Skip to content
Quick Start for:

Agency helps Texans avoid investment scams
Caution: Easy Money

The promise of easy money can be tough to ignore. Unfortunately, it often comes in the form of investment scams and fraud.

Modern scams hit Texans via telephone, standard mail, the Internet and sometimes right at the front door, according to John Morgan, enforcement director for the Texas State Securities Board (SSB).

"It is an enormous problem in this state," he said. "People need to be very cautious when approached to invest in anything."

More con-artists are getting caught, however. Annual securities fraud convictions are increasing in Texas--there were 141 in fiscal 2005, up from 100 in fiscal 2004 and 62 in 2003.

Modern scams are called "securities," Morgan said, though the definition is tough to pin down.

"It's a very broad definition," he said. "But the essential thing to remember is it's basically any type of investment and there is no minimum dollar amount."

Chart topper
Ponzi schemes, named after 1920s swindler Charles Ponzi, top the list of securities frauds in Texas, according to the SSB. Similar to "pyramid schemes," they involve investors who give money to the chief investor and then recruit others, according to Russel Turbeville, chief prosecutor in the Fraud Division of the Harris County District Attorney's office.

The real difference between a Ponzi and a pyramid is that in a Ponzi scheme there's no product for the investors.

"Ponzi is a scheme where investors put money into a lucrative opportunity with the promise of big returns," Turbeville said. "The early investors are usually paid well with profits, and they in turn give testimonials to get new investors. The actual investment is usually a token one if it exists at all."

The investors are usually paid with funds from later investors, creating the illusion that the phony investment is paying off and convincing early investors to recruit new members. Ultimately, the scheme's originator either gets caught or simply disappears with money in hand, Turbeville said.

One Texas case, Turbeville said, involved Lanny Lown, who was sentenced to life in prison in 2004 after scamming more than $13 million from investors. Lown's scam involved titanium milled in New Guinea and sold to the U.S. for use in submarines.

"The U.S. does not use titanium in submarines, and there's no titanium in New Guinea," Turbeville said.

Investor education
There are ways Texas investors can protect themselves, and the SSB is making sure fraud information is available, said JoAnn Kocurek, investor education coordinator for SSB.

"We've always had enforcement cases we had to deal with," she said. "It's just that people don't know who it is that they need to call over a broker or a product. That's why we think our Investor Education Program [IEP] is so important. We need to let people know who we are and what they need to check out to keep themselves safe."

The SSB held 39 investor seminars in fiscal 2005, three times the number held in 2004.

Kocurek said with six offices across the state--in Austin, Lubbock, Houston, San Antonio, Dallas and Corpus Christi--the agency should be able to increase its presence.

"As of [October,] I've already got 25 lined up for this year, and we're hoping to triple what we did in 2005," she said.

Good and bad
Not all investment opportunities are bad ones, Kocurek said. The sheer number of investment opportunities makes it hard to spot phonies.

More than 181,000 businesses or individuals are licensed to sell more than 39,000 securities in Texas. Those securities are worth more than $249 billion, according to SSB.

"We consider ourselves a resource for Texas citizens," Kocurek said. "If they call, we can tell them if that person is correctly licensed, how long they have been and if there's any kind of disciplinary history behind them."

Education efforts will head to Texas high schools, thanks to Senate Bill (S.B.) 851, passed by the 2005 Texas Legislature. S.B. 851 authorizes the Texas Education Agency (TEA) to work with the SSB and the Office of the Consumer Credit Commissioner to establish a high school curriculum to teach economics and fraud awareness to high school students.

The bill, which did not appropriate funding, authorizes a pilot program in 25 schools. TEA hopes to pick the schools by January 2006, according to George Rislov, managing director for the Division of Curriculum.

"Most of the curriculum is already developed," Rislov said. "We'd like to identify our schools and have them notified by January 2006 and they could get that started in the second semester."

Private funding is needed to train teachers in the selected schools, Rislov said. Schools could get the curriculum immediately, however, and would not have to wait for the 2006-07 school year.

Avoiding landmines
Ponzi schemes certainly are not the only fraud hazard around, Kocurek said. Oil and gas scams--where con artists tout "new technologies" that convert common substances into fuel--and Internet scams are just a couple of ways crooks try and take advantage of Texans. And a crook's ability to reach potential victims is getting easier, Turbeville said.

"Technology has made it possible for crooks to reach out and touch someone, many times anonymously," he said. "In this digital age, everybody has a new technology that is going to make a lot of money. Everyone has a way to 'build a better mouse trap.'"

Scams are not limited to the wealthy, Turbeville said, adding that there's a scam for every age and socioeconomic group.

A recent example in Harris County involved a word-of-mouth scam in a minority community. Residents were told that for a $100 fee, they could get a grant proposal that would help them secure grant money for education, special needs and home improvement, Turbeville said.

"Thousands of people paid that $100, and there are no grant proposals that we can find," he said.

Another involved a radio ad campaign on a Hispanic radio station. Investors would help send rice to Africa in exchange for diamonds, which would be sold in the West. Investors were promised a share of the profits.

"They had about 200 people put about $2 million into that one," Turbeville said. "It was nothing more than a Ponzi scheme. [In the end,] they stole more than $1 million from about 100 [people]."

The mastermind of that scheme was sentenced to 55 years in prison, Turbeville said.

Both Morgan and Kocurek said investors should ask questions first.

"The first thing people should check is to see if the offering company is registered with the [SSB]," he said. "They have to be registered as a salesman and what they-re selling has to be registered with the agency."

Kocurek said she hears too many hard-luck stories.

"I have people tell me, 'Oh, I wish I'd have known about you five years ago or 10 years ago,'" she said.

Clint Shields