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INVESTMENT OUTLOOK: HOW TO GET AHEAD : ASSESSING 1988 : YEAR OF THE FLIMFLAM : Discount Gold Mines, Telemarketing and Credit 'Repair' Frauds Top List of Investment Scams

December 04, 1988|JAMES BATES | Times Staff Writer

The guy rides in a leased limousine, spends most of his time talking on a car telephone and wears more gold than Sammy Davis Jr. And he's going to make you rich.

You can double your money investing in his jojoba futures, he tells you. What's more, the investment is safe because it's backed by something in the Netherlands Antilles he calls a bank that the rest of us would call a post office box.

It seems more likely that you'll cross paths with Elvis in the next week than make money with this guy, but you chance it anyway. And before you can say Charles Ponzi, he's skipped town with your cash.

How do you fend off the investment shark? It's not easy these days. The scam artist is on the prowl, more so than ever this year, according to federal, state and local investigators.

1988 was a bull market year for investment scams. Securities regulators estimate investors were bilked of at least $40 billion.

Why? The stock market crash of 1987 frightened the small investor. Wall Street scandals convinced him that the game is rigged. So he looked elsewhere for places to put his money, and the crooks were waiting.

"The disposable income people might have spent on the stock market was available to the con artist to be put into the phony deal. The con artists aren't stupid. They knew that," said G. William McDonald, chief of enforcement for the California Department of Corporations.

Of the hundreds of scams and alleged scams that surfaced in 1988, here is a subjective list of the top five categories:

Gold Fraud

Pannos Mining in Costa Mesa claimed it had a mother lode of gold and silver in a mine near Wickenburg, Ariz. So rich was the mine, the company allegedly told prospective investors, that proven reserves were worth $826 million.

For a $5,000 investment, Pannos allegedly promised gold or silver bars from the mine that would be delivered at roughly half the current market price. A low-risk investment, investors say they were told.

The Federal Trade Commission disagreed. So it sued Pannos in October, charging the company and its officers with operating a bogus investment scheme that bilked investors out of at least $2.4 million. The FTC says six soil samples taken from the mine contained little more than dirt. The case is still pending, but the agency got a court order in November freezing the company's assets.

No scheme was more popular in 1988 than gold-related scams. The North American Securities Administrators Assn. dubbed it the "Fool's Gold Rush of 1988."

In a typical pitch, telephone solicitors offer to sell 100 tons of dirt--purportedly extracted from a mine--for $5,000, guaranteeing that it will have 20 ounces of gold in it. If true, that would work out to $250 an ounce, a little more than half the market price this year. The only problem is that the pile of dirt investors buy is almost always nothing more than just that. Whatever gold does exist can usually be seen only with a microscope.

Since early 1987, the number of gold investments under investigation by state and federal authorities soared from eight to more than 50. Overall, the securities administrators' group estimated that investors in gold scams were swindled for more than $250 million this year.

Telemarketing Scams

The salesmen promised genuine Salvador Dali prints at bargain prices--$900 to $3,500--to prospective customers over the phone, authorities said. Low-risk investments that easily could be sold for at least the amount of money they were bought for, and probably more.

But FTC officials discovered the prints were fake, worth no more than the $25 to $50 posters often found in museum gift shops. So it sued the now-defunct gallery that offered them, Federal Sterling Galleries in Scottsdale, Ariz. In September, the FTC won a court judgment against the gallery, and the agency is trying to recover some $4.6 million that investors spent on the bogus Dali art.

Fake art prints are only one of a number of bogus investments sold to people over the phone each year through "telemarketing," the con artist's favorite way of reaching victims these days.

Telemarketing is the 1980s way to describe telephone sales. There's nothing illegal about telemarketing, which accounts for $20 billion a year in business nationwide.

But as much as 5% of it may be bogus. Authorities estimate that investors could lose as much as $1 billion a year in investments sold to them through telemarketing scams, many based in Orange County.

In a telemarketing scam, investors are solicited by high-pressure salespeople who work in "boiler rooms" crammed with banks of telephones. Typically, salespeople call prospective customers from out of state because they want to stay out of reach of local authorities.

Pink Sheets and Penny Stocks

The brokers called themselves the "Hole-in-the-Wall Gang" after Butch Cassidy's outlaws. For investors, they may have been more like the hole-in-the-wallet gang.

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