sell carpeting. He ran his company as a pyramid scheme, netting millions. His salesmen sold overpriced and poor quality carpets to customers who were told that if they recommended up to ten others, they would get referral fees that would eventually reimburse them the total cost of the carpet. For each person they recommended that actually bought, they would get $60. If, eventually, those secondary clients recommended others who made a purchase, they would get $40. Thus if half of their recommendations purchased, they’d receive $300, and if half of those people’s referrals bought, they could potentially get an additional $1000. On average the carpets sold for between $1,000 and $1,500. Very few people saw more than $100 total in such commissions, and since the carpets provided considerable profit for the company, they did quite well until shut down by the government.
For six months in 1967, in Morgan City, Louisiana, Howard Blachly, operating under the trade names of Pioneer Products or Pioneer Marketing, sold water softeners using what they called a Referral Selling Plan. Along with two confederates, Blachly set up appointments with potential purchasers during evening hours. As part of the sales technique, it was required that both husband and wife be present. This is typical in a selling scam, as we will see when we look at pressure sales techniques.
A demonstration of the product was given by means of a miniature model of the water softener, and the advantages of using the treated, demineralized water in the home were explained. At the conclusion of the demonstration the parties who expressed an interest were then informed of the mechanics of the Plan. They were told that as a result of a promotional advertising plan, the family could not only acquire the water softener at no cost to themselves but also would have the opportunity to earn a profit. This was possible since each sale thereafter made to a future prospective customer whose name had been supplied by the current potential purchaser would entitle such purchaser to a referral sales commission of $40. No limit was placed on the number of referred parties that the purchaser could give. The right to an additional $40 sales commission also extended to secondary sales. Thus each sale to a third level customer would also net the current family $40.
Once the family was convinced, they signed a contract for the water softener for $610, including taxes, or for a time payment that came to $829 over 36 months. The contract also spelled out the referral commissions. A second copy, with additional information was also signed, by both the husband and wife and the salesperson. This one was, they were told, “for purposes of record keeping or for obtaining credit references.” In actuality, the second was a blank property deed, which, once filled out, turned the ownership of their house to Pioneer Products.
Blachly was convicted on 17 counts of mail fraud and sentenced to 3 years' imprisonment on one count, sentencing on the remaining counts suspended with 5 years' supervised probation.
In one of the first direct marketing cases heard in the United States, Ger-Ro-Mar and its president Carl Simonson, were convicted under the pyramid scheme statutes for using a technique now commonly used by the multi-level marketing companies we looked at earlier. In this case, the company enlisted the services of people to sell their products at wholesale and retail, requiring distributors to buy an inventory of varying size before they may participate in the program. A potential distributor (also called a "consultant") may enter at one of three levels ("Key Distributor," "Senior Key," or "Supervisor"), and eventually work up to a fourth and fifth level (District Manager and Regional Manager).
Entry into the program is through a non-refundable purchase of merchandise from the company or one of its distributors. All distributors except the lowest purchased directly from the company; a Key Distributor purchases from his sponsor. The initial purchase requirement for entry into the program is $300, which is discounted 35% to $215. As you advanced in management level, your purchase amounts also increased, first to $1,000, then $3,000. Each was also discounted.
Thus when the manager sold to a supervisor, the manager received a profit of around 15%. The manager then sold down to the next level, also getting 15%. The promotional literature stated that a district manager could earn up to $56,400 per year and Regional managers up to $90,600. The legalese was the phrase “up to,” and in reality no one came close, except the officers of the company.
There are several general techniques that identify pyramid schemes, and these also apply to mass-marketing companies.
Participants are recruited in an endless chain of participants.
Advancement is based on how many others you recruit.
Participants are expected to buy products or services in order to qualify for commissions or bonuses or to advance in the scheme.
The company pays commissions and bonuses on more than four levels of participants.
Next time we will discuss Multi-Level marketing, which, although they conform to the letter of the law, are in actuality considered selling schemes by most consumer advocates.
The Consumer Awareness Institute classifies several scams as pyramids. They include multi-level marketing, network and consumer direct marketing, as well as the typical pyramid schemes. Included in the multi-level marketing category are Shaklee, Herbalife, Amway, Avon, Mary Kay, Nu Skin, Sunrider, and Vector marketing. Wikipedia lists over 40 active companies in this group.
The earliest recognized pyramid schemes were chain letters. The initiator sent out an unknown number of postal letters stating something like, “This is a good luck letter. Put your name on the bottom of the list and send it to 5 people, plus the person on the top of the list.” If everyone followed through, eventually it would go to 5, then 25, then 225, then 625, and finally over 3,000 people.
If the scam was to, “Send $1 to the person at the top and put your name at the bottom of the list,” and if everyone followed through, the scheme would net around $3,000. The United States Post Office prosecutes pyramid schemes senders for mail fraud.
Many pyramid schemes involve selling products of little or no value. In the 1950s and 1960s, many such activities involved signing up at least 5 people you know to get important, priceless information on how to make money legally from such things as government or armed forces surplus auctions, confiscated goods, or some financial investments. You had to send their names in with $10 to get the information, as well as notify them that they can also participate. In most cases there was time pressure as it was a limited offer. If 500 people fell for the scam, the originator was $5,000 richer, which in those times was a year’s salary for the average worker.
Charles Ponzi, an Italian immigrant to America in 1903, who had been arrested in Canada for various fraudulent activities, made a fortune after World War I illegally trading international currency. In 1919 he established a company, the Security Exchange Commission, and advertised that investments in his company would receive a guaranteed return of 100% in three months. Thus, if you invested $100, 90 days later you would receive $200. He accepted amounts of from $10 to $50,000 from individuals.
Using new money that he received from those who heard about this amazing return, he paid off the initial investors, giving them the harvest he promised. The success of the Security Exchange Commission became well advertised and people flocked to send him money. His scheme only lasted nine months, but he accumulated over $15 million, a huge sum for 1920. He served time in jail and was deported back to Italy in 1934 where he eventually died nearly penniless.
In the 1960s, William J. Armantrout founded Modern Floor Fashions to sell carpeting. He ran his company as a pyramid scheme, netting millions. His salesmen sold overpriced and poor quality carpets to customers who were told that if they recommended up to ten others, they would get referral fees that would eventually reimburse them the total cost of the carpet. For each person they recommended that actually bought, they would get $60. If, eventually, those secondary clients recommended others who made a purchase, they would get $40. Thus if half of their recommendations purchased, they’d receive $300, and if half of those people’s referrals bought, they could potentially get an additional $1000. On average the carpets sold for between $1,000 and $1,500. Very few people saw more than $100 total in such commissions, and since the carpets provided considerable profit for the company, they did quite well until shut down by the government.
For six months in 1967, in Morgan City, Louisiana, Howard Blachly, operating under the trade names of Pioneer Products or Pioneer Marketing, sold water softeners using what they called a Referral Selling Plan. Along with two confederates, Blachly set up appointments with potential purchasers during evening hours. As part of the sales technique, it was required that both husband and wife be present. This is typical in a selling scam, as we will see when we look at pressure sales techniques.
A demonstration of the product was given by means of a miniature model of the water softener, and the advantages of using the treated, demineralized water in the home were explained. At the conclusion of the demonstration the parties who expressed an interest were then informed of the mechanics of the Plan. They were told that as a result of a promotional advertising plan, the family could not only acquire the water softener at no cost to themselves but also would have the opportunity to earn a profit. This was possible since each sale thereafter made to a future prospective customer whose name had been supplied by the current potential purchaser would entitle such purchaser to a referral sales commission of $40. No limit was placed on the number of referred parties that the purchaser could give. The right to an additional $40 sales commission also extended to secondary sales. Thus each sale to a third level customer would also net the current family $40.
Once the family was convinced, they signed a contract for the water softener for $610, including taxes, or for a time payment that came to $829 over 36 months. The contract also spelled out the referral commissions. A second copy, with additional information was also signed, by both the husband and wife and the salesperson. This one was, they were told, “for purposes of record keeping or for obtaining credit references.” In actuality, the second was a blank property deed, which, once filled out, turned the ownership of their house to Pioneer Products.
Blachly was convicted on 17 counts of mail fraud and sentenced to 3 years' imprisonment on one count, sentencing on the remaining counts suspended with 5 years' supervised probation.
In one of the first direct marketing cases heard in the United States, Ger-Ro-Mar and its president Carl Simonson, were convicted under the pyramid scheme statutes for using a technique now commonly used by the multi-level marketing companies we looked at earlier. In this case, the company enlisted the services of people to sell their products at wholesale and retail, requiring distributors to buy an inventory of varying size before they may participate in the program. A potential distributor (also called a "consultant") may enter at one of three levels ("Key Distributor," "Senior Key," or "Supervisor"), and eventually work up to a fourth and fifth level (District Manager and Regional Manager).
Entry into the program is through a non-refundable purchase of merchandise from the company or one of its distributors. All distributors except the lowest purchased directly from the company; a Key Distributor purchases from his sponsor. The initial purchase requirement for entry into the program is $300, which is discounted 35% to $215. As you advanced in management level, your purchase amounts also increased, first to $1,000, then $3,000. Each was also discounted.
Thus when the manager sold to a supervisor, the manager received a profit of around 15%. The manager then sold down to the next level, also getting 15%. The promotional literature stated that a district manager could earn up to $56,400 per year and Regional managers up to $90,600. The legalese was the phrase “up to,” and in reality no one came close, except the officers of the company.
There are several general techniques that identify pyramid schemes, and these also apply to mass-marketing companies.
Participants are recruited in an endless chain of participants.
Advancement is based on how many others you recruit.
Participants are expected to buy products or services in order to qualify for commissions or bonuses or to advance in the scheme.
The company pays commissions and bonuses on more than four levels of participants.
Next time we will discuss Multi-Level marketing, which, although they conform to the letter of the law, are in actuality considered selling schemes by most consumer advocates.
Monday, March 16, 2009
Consumer Safety & Awareness Part 12
Pyramid Scams: Introduction
Greed can make many people act unscrupulously; especially if they themselves have been scammed into believing what they are saying is the truth. Most pyramid scams are based on this. Pyramids, similar to what is known as Ponzi schemes, are illegal in every state. They are based on making promises that cannot be easily disproved and that appear to work. Many e-mail scams today are based on it. In fact I remember seeing similar things run by classmates when I was in school, oh so many years ago. I doubt the kids knew what they were doing was illegal.
Consider the shape of the pyramid and relate it to this scam. The person at the top comes up with a moneymaking idea: an investment in something that does not exist. For example, they promise everyone that they will invest money in a great company that has been averaging 5% returns a month for the last six years. Only he knows about them and only he can get the money to the investment company. It is usually located outside the United States and does not come under US laws and regulations. If you invest $200, the least they will accept, which is really not much, for three years, you will get a check for at least $10 a month every month for those 36 months, or a total of $360. And you will then get the original investment back. Since the company is building a Costa Rican hotel or a German factory, or digging a Peruvian gold mine, you will never have to report it to our government, as the money was not made in this country.
So you invest the $200 and, sure enough, in a month you get $20 in cash, a whopping 10% return. Then the scammer gives you a new opportunity: he will share half of the fee the company pays him, for every new person you can get to invest. He gets $4 a month for each investor, so if you get 10 people to join you’ll get an additional $20 monthly. Thus the pyramid grows. During the next few months your return may vary between 5 and 10%, so after four months you have gotten at least $60 back, more than a quarter of your investment
If he has 100 people on the hook initially, and runs this scam for four months before disappearing, he’s made $140 from your initial investment (times 100 people) and, if each of those people get 10 more, than those ten get ten more investors, there is obviously a lot on money being forwarded. Some invest more than $200 or contribute additional sums after the amazing 10% return the first month. You can imagine that in four months the quite large pyramid has made him well over $100,000 or even $200,000. He then, suddenly, and with no way of contacting him, disappears. Since only the original 100 people ever met the scammer, or shared e-mails with him, and each of them has profited from those they brought in and are thus unlikely to go to the cops, the scammer rarely gets caught.
The greatest of such scammers, Alyn Richard Waage, used a pyramid scheme to take money from around 15,000 investors. His total was estimated at $60 million dollars. He set up a company called Tri-West Investment Club, and, using a web site and e-mail, told investors the money would be put in safe, high-yield securities. When he was eventually arrested, and jailed in South Carolina, it was discovered that the money had been spent on a private yacht, a helicopter and real estate.
A close friend of mine lives in a small town around an hour from Bogotá, Columbia. His area made huge news last November with the breakup of a country-wide pyramid scam that possibly included as many as a ten percent of the people in the country. David Murcia Guzman, who named his company after himself, DMG, escaped to Panama, but was captured and returned to Bogotá. The 28-year old, executed his scheme for around 3 years, hooking in over 200,000 Colombians who sold their homes to invest with him.
The Colombian newsweekly magazine, Semana, described it this way:
For the last two years, a unique economic situation has calmed the income anxiety of those who live in the Putumayo region, which since the 1990s has based its economy on coca cultivation and harvesting. Many people arrive at the DMG offices as much as two days before the payment day. Months ago they had left millions and millions of pesos in DMG’s coffers. Some lost all of their savings. Others, what they got from selling their house, their car or their farm. There are even some who have taken out bank loans in order to invest the cash in this magical way of increasing their capital. When they arrive at the branch, the person receives the “benefit” of his investment, as agreed in each contract. Interest rates of 10, 15, 30, 50 percent, and during “special offer” periods even 100 percent.
Ten million pesos in DMG’s hands for six months can be turned into 20 million. Or if you prefer a monthly payment, they will give you a million pesos every 30 days. That is, 10 percent. One can choose whichever way one prefers. Either way it is well above what any bank would pay to a savings account holder.
David Murcía Guzmán is the person behind this miraculous system. A young man of less than 30 years about whom little is known in the region. Only that one day he came to six of Putumayo’s 13 municipalities and set up his business. The DMG offices, the local population says, have strong safes to hold the cash that arrives at the regional airports and is transported along the department’s awful roads by armored, escorted cars.
There is nothing clear about this business. There are no sanctions from Colombia’s bank-oversight agency; there are no results from the preliminary investigations that the Prosecutor-General’s office began. The business is so prosperous, that in a zone where the narco-economy led the parade for years, it is easy to imagine that something strange is behind this surprising way of getting many out of poverty.
But this matters to very few. In the region, people are so content with DMG that any politician who wants to campaign and win elections in Putumayo would do well not to get involved. “A legislator asked in public about the origin of this money and called for an investigation, and the next day he had thousands of opponents in the department. The people will not allow this subsistence source to be taken from them,” commented a departmental government official.
At least two people were killed in riots in November when the people who ran the local DMG offices started shutting their doors and disappearing with cash. Mr. Guzman faces charges including money-laundering and illicit enrichment. He denies the allegations. Even after he fled, was arrested and returned to Colombia, his scheme continued, taking on a life of its own. DMG was still operating until the police closed its 60 branches across Colombia. Protests against the government by investors who insist that the company is legitimate and that the government had forced its collapse lasted for weeks. The Colombian authorities believe DMG was the most sophisticated pyramid scheme this country has ever seen.
Greed can make many people act unscrupulously; especially if they themselves have been scammed into believing what they are saying is the truth. Most pyramid scams are based on this. Pyramids, similar to what is known as Ponzi schemes, are illegal in every state. They are based on making promises that cannot be easily disproved and that appear to work. Many e-mail scams today are based on it. In fact I remember seeing similar things run by classmates when I was in school, oh so many years ago. I doubt the kids knew what they were doing was illegal.
Consider the shape of the pyramid and relate it to this scam. The person at the top comes up with a moneymaking idea: an investment in something that does not exist. For example, they promise everyone that they will invest money in a great company that has been averaging 5% returns a month for the last six years. Only he knows about them and only he can get the money to the investment company. It is usually located outside the United States and does not come under US laws and regulations. If you invest $200, the least they will accept, which is really not much, for three years, you will get a check for at least $10 a month every month for those 36 months, or a total of $360. And you will then get the original investment back. Since the company is building a Costa Rican hotel or a German factory, or digging a Peruvian gold mine, you will never have to report it to our government, as the money was not made in this country.
So you invest the $200 and, sure enough, in a month you get $20 in cash, a whopping 10% return. Then the scammer gives you a new opportunity: he will share half of the fee the company pays him, for every new person you can get to invest. He gets $4 a month for each investor, so if you get 10 people to join you’ll get an additional $20 monthly. Thus the pyramid grows. During the next few months your return may vary between 5 and 10%, so after four months you have gotten at least $60 back, more than a quarter of your investment
If he has 100 people on the hook initially, and runs this scam for four months before disappearing, he’s made $140 from your initial investment (times 100 people) and, if each of those people get 10 more, than those ten get ten more investors, there is obviously a lot on money being forwarded. Some invest more than $200 or contribute additional sums after the amazing 10% return the first month. You can imagine that in four months the quite large pyramid has made him well over $100,000 or even $200,000. He then, suddenly, and with no way of contacting him, disappears. Since only the original 100 people ever met the scammer, or shared e-mails with him, and each of them has profited from those they brought in and are thus unlikely to go to the cops, the scammer rarely gets caught.
The greatest of such scammers, Alyn Richard Waage, used a pyramid scheme to take money from around 15,000 investors. His total was estimated at $60 million dollars. He set up a company called Tri-West Investment Club, and, using a web site and e-mail, told investors the money would be put in safe, high-yield securities. When he was eventually arrested, and jailed in South Carolina, it was discovered that the money had been spent on a private yacht, a helicopter and real estate.
A close friend of mine lives in a small town around an hour from Bogotá, Columbia. His area made huge news last November with the breakup of a country-wide pyramid scam that possibly included as many as a ten percent of the people in the country. David Murcia Guzman, who named his company after himself, DMG, escaped to Panama, but was captured and returned to Bogotá. The 28-year old, executed his scheme for around 3 years, hooking in over 200,000 Colombians who sold their homes to invest with him.
The Colombian newsweekly magazine, Semana, described it this way:
For the last two years, a unique economic situation has calmed the income anxiety of those who live in the Putumayo region, which since the 1990s has based its economy on coca cultivation and harvesting. Many people arrive at the DMG offices as much as two days before the payment day. Months ago they had left millions and millions of pesos in DMG’s coffers. Some lost all of their savings. Others, what they got from selling their house, their car or their farm. There are even some who have taken out bank loans in order to invest the cash in this magical way of increasing their capital. When they arrive at the branch, the person receives the “benefit” of his investment, as agreed in each contract. Interest rates of 10, 15, 30, 50 percent, and during “special offer” periods even 100 percent.
Ten million pesos in DMG’s hands for six months can be turned into 20 million. Or if you prefer a monthly payment, they will give you a million pesos every 30 days. That is, 10 percent. One can choose whichever way one prefers. Either way it is well above what any bank would pay to a savings account holder.
David Murcía Guzmán is the person behind this miraculous system. A young man of less than 30 years about whom little is known in the region. Only that one day he came to six of Putumayo’s 13 municipalities and set up his business. The DMG offices, the local population says, have strong safes to hold the cash that arrives at the regional airports and is transported along the department’s awful roads by armored, escorted cars.
There is nothing clear about this business. There are no sanctions from Colombia’s bank-oversight agency; there are no results from the preliminary investigations that the Prosecutor-General’s office began. The business is so prosperous, that in a zone where the narco-economy led the parade for years, it is easy to imagine that something strange is behind this surprising way of getting many out of poverty.
But this matters to very few. In the region, people are so content with DMG that any politician who wants to campaign and win elections in Putumayo would do well not to get involved. “A legislator asked in public about the origin of this money and called for an investigation, and the next day he had thousands of opponents in the department. The people will not allow this subsistence source to be taken from them,” commented a departmental government official.
At least two people were killed in riots in November when the people who ran the local DMG offices started shutting their doors and disappearing with cash. Mr. Guzman faces charges including money-laundering and illicit enrichment. He denies the allegations. Even after he fled, was arrested and returned to Colombia, his scheme continued, taking on a life of its own. DMG was still operating until the police closed its 60 branches across Colombia. Protests against the government by investors who insist that the company is legitimate and that the government had forced its collapse lasted for weeks. The Colombian authorities believe DMG was the most sophisticated pyramid scheme this country has ever seen.
Monday, March 9, 2009
Consumer Safety & Awareness Part 11
Bait & Switch: Pet Scams
Nothing is cuter than a cat. Nope, no dog, hamster, or fish comes close. And nothing is less adorable than a scam revolving around animals. Scambusters reports on five pet-related frauds.
If you have placed an ad in a local paper about your lost pet, and particularly if you offered a reward, you may get a call from someone claiming to have found your pet and asking for money to get it to you. There are many obvious ways to avoid this scam. Ask for a description of the animal, especially distinguishing marks not listed in your ad. Ask where it was found. Ask if there was a collar, especially if there wasn’t one. Tell the person to send you a picture by e-mail. Inform them that you will pay cash on delivery only.
Occasionally the caller threatens to harm your pet to put the pressure on so you'll pay up. In such cases ask for a callback number as you have to arrange for the money. Then notify the police. Threatening an animal for cash is embezzlement as well as violates the state’s cruelty to animal laws.
In a variation, the caller claims to be a trucker who found your injured animal as he was driving through the area. The caller may offer to send the animal back with another trucker who is heading your way. Turn that offer down. Treat it the same way as already described.
If the caller claims that your pet needed vet care, which he has taken care of and paid for, but he needs you to wire him the money so he can pick your pet up, ask for the name of the vet so you can find out the condition of your animal. If he refuses then hang up. Never pay in advance and never give out your name and address. If the call is legitimate, meet the person at the vet’s, even if it is out of state.
In a more complicated scam, your ad prompts a call from someone who claims to have found an animal that might be yours. In the process of exchanging descriptions, the caller will say that he's found a different animal, not yours. He'll apologize for your loss, and for taking your time. This is a set-up -- in a short time, he uses the information he's gotten about your pet to have a second person call and claim to have found your pet. Again, he'll try to collect any reward money in advance.
Your lost pet ad prompts a call from someone who precisely describes your pet, and wants to return it to claim the reward. In reality, your pet has been stolen by this person, who knew you would run an ad!
In a bizarre twist, scammers also respond to 'found' ads with the claim that you have found their pet. When you return the found pet, it may be sold to a research facility.
There are also advanced money scams relating to purchasing pets. The most common is where you buy a pet online, pay for it, and never get it. Another common one is when you are selling a pet (or any animal) and the person sends you a money order or check for an amount much larger than the agreed price. When you make contact the scammer tells you to cash the check and send him the difference. You’re stuck with a stolen or counterfeit check, and the bank wants its money back.
Bait and switch works on pets as well. You respond for an ad for an expensive breed of animal, pay for it, and get a mutt.
When getting an animal, be alert if the seller does not let you spend time with it prior to purchase or if the animal looks or acts unhealthy. If the seller focuses on the money and not the animal, then you should leave. In some cases the seller lets you see the animal, puts it back in his car, then takes your money and drives away.
The Humane Society’s web site has stories about such scammers.
“We all know the Internet can be a great place to buy anything from books to DVDs and rare gifts, but it's not where you should go to buy a new pet. In addition to disreputable dealers and puppy mills, Internet scammers have crept into the realm of online pet sales, stealing money from unsuspecting people who think their new dog or cat is on the way to his or her new home, when in fact there was never really an animal at all. The only party harmed in these scams is the person who is out hundreds or thousands of dollars. “
“In the real world of online pet sales, families often lose significant money when the pet they ordered falls ill soon after arrival. Such animals come from breeding stuck in factory-style operations, churning out babies to be sold off for a quick profit.”
The first rule whenever someone thinks of buying a pet is to visit where that animal was born and see how the parents are living. That cute puppy in the photo on the legitimate-looking website is almost too cute to be real. Often, he isn't.
One scam promises you a free puppy—as long as you pay the shipping. Once the scammers get your "shipping" costs, the scammer says your puppy is stuck at the airport due to customs complications, and you are asked to send more money.
Finally, the scammer (and the puppy who never existed in the first place) disappears. In many cases, victims think their dog is at the airport waiting for them after they've sent two or three money orders.
One woman recently contacted the Humane Society for help in saving a puppy that didn't exist. She believed she was adopting the puppy from a person she had met on the Internet who was stationed abroad. After taking some money from the woman for "shipping" costs, the scammer requested more money to help transport the dog from a European airport, where she said the dog was being held because of problems with the crate. After receiving e-mails that appeared to be from airport officials, the woman was convinced that "her" puppy was really at the airport and in need of her help. But it was all a hoax.
One e-mail scam tells the story of a woman whose mother unexpectedly died, leaving behind "adorable bulldog puppies" who—along with their parents—are in need of a home because the daughter and her husband moved to an apartment where pets are not allowed. Respondents are duped out of "shipping" or "adoption" fees for these non-existent puppies.
In other cases, the seller claims to represent an animal shelter or a Good Samaritan, offering the breeds for "adoption." In these cases, it's important to remember that reputable shelters do not place puppies by sending out mass e-mails and then shipping animals to people.
Internet scammers can deceive would-be buyers by using readily available online photos or by using stolen photos of other people's pets to represent the non-existent animal. They will often copy the claims of legitimate rescue groups and attempt to sound reputable by saying that they will only adopt the pet to someone who has a fenced yard, for example. They will also copy the text from breeder ads and claim to have registration certificates, vet records and health guarantees.
For more information about pet scams, visit TerrificPets.com/Scams where they actually list e-mail sent from people who have been the target of scam attempts.
Nothing is cuter than a cat. Nope, no dog, hamster, or fish comes close. And nothing is less adorable than a scam revolving around animals. Scambusters reports on five pet-related frauds.
If you have placed an ad in a local paper about your lost pet, and particularly if you offered a reward, you may get a call from someone claiming to have found your pet and asking for money to get it to you. There are many obvious ways to avoid this scam. Ask for a description of the animal, especially distinguishing marks not listed in your ad. Ask where it was found. Ask if there was a collar, especially if there wasn’t one. Tell the person to send you a picture by e-mail. Inform them that you will pay cash on delivery only.
Occasionally the caller threatens to harm your pet to put the pressure on so you'll pay up. In such cases ask for a callback number as you have to arrange for the money. Then notify the police. Threatening an animal for cash is embezzlement as well as violates the state’s cruelty to animal laws.
In a variation, the caller claims to be a trucker who found your injured animal as he was driving through the area. The caller may offer to send the animal back with another trucker who is heading your way. Turn that offer down. Treat it the same way as already described.
If the caller claims that your pet needed vet care, which he has taken care of and paid for, but he needs you to wire him the money so he can pick your pet up, ask for the name of the vet so you can find out the condition of your animal. If he refuses then hang up. Never pay in advance and never give out your name and address. If the call is legitimate, meet the person at the vet’s, even if it is out of state.
In a more complicated scam, your ad prompts a call from someone who claims to have found an animal that might be yours. In the process of exchanging descriptions, the caller will say that he's found a different animal, not yours. He'll apologize for your loss, and for taking your time. This is a set-up -- in a short time, he uses the information he's gotten about your pet to have a second person call and claim to have found your pet. Again, he'll try to collect any reward money in advance.
Your lost pet ad prompts a call from someone who precisely describes your pet, and wants to return it to claim the reward. In reality, your pet has been stolen by this person, who knew you would run an ad!
In a bizarre twist, scammers also respond to 'found' ads with the claim that you have found their pet. When you return the found pet, it may be sold to a research facility.
There are also advanced money scams relating to purchasing pets. The most common is where you buy a pet online, pay for it, and never get it. Another common one is when you are selling a pet (or any animal) and the person sends you a money order or check for an amount much larger than the agreed price. When you make contact the scammer tells you to cash the check and send him the difference. You’re stuck with a stolen or counterfeit check, and the bank wants its money back.
Bait and switch works on pets as well. You respond for an ad for an expensive breed of animal, pay for it, and get a mutt.
When getting an animal, be alert if the seller does not let you spend time with it prior to purchase or if the animal looks or acts unhealthy. If the seller focuses on the money and not the animal, then you should leave. In some cases the seller lets you see the animal, puts it back in his car, then takes your money and drives away.
The Humane Society’s web site has stories about such scammers.
“We all know the Internet can be a great place to buy anything from books to DVDs and rare gifts, but it's not where you should go to buy a new pet. In addition to disreputable dealers and puppy mills, Internet scammers have crept into the realm of online pet sales, stealing money from unsuspecting people who think their new dog or cat is on the way to his or her new home, when in fact there was never really an animal at all. The only party harmed in these scams is the person who is out hundreds or thousands of dollars. “
“In the real world of online pet sales, families often lose significant money when the pet they ordered falls ill soon after arrival. Such animals come from breeding stuck in factory-style operations, churning out babies to be sold off for a quick profit.”
The first rule whenever someone thinks of buying a pet is to visit where that animal was born and see how the parents are living. That cute puppy in the photo on the legitimate-looking website is almost too cute to be real. Often, he isn't.
One scam promises you a free puppy—as long as you pay the shipping. Once the scammers get your "shipping" costs, the scammer says your puppy is stuck at the airport due to customs complications, and you are asked to send more money.
Finally, the scammer (and the puppy who never existed in the first place) disappears. In many cases, victims think their dog is at the airport waiting for them after they've sent two or three money orders.
One woman recently contacted the Humane Society for help in saving a puppy that didn't exist. She believed she was adopting the puppy from a person she had met on the Internet who was stationed abroad. After taking some money from the woman for "shipping" costs, the scammer requested more money to help transport the dog from a European airport, where she said the dog was being held because of problems with the crate. After receiving e-mails that appeared to be from airport officials, the woman was convinced that "her" puppy was really at the airport and in need of her help. But it was all a hoax.
One e-mail scam tells the story of a woman whose mother unexpectedly died, leaving behind "adorable bulldog puppies" who—along with their parents—are in need of a home because the daughter and her husband moved to an apartment where pets are not allowed. Respondents are duped out of "shipping" or "adoption" fees for these non-existent puppies.
In other cases, the seller claims to represent an animal shelter or a Good Samaritan, offering the breeds for "adoption." In these cases, it's important to remember that reputable shelters do not place puppies by sending out mass e-mails and then shipping animals to people.
Internet scammers can deceive would-be buyers by using readily available online photos or by using stolen photos of other people's pets to represent the non-existent animal. They will often copy the claims of legitimate rescue groups and attempt to sound reputable by saying that they will only adopt the pet to someone who has a fenced yard, for example. They will also copy the text from breeder ads and claim to have registration certificates, vet records and health guarantees.
For more information about pet scams, visit TerrificPets.com/Scams where they actually list e-mail sent from people who have been the target of scam attempts.
Monday, March 2, 2009
Consumer Safety & Awareness Part 10
Bait & Switch: Financial and Service Scams
How would you react if a store keeper took your five-dollar bill and gave you a single in exchange? Some financial institutions use bait and switch to increase their profits, and, based on their reactions and refusal to admit there is anything wrong with their practices, they simply do not care.
Every time a company attempts to sell an annuity, they are pulling a scam. Annuities have the worst rate of return of any investment, and by telling you otherwise, in fact by assuring you that it’s the best investment you can make, the salesperson as well as the company is lying to you. By not offering an investment that has a higher rate of return, they are using a variation of bait and switch.
USA Today offers this advertisement as an example: "Come learn from the IRA Technician" at a seminar that more than 10,000 seniors have attended. Top sirloin steak will be served — along with tips on "how to guarantee your IRA will never run out, regardless of market fluctuations." The seminar then attempts to sell you an annuity. Since it takes forever for annuities to pay off, those over 50 should never invest in them.
When I was teaching, I was offered annuities almost every year. Many of my fellow teachers actually invested. Today, partly because I refused to invest in them, I have more money than they do.
An annuity is an investment that is tax deferred. You put in an amount, usually it’s taken out of your pay check and any interest you earn is not taxed until you cash it out, usually when you retire. Annuities are poorly regulated, and the companies are not required to disclose everything to you. They actually produce the lowest return of all legal investments. Many of them not only have large, occasionally hidden fees and commissions, but also take a percentage of your earnings out for maintenance or other silly excuses. Even Fidelity Investments, one of the most trustworthy names in the industry, was cited for annuity fraud.
It is highly recommended, based on more than 30 years of investigation by lawyers and consumer advocates, that you never put any money into an annuity and if you have money there you should consider withdrawal as soon as you can, even if it creates a penalty. A typical municipal bond fund, which is mostly tax-free and has consistently returned over 3%, occasionally up to 5%, produces as much as five times the return of an annuity.
The following information is from infofaq.com: “Variable annuities cost too much. Because annuities are primarily insurance products, their fees typically dwarf those charged by mutual funds. This is simple to understand when you realize there are two players involved instead of one.....the insurance company and the mutual fund company. According to Morningstar, the average variable annuity passes along expenses of 2.2 percent of the assets per year. This percentage probably won't mean much to you unless you realize how such a large fee can drain the momentum out of a portfolio. Let’s suppose, for example, that you invested $3,000 a year in a typical variable annuity that generates a yearly and unbelievably large 8 percent return before expenses. At the end of a 25-year period, your annuity would have grown to $168,000. If you had put that money into tax-efficient index mutual funds, charging between a low of 0.20 percent and a high of .50% in yearly expenses, the index fund would be worth $230,000. That's a difference of $69,000.”
Salesmen love to boast that you won't pay taxes on the money that's growing inside an annuity, because it’s "tax deferred". That's true, but it’s only half the story. You'll owe ordinary income taxes on every dollar of annuity withdrawals. This might not seem so bad until you appreciate what would happen if you had invested the same money in stocks or mutual funds in a plain old taxable account. These withdrawals would be taxed at long-term capital gains rates, which is only 15%. So lets say you're in a 35% ordinary income tax bracket and you've got a variable annuity. You'd pay $350 in taxes for every $1,000 you pull out. In contrast, if you'd kept this money in a taxable account, you'd pay no more than $150 for every $1,000 withdrawal. Extending this a bit, an investor cashing out a $100,000 annuity would pay $35,000 in taxes vs. $15,000 in a taxable account.
“So it is likely that investors buying variable annuities will actually end up paying more in taxes and having less after-tax wealth at retirement. In fact, the tax deferral feature of annuities actually harms investors who hold mostly equities in their accounts. If these investors are not told that they are being tax-disadvantaged by this tax deferral feature, then their brokers are making material misrepresentations and omissions.” 401-K accounts also have the same tax problem.
“Further, the tax disadvantage won't die when you do. It can hurt your heirs. That's because your beneficiaries will be saddled with paying capital-gains tax on any profit your annuity generated. If your original $50,000 annuity grew to $75,000, your heirs would owe tax on the $25,000 profit. In contrast, if you had placed your money in taxable mutual funds, because of the step-up in basis, your kids would get that $25,000 tax free.”
Earlier I mentioned that many of my fellow teachers have fallen for annuity plans. Teachers do not have access to 401-K plans for retirement. The only similar thing that is available to them is the 403-B. This is one of the worst investment and retirement options ever conceived. Howard Clark, a scam blogger and radio talk host, states “In the worst cases, teacher’s unions are handling the retirement plans and are taking kickbacks for putting teachers in a certain annuity. In New York, for example, the New York State United Teachers union gets a $3 million kickback to put teachers in these plans. If you’re a teacher, you need to know about this and take action. You can transfer your money tax free to two low-cost companies. The companies with the lowest costs are TIAA-Cref and Vanguard. Both are much better choices than any kind of annuity your union is pushing on you.”
So how do you know the best way to invest your money? You hire an investment counselor or you respond to one of the many ads for investment services. You might as well give your money to me right now. I’ll spend it on a few cups of coffee that we can share and you’ll have gotten a better return.
Cox Broadcasting recently had a show about investment counseling. Their conclusion was, “One of the greatest danger points is in mid-career, when you find yourself with a great deal of money in a 401K. At that time you're at the greatest risk, because that's when you're most likely to end up hiring a commissioned salesperson. Is that a problem in itself? No. There are plenty of situations when paying a commission is just fine. But in the investment world, there can be inherent conflict of interest with commissions. There are plenty of investment products that may not be the best choice for you, but you may be sold on them by the person you hire simply because the commissions are humongous. Variable and Index Annuities are referred to as 'sold', not 'bought', since people don't buy these on their own -- they are convinced to do so. Salespeople use code words such as Retirement Secured Account and other phony phrases to keep from tipping you off that you're being sold an annuity. Sometimes a Life, or Immediate Annuity makes sense, but the commissions are so low you won't hear much about them.”
“You also need to stay away from "fee-based planners." These salespeople start with a fixed fee, but the commissions on products they may sell you defray those initial costs, which again, may not be in your best interest.”
Financial scams are not limited to annuities and the sale of high-commission investments. In fact, there are so many of them that it would be impossible to list all even in a 1,000-page book.
Credit cards use bait and switch. They offer you initially low rates that zoom upward quite rapidly. Debit cards have hidden fees and, with interest charged from the moment of use, they are among the worst ways you can shop.
Mortgages come in so many flavors that it’s often hard to know if you have been switched from the one you wanted. In 2007, a Seattle mortgage company used a unique scam. According to the Seattle Post-Intelligencer:
“While Linden Loans LLC advertised residential home loans at "1 percent, with no points and no fees," the state Department of Financial Institutions said it found that "not one borrower actually received those terms in 2006." The department is looking into the company's 2007 practices.”
"The 1 percent rate touted by Linden lasts only a matter of months, and requires borrowers to accept predatory loan terms that would greatly increase costs to borrowers," Deb Bortner, the department's director of consumer services, said in a statement. "Consumers have to be careful. Low rate, low-cost mortgage loans may be available, but they often result in borrowers paying more than they should."
The Los Angeles Times offers this hoax from 2008: “Federal authorities in Brooklyn today indicted two former Credit Suisse brokers, alleging that they tricked large corporations into buying more than $1 billion of so-called auction-rate securities tied to mortgage debt in recent years. The companies had hired Credit Suisse to invest their short-term cash reserves in auction-rate debt backed by federally insured student loans, according to the indictment. But the brokers instead often placed clients in auction-rate issues backed by subprime home loans and other mortgage-related debt known as collateralized debt obligations -- because those issues paid them "significantly higher" commissions, the government says.”
BusinessNet has this example: “According to an Oct. 29, 2002 securities fraud action filed by the SEC in U.S. District Court in Oklahoma, Southmark has defrauded at least 400 investors, most of them elderly, since 1996 with a "bait and switch" gimmick using advertisements for high-yielding certificates of deposit. Customers seeking the safety of CDs would inquire, the suit says, then Southmark agents would aggressively pitch to them "a purportedly personalized managed mutual fund investment program." The agents described the program as "as safe or safer" than CDs. But principal invested in mutual funds may depreciate, unlike CDs which guarantee a set return.”
“Also investors were sold Class "B" mutual fund shares that carry deferred sales charges (loads) and higher internal expenses than Class "A" shares. One customer, a retired commercial airline pilot, invested his $2.1 million retirement savings with Southmark and quickly incurred more than $84,000 in commission charges and fees, according to court records.”
Just because the institution has a known name, and a good reputation, does not mean that individual salesmen will not attempt to defraud their customers. Enter every financial transaction with your eyes opened.
How would you react if a store keeper took your five-dollar bill and gave you a single in exchange? Some financial institutions use bait and switch to increase their profits, and, based on their reactions and refusal to admit there is anything wrong with their practices, they simply do not care.
Every time a company attempts to sell an annuity, they are pulling a scam. Annuities have the worst rate of return of any investment, and by telling you otherwise, in fact by assuring you that it’s the best investment you can make, the salesperson as well as the company is lying to you. By not offering an investment that has a higher rate of return, they are using a variation of bait and switch.
USA Today offers this advertisement as an example: "Come learn from the IRA Technician" at a seminar that more than 10,000 seniors have attended. Top sirloin steak will be served — along with tips on "how to guarantee your IRA will never run out, regardless of market fluctuations." The seminar then attempts to sell you an annuity. Since it takes forever for annuities to pay off, those over 50 should never invest in them.
When I was teaching, I was offered annuities almost every year. Many of my fellow teachers actually invested. Today, partly because I refused to invest in them, I have more money than they do.
An annuity is an investment that is tax deferred. You put in an amount, usually it’s taken out of your pay check and any interest you earn is not taxed until you cash it out, usually when you retire. Annuities are poorly regulated, and the companies are not required to disclose everything to you. They actually produce the lowest return of all legal investments. Many of them not only have large, occasionally hidden fees and commissions, but also take a percentage of your earnings out for maintenance or other silly excuses. Even Fidelity Investments, one of the most trustworthy names in the industry, was cited for annuity fraud.
It is highly recommended, based on more than 30 years of investigation by lawyers and consumer advocates, that you never put any money into an annuity and if you have money there you should consider withdrawal as soon as you can, even if it creates a penalty. A typical municipal bond fund, which is mostly tax-free and has consistently returned over 3%, occasionally up to 5%, produces as much as five times the return of an annuity.
The following information is from infofaq.com: “Variable annuities cost too much. Because annuities are primarily insurance products, their fees typically dwarf those charged by mutual funds. This is simple to understand when you realize there are two players involved instead of one.....the insurance company and the mutual fund company. According to Morningstar, the average variable annuity passes along expenses of 2.2 percent of the assets per year. This percentage probably won't mean much to you unless you realize how such a large fee can drain the momentum out of a portfolio. Let’s suppose, for example, that you invested $3,000 a year in a typical variable annuity that generates a yearly and unbelievably large 8 percent return before expenses. At the end of a 25-year period, your annuity would have grown to $168,000. If you had put that money into tax-efficient index mutual funds, charging between a low of 0.20 percent and a high of .50% in yearly expenses, the index fund would be worth $230,000. That's a difference of $69,000.”
Salesmen love to boast that you won't pay taxes on the money that's growing inside an annuity, because it’s "tax deferred". That's true, but it’s only half the story. You'll owe ordinary income taxes on every dollar of annuity withdrawals. This might not seem so bad until you appreciate what would happen if you had invested the same money in stocks or mutual funds in a plain old taxable account. These withdrawals would be taxed at long-term capital gains rates, which is only 15%. So lets say you're in a 35% ordinary income tax bracket and you've got a variable annuity. You'd pay $350 in taxes for every $1,000 you pull out. In contrast, if you'd kept this money in a taxable account, you'd pay no more than $150 for every $1,000 withdrawal. Extending this a bit, an investor cashing out a $100,000 annuity would pay $35,000 in taxes vs. $15,000 in a taxable account.
“So it is likely that investors buying variable annuities will actually end up paying more in taxes and having less after-tax wealth at retirement. In fact, the tax deferral feature of annuities actually harms investors who hold mostly equities in their accounts. If these investors are not told that they are being tax-disadvantaged by this tax deferral feature, then their brokers are making material misrepresentations and omissions.” 401-K accounts also have the same tax problem.
“Further, the tax disadvantage won't die when you do. It can hurt your heirs. That's because your beneficiaries will be saddled with paying capital-gains tax on any profit your annuity generated. If your original $50,000 annuity grew to $75,000, your heirs would owe tax on the $25,000 profit. In contrast, if you had placed your money in taxable mutual funds, because of the step-up in basis, your kids would get that $25,000 tax free.”
Earlier I mentioned that many of my fellow teachers have fallen for annuity plans. Teachers do not have access to 401-K plans for retirement. The only similar thing that is available to them is the 403-B. This is one of the worst investment and retirement options ever conceived. Howard Clark, a scam blogger and radio talk host, states “In the worst cases, teacher’s unions are handling the retirement plans and are taking kickbacks for putting teachers in a certain annuity. In New York, for example, the New York State United Teachers union gets a $3 million kickback to put teachers in these plans. If you’re a teacher, you need to know about this and take action. You can transfer your money tax free to two low-cost companies. The companies with the lowest costs are TIAA-Cref and Vanguard. Both are much better choices than any kind of annuity your union is pushing on you.”
So how do you know the best way to invest your money? You hire an investment counselor or you respond to one of the many ads for investment services. You might as well give your money to me right now. I’ll spend it on a few cups of coffee that we can share and you’ll have gotten a better return.
Cox Broadcasting recently had a show about investment counseling. Their conclusion was, “One of the greatest danger points is in mid-career, when you find yourself with a great deal of money in a 401K. At that time you're at the greatest risk, because that's when you're most likely to end up hiring a commissioned salesperson. Is that a problem in itself? No. There are plenty of situations when paying a commission is just fine. But in the investment world, there can be inherent conflict of interest with commissions. There are plenty of investment products that may not be the best choice for you, but you may be sold on them by the person you hire simply because the commissions are humongous. Variable and Index Annuities are referred to as 'sold', not 'bought', since people don't buy these on their own -- they are convinced to do so. Salespeople use code words such as Retirement Secured Account and other phony phrases to keep from tipping you off that you're being sold an annuity. Sometimes a Life, or Immediate Annuity makes sense, but the commissions are so low you won't hear much about them.”
“You also need to stay away from "fee-based planners." These salespeople start with a fixed fee, but the commissions on products they may sell you defray those initial costs, which again, may not be in your best interest.”
Financial scams are not limited to annuities and the sale of high-commission investments. In fact, there are so many of them that it would be impossible to list all even in a 1,000-page book.
Credit cards use bait and switch. They offer you initially low rates that zoom upward quite rapidly. Debit cards have hidden fees and, with interest charged from the moment of use, they are among the worst ways you can shop.
Mortgages come in so many flavors that it’s often hard to know if you have been switched from the one you wanted. In 2007, a Seattle mortgage company used a unique scam. According to the Seattle Post-Intelligencer:
“While Linden Loans LLC advertised residential home loans at "1 percent, with no points and no fees," the state Department of Financial Institutions said it found that "not one borrower actually received those terms in 2006." The department is looking into the company's 2007 practices.”
"The 1 percent rate touted by Linden lasts only a matter of months, and requires borrowers to accept predatory loan terms that would greatly increase costs to borrowers," Deb Bortner, the department's director of consumer services, said in a statement. "Consumers have to be careful. Low rate, low-cost mortgage loans may be available, but they often result in borrowers paying more than they should."
The Los Angeles Times offers this hoax from 2008: “Federal authorities in Brooklyn today indicted two former Credit Suisse brokers, alleging that they tricked large corporations into buying more than $1 billion of so-called auction-rate securities tied to mortgage debt in recent years. The companies had hired Credit Suisse to invest their short-term cash reserves in auction-rate debt backed by federally insured student loans, according to the indictment. But the brokers instead often placed clients in auction-rate issues backed by subprime home loans and other mortgage-related debt known as collateralized debt obligations -- because those issues paid them "significantly higher" commissions, the government says.”
BusinessNet has this example: “According to an Oct. 29, 2002 securities fraud action filed by the SEC in U.S. District Court in Oklahoma, Southmark has defrauded at least 400 investors, most of them elderly, since 1996 with a "bait and switch" gimmick using advertisements for high-yielding certificates of deposit. Customers seeking the safety of CDs would inquire, the suit says, then Southmark agents would aggressively pitch to them "a purportedly personalized managed mutual fund investment program." The agents described the program as "as safe or safer" than CDs. But principal invested in mutual funds may depreciate, unlike CDs which guarantee a set return.”
“Also investors were sold Class "B" mutual fund shares that carry deferred sales charges (loads) and higher internal expenses than Class "A" shares. One customer, a retired commercial airline pilot, invested his $2.1 million retirement savings with Southmark and quickly incurred more than $84,000 in commission charges and fees, according to court records.”
Just because the institution has a known name, and a good reputation, does not mean that individual salesmen will not attempt to defraud their customers. Enter every financial transaction with your eyes opened.
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