Investors beware fraudulent opportunities

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Inter Reef Ltd. seemed to offer the deal of a lifetime.

The Internet-based investment company promised investors would “Get richer with every sunrise,” with a daily return on the investment of 1.5 to 2.5 percent.

It promised it used Biblical values to invest money, with short-term “hard money loans” to businesses throughout the United States and Europe. They promised clients there was no risk. But it’s an invitation-only offer and could close any minute. Delay could cost investors millions.

On Facebook, the company promised that a $2,000 investment could become $64,000 in a matter of weeks. And, there’s no “upper limit” on the money that can be made at the company.

Sound too good to be true? It is.

Inter Reef and Profitable Sunrise have been targeted by state securities commissioners, the federal Securities and Exchange Commission and counterparts in several countries around the world. In Colorado, Securities Commissioner Fred Joseph issued an order that banned the company’s investment scheme in the state.

“Profitable Sunrise is running a massive international scheme, based in England, which takes advantage of religious affinity to lure investors into sending them money,” Joseph said in a press release announcing the cease-and-desist order.

Scams like Inter Reef’s aren’t new or unusual to the Colorado Division of Securities, whose staff routinely investigate between 150 and 200 fraud cases at any given time. Being aware of scams, said Joseph, will narrow the chances that neophyte investors — those with lots of cash but little experience — will become embroiled in a fraudulent scheme.

Inter Reef — operating as Profitable Sunrise — had all the earmarks of classic investment fraud, he said. The returns were too good to be true given today’s very low interest rates, and the group encouraged immediate, emotional decisions and used religious affinity to lure unsuspecting investors.

As securities commissioner, it’s Joseph’s job to protect investors from fraudulent schemes designed to part them from their hard-earned cash. It’s a job that never ends, he says.

“We have a pretty steady number of cases we investigate,” he said. “It doesn’t matter if the economy’s down or up; it seems people always have a propensity to do bad things.”

Buyer, beware

Investors need to look for certain things before they decide to buy into a proposition, says Paul Miller, professor of accounting at the University of Colorado Colorado Springs.

“The most important is, don’t invest if you don’t understand how it makes money,” he said. “Even Warren Buffet says he won’t invest money if he doesn’t understand how the investment works.”

The second — always perform due diligence. Investors should spend some time and money — and possibly hire an attorney — to read pages of fine print.

“You should know who you are investing with — what the company is, what its reputation is,” he says. “And don’t go on the recommendation of a friend who might be as clueless as you are. Do some real due diligence.”

Allan Roth, owner of Wealth Logic in Colorado Springs, and author of a best-selling investment book, echoes Miller’s advice.

“I always say if an 8-year-old can’t understand it, then don’t invest,” he said. “It should be simple.”

Also, be wary of offers that have a short shelf-life.

“If they say, this offer is going quickly, and won’t be around tomorrow, write that $5,000 check today, then that’s a red flag,” he said.

Anything that offers high interest rates in today’s market should raise eyebrows, said Joseph.

“High returns usually equal very high risk,” he said. “These companies are making promises they can’t keep. If they say there’s no risk, or very low risk, that’s a red flag. No one can say there’s no risk.”

But people frequently invest anyway, he said. He’s gotten angry letters for stopping investments into what seems to be a “sure thing,” to many Colorado residents.

“People don’t like to think they’ve been taken,” he said. “They really want to believe. And they get angry when they think you’ve stopped them from making money.”

Sometimes the scams take on creative names and even more creative financial manipulations. He remembers a scheme called “Cleopatra’s Secret.” Investors paid money — as much as they wanted — and received a powder in the mail. They mixed it with milk and put it in jars in the closet for weeks. At the end of the time period, they were to send the concoction back to the company, which was supposed to market it as a cosmetic cream. When it was shut down, people complained bitterly.

“It was a Ponzi scheme,” he said. “There was no real product, no FDA (Food and Drug Administration) approval,” he said. “It netted a lot of people. And those people really wanted to believe in it.”

Common schemes

While schemes about Cleopatra’s beauty secrets are rare, fraud involving oil and gas companies, real estate investment and early investing into startup companies are not. While Joseph’s office has seen it all, he says those are the most common types of fraud.

Frequently, just letting people know they haven’t registered the security properly is enough — when it isn’t, Joseph can issue a cease-and-desist order, just as he did with Inter Reef. But sometimes, criminal law comes into play.

“I don’t have prosecutorial powers,” he said. “In those cases, I have to involve the local district attorney or the state’s attorney general. They take the case to court — we build the case, but they prosecute it.”

Roth says that not all schemes that defraud clients are illegal. He points to one of his clients, a National Basketball Association player, who has $2 million still tied up in a hedge fund. After the 2008 market crash, the client was unable to pull his money from his hedge fund, which is no longer operational. But the bank still charges him 8 percent annually for the fund.

“They bury this information on page 232 of a 500-page document,” Roth said. “And expect people to read and understand it. This guy has been trying to get his money out of the fund, but just can’t. And it’s legal for them to keep his money. These types of deals are 1,000 times more common than anything Bernie Madoff tried to pull.”

Roth says nationally, there are about $2 trillion trapped in hedge funds — and most people have no way of liquidating their investment.

“In my opinion, if the investment bank misleads you, it’s fraud,” he said. “Regulators shouldn’t allow it. My client’s case is one of the most egregious I’ve ever seen. The hedge fund manager made promises and behaved in a way that shouldn’t be allowed. We stand a good chance of getting his money out.”

Miller says that example is just one reason investors should read the documents thoroughly, and hire an attorney to investigate the fund and the promises.

“People need to read the documents, understand what the fund says,” he said. “Nothing stays up forever, the market has ups and downs. If it goes down, and it’s bad for the investor, the person should know that before they put their money in.”

Investment fraud red flags

  • Opportunity presented as a high reward with little risk.
  • Overall package seems too good to be true.
  • Affinity is used to win trust, through religious affiliation or university alums, etc.
  • Short shelf life, opportunity is moving quickly and won’t be available tomorrow.