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Every year, the SEC receives thousands of complaints describing a scam called an “advance fee fraud.”  Advance fee fraud gets its name from the fact that an investor is asked to pay a fee up front – in advance of receiving any proceeds, money, stock, or warrants – in order for the deal to go through.  The bogus fee may be described as a deposit, underwriting fee, processing fee, administrative fee, commission, regulatory fee or tax, or even an incidental expense that fraudsters may guarantee to repay later.  Sometimes, advance fee frauds brazenly target investors who have already lost money in investment schemes.  Fraudsters also often direct investors to wire advance fees to escrow agents or lawyers to give investors comfort and to lend an air of legitimacy to their schemes.

The variety of advance fee fraud schemes is limited only by the imagination of the fraudsters who offer them.  They may involve the sale of products or services, the offering of investments, lottery winnings, found money, or many other opportunities.  Frequently, fraudsters will offer common financial instruments such as bank guarantees, old government or corporate bonds, medium or long term notes, stand-by letters of credit, blocked funds programs, “fresh cut” or “seasoned” paper, and proofs of funds.  Clever con artists will offer to find financing arrangements for their clients who pay a “finder’s fee” in advance.  They require their clients to sign contracts in which they agree to pay the fee when they are introduced to the financing source.  Victims often learn that they are ineligible for financing only after they have paid the “finder” according to the contract.

SEC Advance Fee Fraud Case

Brett A. Cooper, and his companies, conned investors out of more than $2 million through various frauds, including prime bank schemes guaranteeing astronomical returns to investors in purported prime bank transactions and overseas debt instruments.  The defendants were found to have lured investors into fictitious “Prime Bank” or “High-Yield” investment contracts with the promise of extraordinary returns on their investments in a matter of weeks, with little or no risk.  The purported investments included “standby letters of credit” and “bank guarantees” from major international banks, however none of the investors received any returns on the money they invested and none of it was used to acquire any bank instruments.

In addition, Cooper and one of his companies participated in an advance ”finder’s fee” scheme, in which an investor was charged a “fee” purportedly to get a bank or brokerage firm to accept a “Brazilian bond” for listing and eventual sale.  The fees were pocketed by Cooper and friends

They also posed as legitimate U.S. brokers or firms and offered to help investors recover their stock market losses by exchanging worthless stock, for an established blue chip stock or by purchasing the stock outright.  But investors had to first pay an upfront “security deposit” or post an “insurance” or “performance bond.”

Advance fee fraud schemes may try to fool investors with official-sounding websites and e-mail addresses.  These addresses may contain “.gov” and end in “.us” or “.org.”  U.S. government agency websites or e-mail addresses end in “.gov,” “.mil,” or “fed.us.”  Be wary of a website or correspondence claiming to be from a U.S. government agency if the website or e-mail address does not end in “.gov,” “.mil,” or “fed.us.”  Even if the sender’s email address appears to end in “.gov,” “.mil,” or “fed.us,” an impersonator may have sent the email message.  Other schemes may involve direct mail solicitations.

U.S. Department of Justice (DOJ) Mass Mailing Cases

The Department of Justice has recently focused its efforts on international mass mailing fraud schemes.  Victims received a steady stream of mailings in which they are promised lottery winnings, gifts, and/or unique items with important mystical characteristics, in return for a relatively small fee.  The mailers appear to be personalized to the victim, but, in reality, are received by hundreds of thousands of other individuals.  DOJ recently shut down an international “psychic” mail fraud scheme in which two purported psychics allegedly defrauded more than one million Americans out of more than $180 million by sending mass mailings claiming that the psychics had specific, personalized visions or psychic readings revealing the opportunity for the recipient to receive great wealth, including claims of winning lottery millions.  The mailings urged victims to purchase products and services in order to ensure that the foreseen good fortune would come to pass.  In reality, the solicitations were identical, mass produced form letters sent to tens of thousands of recipients monthly.

In another mass mailing advance fee fraud, DOJ filed an action against an individual and two Dutch companies that allegedly engaged in multiple mail fraud schemes targeting elderly and vulnerable U.S. victims.  The defendants allegedly sent direct mail solicitations that falsely claimed that the recipients had won, or would soon win, cash or valuable prizes or otherwise come into great fortune.  Recipients responded to the solicitations by completing a form and submitting a payment from $15 to $55 via mail.  DOJ estimates the scheme raised more than $18 million annually in the U.S.

Be Skeptical and Ask Questions

One of the best ways to avoid investment fraud is to ask questions.  Be skeptical if you are approached by somebody touting an investment opportunity.  Check our investor questionnaire:  “HOW TO INTERVIEW AN ADVISOR, WITH TIPS FROM REGULATORS”.  Some questions investors may consider asking include:

  • Does it sound too good to be true?  If it sounds too good to be true, it (probably) is.
  • Is the investment offering registered with the SEC and my state securities agency?  Where can I get more information about this investment?  Can I get the latest reports filed by the company with the SEC: a prospectus or offering circular, or the latest annual report and financial statements?
  • Research the background of the individuals and firms offering and selling you these investments, including their registration/license status and disciplinary history.
  • Do I understand what I am agreeing to?  Make sure you fully understand any investment or business agreement that you enter into, or have the terms reviewed by a competent attorney.
  • Can I locate the business or person with whom I am dealing?  Be wary of businesses that operate out of post office boxes or mail drops and do not have a street address.  Also, be suspicious when dealing with persons who do not have a direct telephone line and who are never in when you call, but always return your call later.

 From FINRA:

Beware of Fake Check Scams.

FINRA has received a number of calls from individuals who have received unexpected checks that purport to be issued by FINRA.  The checks are counterfeit, and may arrive by special delivery and require a recipient’s signature.  The arrival of these checks may be linked to job search scams, though callers note that there is no direct reference to a job search relationship accompanying the mailing—just a check.  Learn more about “mystery shopper,” “modeling” and other job-search scams in which individuals receive checks that appear to be from legitimate companies—including FINRA.

It Can Be Hard to Recover from “Recovery” Scams

It’s an alluring offer.  You hear from someone who claims to be able to help you recover money you lost from a previous investment.  The information sounds credible and the organization sounds legitimate.  FINRA is warning investors—particularly who live outside the U.S.—that offers to recover money lost from securities investments may be fraudulent.