Securities Fraud
Bogus Offerings

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Securities Fraud

By Jay Perlman (TMF Jay)
February 23, 2000

Bogus offerings do not require a lot of explaining, nor are they difficult to understand. In a nutshell, a bogus offering is an investment opportunity in which the product being touted does not exist. The offering is nothing more than a vehicle to steal money from investors. Think of a bogus offering as a stickup where the weapon is a promise of a high investment return rather than a gun or a knife.

Stocks, limited partnership interests, debt instruments, and participation certificates are just a few of the ways in which a bogus offering can be marketed. However, these are only examples, and not an exhaustive list; bogus offerings can present themselves in virtually any type of investment opportunity. So how do you recognize whether you're being solicited to invest in a bogus offering? Besides doing some due diligence to determine whether this is really the investment for you (a topic that we cover in more detail in article 8: "An Ounce of Prevention"), you need to be aware of some potential warning signs.

You should always be somewhat concerned when the investment opportunity promises unusually high returns, which the promoter claims are guaranteed. The old adage "if it sounds to good to be true, it probably is" carries a lot of weight. Also, if the investment is based on facts that can't be easily verified, or even investigated, think twice about investing. Consider how you have to pay and where you have to send money. In other words, if the promoter requests that you provide your bank account number and other personal information so he can facilitate the transaction, or the money is to be sent to a post office box (especially if it's offshore), consider choosing a different investment opportunity. These warning signs -- while not end-all, be-all solutions to avoiding a scam -- are nonetheless important because they serve to make you a wary investor, and a wary investor has a much better chance of not being scammed.

Some real-life examples may also help you understand the scam. In SEC v. Briden, seven investors ponied up a total of $295,000 to purchase "prime bank securities" and were guaranteed 640% in 40 weeks. When the returns were due, investors were told there had been a mix-up at the bank, or the Channel Islands bank that held the money was closed due to a bank holiday.

Never buy prime bank securities. Why? There is no such thing. They may also be pitched as "high-yield investment programs," "standby letters of credit," or "revolving credit guarantees." Regardless of how they're pitched, the common denominator is that investors are told they are debt obligations guaranteed by the world's 100 top banks, or "prime banks." Don't fall for it: These are simply schemes to part investors with their money.

Have you ever heard of the country of New Utopia? SEC v. Lazarus Long involved a situation where Prince Lazarus Long promoted a $350 million bond offering and a currency investment program that promised investors a 200% return. Prince Long told investors that New Utopia was a country that would be built on giant concrete platforms in the Caribbean, 115 miles from the Cayman Islands, and that funds were needed to finance the construction of these platforms. As an added benefit to investing in the New Utopia offering, investors would become charter citizens of the country. The offering was touted both online and offline, and yes, people did actually invest.

One of the most well-publicized bogus offering cases involved Interactive Products and Services and its president, Matthew Bowin. Between November 1996 and July 1997, Bowin raised approximately $190,000 from 150 investors, telling them that Interactive Products and Services was a high-tech start-up that had a patent for a wireless Internet technology. In reality, there was no patent, there was no product, and Interactive Products and Services was insolvent. Instead of using investors' funds for corporate purposes, Bowin used the money to purchase groceries, clothing, and stereo equipment. The end result: Bowin was sued by the SEC, charged with fraud by the Santa Cruz district attorney's office, and is now serving a 10-year prison sentence.

What have you learned? Well, you've learned some geography (New Utopia doesn't exist). More importantly, however, you've learned that bogus offerings, while seemingly ridiculous in some cases, do trap people.

Warning Signs

  • Promise of high returns
  • Terms such as "high-yield investment programs," "standby letters of credit," "revolving credit guarantees," which may be fraudulent prime bank securities
  • Promoters who ask for personal information
  • Promoters who want you to send money to a P.O. Box, especially an offshore one

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