TypewriterFrom The Urbach Letter – January 2003

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Investment Scams – We Won't Get Fooled Again  
It's an odd time to be writing about investing. Many people I know don't even open their monthly brokerage statements anymore. It's too painful. Personally, I'm "hunkered down in a bomb shelter with an AK-47…" focused more on protecting what's mine than on making a fortune. But one day, the "all clear" siren will blow, and we'll surface… ready to do battle in the investment arena once again. When the future seems bright, 2% on a 12-month CD seems pretty dim. And just 3½% on a 5-year? Black as night. We used to see at least that much every month. No, we'll be back, actively investing and looking for the double-digit returns again soon enough. And the scam artists will be waiting for us. Swindlers love investment scams. All the right elements are there: big money, greed, and misinformation – everything needed to separate "investors" from their hard-earned dollars. And make no mistake: those dollars are hard-earned. No more play money. We've sweated and suffered for every dime. Here's what you need to know to keep your money safe:

The Internet: Investor's Friend? Or Foe? If you know how to do Internet research, it can be an awesome tool for investigating investment opportunities. But tech-savvy swindlers also fancy the Internet. It's their very best tool for pulling the wool over our eyes. Be very suspicious about any opportunity you first learn about online. It's all too easy for scammers to build an impressive (sham) web site, post compelling (yet phony) messages on online message boards, and blast out "investment alert" emails by the millions. Technology has made it easy for criminals to make their communications appear very real and credible. However, it is virtually impossible for investors to tell the difference between fact and fiction – based solely upon what we see on our computer screens.

Investment Newsletters. In the heyday (late 90's), over a thousand stock-picking newsletters circulated on the Internet. Many still exist, and others will surely bloom again once the markets recover. These letters appear to offer investors unbiased information about featured companies. Some charge for this information but the majority are free. Many are legitimate but some are not. Sometimes, the writers of these advisory letters will be compensated (with cash and/or securities) to "tout" the stocks of particular companies – by those in a position to profit from an increase in share price, or "bash" the stock, if a decrease is desired by the manipulators. Surprisingly, this practice is NOT always illegal, provided there is full disclosure by the writers: who paid them, how much, type of payment, etc. The unscrupulous publishers don't disclose, or they misrepresent. They hold themselves out as independent providers of unbiased information, claim they do in-depth research on the companies listed, and fabricate bogus track records of success. The bottom line is they stand to profit handsomely if their "advice" convinces investors to buy or sell particular targeted stocks. Be very wary of supposed investment "gurus."

Online Forums: Beware the "Pump and Dump." Yahoo! Message Boards, Lycos Raging Bull, Silicon Investor, and seventy more (see full listing at www.boardcentral.com) are home to thousands of active company-specific discussion boards. Sometimes known as "bulletin boards," these forums contain ongoing message "threads" contributed by individual, often anonymous writers. While some messages contain well-thought out analyses of investment opportunities, forums are not the place to make specific investment decisions. People will often pump up a company or pretend to have inside information about favorable announcements, new products, and big contracts. If they are successful in pumping up the stock price, they'll dump their holdings at a profit at the first opportunity (the classic pump & dump). You simply cannot tell who is telling the truth, and never know for certain who the writer is. Most boards permit users to hide their true identity behind online aliases. It's easy for a single individual to create multiple aliases and create the illusion of widespread interest in a thinly-traded stock.

"Investor Alert" E-mails: A.K.A. Spam. Have you ever heard of "Cal-Bay International, Inc." or its stock symbol CBYI? Well, I sure have. In the past year some %*@$*# (expletives deleted) promoter has sent me well over a thousand spam messages touting this company. By some accounts, this has been the largest stock-related spam campaign ever, with hundreds of millions of messages sent. Here's the full story if you're interested: Cal-Bay Spam. I hope I don't need to say this, but I will anyway:

Never – under any circumstances – invest based on
information you receive via unsolicited spam email!

Instead, forward it to this special email address at the Securities & Exchange Commission dedicated to stock promotion spam: enforcement@sec.gov.

So... You really want to invest in that company?

When it comes to manipulating information, stock scammers have the upper hand. Now that we've learned (the hard way) that even large public companies and their brand name accounting firms are capable of heinous financial misrepresentation, you must do your own due diligence on *every* substantial investment you make. Here are the new rules:

Rule #1: Never make an investment – large or small – based solely on what you read in a newsletter, a forum posting, or a web site.

Rule #2: If the investment involves a small, thinly-traded company, put your "B.S. detector" on maximum. Assume everything you hear and read is half-true at best.

Rule #3: Worst case scenarios happen. We used to go lightly over the "Risk Factors" section of the offering. Can't do that anymore. If you can't live with the WCS, don't invest.

Rule #4: Ask tough questions. It's a buyer's market right now. People trying to raise funds are having an incredibly tough time. Unfortunately, that desperation can lead some to bend the truth. Your best defense is to ask tough, direct questions – and verify every answer you get. Here's a good list, prepared by the SEC, to get you started: Questions You Should Ask About Your Investments… and What To Do If You Run Into Problems.

Rule #5: Be prepared to dig deep. Get financial statements and analyze them yourself. Personally verify any claims regarding new contracts or product releases. Contact major customers and ask if they really buy from the company. Call key vendors and ask about their relationship to the firm. Finally, and most importantly, do an in depth background check on the major players at the company. Make absolutely certain they are who they claim to be… and that they've "been there and done that" (which means: they've made real money for other investors before – and are ready to do it again for you).

Rule #6: Check EDGAR. Most public companies are registered with the SEC and file quarterly/annual financial statements. These reports are archived in the EDGAR database and are available for review at no charge to you. You should also check with your state securities commission for additional company information, and the NASD to check for any disciplinary actions filed against the broker or promoter.

Off-shore Fraud. If the investment involves off-shore entities, you must be extra vigilant against a possible scam. If you get ripped-off, you'll have little recourse. The SEC and U.S. law enforcement agencies will generally not investigate and prosecute foreign frauds. The bad guys know this and act more boldly than they would in a domestic swindle.

Promissory Note Scams. Promissory notes are typically issued to raise money in the form of corporate debt. Promissory note scams have recently targeted affluent older people, who traditionally viewed them as safe, lucrative investments. Like a bond (but less regulated and structured), the note is an agreement stating the company will pay back the amount invested, plus interest, over a period of time. However, promissory notes are institutional investments, and are not typically sold to individual investors. Those that are promoted to individuals often turn out to be scams. The "investor" receives a very official-looking promissory note certificate, complete with gold embossed seals, etc. Even if the note is real, there's often no collateral behind it, and victims usually end up losing all of their investment. Be aware these notes are sometimes sold by life insurance agents, who are enticed by high commissions and the mistaken belief they don't need to be licensed to sell them.

If there's a common thread to all investment cons and scams it's this: the promise of large financial rewards at low risk. However, one of the iron laws of investing is the relationship between risk and reward. The higher the potential return on investment, the higher the risk of default or loss. The marketplace is very good at establishing norms for legitimate transactions. However, con artists will try to convince you that, "This one is different," and dangle a "risk-free, high-yield" opportunity. Uh, huh. Right. If it sounds too good to be true…

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