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Anatomy of the Billion Dollar Prime Bank Program Scam

Stock-Markets / Scams Oct 20, 2009 - 05:04 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleShah Gilani writes: Two years ago, an associate of mine lost $100,000 because he didn’t listen to me. A year ago, I saved a manufacturing company from the same scam. And just last week I saved a friend of mine $300,000.

For several years now, a far-fetched but seemingly plausible investment opportunity has been wreaking havoc across the globe. In the United States alone, an estimated $10 billion has been lost in this particular gambit. The scheme is typically hidden behind such legitimate-sounding names as “Prime Bank Trading Programs,” “High-Yield Investment Programs,” or “Roll Programs.”


These are not legitimate investment opportunities. The reality is, they are outright scams. And my role as a professional investor has provided me with an up-close-and-personal vantage point from which to observe some of these con games.

Everything I am relating in this story is true. This story – along with real names, contact information and associated documents – has been forwarded to the Federal Bureau of Investigation and the U.S. Securities and Exchange Commission in an effort to catch these brazen conmen and to save unsuspecting investors from further losses.

While there are variations of this scam, once you read this article you should be able to see the set-up and con game from a thousand miles away.

And that’s as close as you ever want to get to any of this.

Raymond’s story

When the real estate market collapsed, my friend “Raymond” had several million dollars invested in the development of a couple of tracts of land in Florida. With the bank threatening foreclosure, he turned to a mortgage broker he knew. The broker, in turn, put Raymond in contact with someone she had not met. But, as the broker subsequently told me, this contact – a man we’ll call “Moss” – had been approved by her company as a source of funds for borrowers that the mortgage company wasn’t able to accommodate.

Raymond called “Moss” to discuss his predicament. Moss identified himself as an Atlanta attorney and offered to put Raymond into an “investment opportunity” that would generate huge gains. But it was only available to a select few big-time investors, Moss said.

The “No Collateral” Come-On

The first oddity about this “investment opportunity” is that it doesn’t require any collateral. Even though Raymond had a multi-million dollar piece of land that was serving as collateral for the bank loan he needed to pay off, Moss wasn’t interested in the property. What made his deal so enticing to Raymond was that Moss was offering to make Raymond twice what he owed on the bank loan – without requiring him to put up any collateral.

A variation on the “no-collateral-required” theme was evident when I steered the manufacturing company away from this same scam. In that variation, conmen offer to raise money for a worthy cause, such as a humanitarian program, or for the construction of a facility that would provide employment for a certain number of people.

But the organizers of these scams never request that part, or all, of the project being “financed” be put up as collateral. They make it sound like all they need to know is what the money is being used for. If it “fits” into one of their “programs,” you don’t need to put up any collateral.

That’s your first red flag: They don’t want collateral, only cash.

“Secret Trading Platforms”

Secret trading platforms are where giant banks and the super rich make tons of money.

In explaining the “investment opportunity” to Raymond, Moss said that it’s really pretty simple. Apparently, there are “trading platforms” out in the market, where “traders” trade “debentures,” which are described as “bonds” or “MTNs” (medium-term notes) that are issued by the big “prime” banks around the world.

Other banks and rich investors trade these instruments. You haven’t heard about these “platforms” because they’re secret, and that’s why the rich get richer and banks make so much money.

There are different programs that get traded on these platforms. But your contact will tell you that he can get you into one of these programs, so that you’ll soon be earning the same returns as the super rich.

But wait. You haven’t yet heard the best part: It’s risk-free!

I was so excited for Raymond that I decided to call Moss and hear the pitch for myself.

A Personal Pitch

What the traders do, Moss explained to me, is match buyers and sellers. The traders are the only ones who can do this. They find a seller – maybe a bank or a rich person – who wants to sell their debentures, their MTNs, or some other high-yield investments. Or maybe the seller is executing a “roll program,” where an investor or institution rolls over an investment, and must then find a buyer to take the other side of the “trade.”

But since all the trader is doing is matching buyers and sellers, there is no risk. It’s really profitable because the “spread” – the difference between what the buyer pays and what the seller sells for – are far apart. The trader keeps the difference and would share that with Raymond. How profitable are these trading platforms, I asked?

Very, very profitable, came the reply.

Said Moss: “You’ve heard of the Rockefellers – haven’t you?”

If it Sounds Too Good To be True …

We’ve all heard the old investing adage: “If it sounds too good to be true, it probably is.”

Well Moss was essentially promising Raymond a 100% return on his money – every month.

And to get started down this golden pathway, all Raymond had to do was put $300,000 into an escrow account.

On its face, that seemed to promise safety. For the funds to be released, both Raymond and Moss had to sign. So Raymond didn’t have to worry, because if he never signed a release, Moss could never get the money.

In the meantime, the escrow account would be “blocked,” so that it would be guaranteed to stay there for a year. Moss would let his “traders” use the money in the escrow account as “show money.” The traders could claim that they were “attached” to the account, meaning they could then borrow up to 10 times that amount to trade prime debentures on their platforms.

With 10-1 leverage, the traders would find “one of the smaller programs” to trade (according to the pitch, there apparently are only two or three small programs … all the other programs are for the rich guys who trade in really big blocks). And since it’s all risk-free, Raymond was told that he could expect to make back his initial investment – about $300,000 – every month.

And he might even be able to make more if the traders could find more of these pesky “small” programs to trade, Moss told Raymond.

On a Scammer’s “Do Not Call” List

I asked Moss what would happen if there weren’t any of the small programs available for Raymond to trade.

His answer was priceless.

Moss said he would have suggested this earlier, but said he’d rather see Raymond make $300,000 a month and pay off his loan than to get involved with the alternative investment. The “alternative” was for Raymond to use his $300,000 to actually “buy” a “leased instrument.”

Under this scenario, Raymond would be buying into a leased instrument that would make him part owner of a giant pool of rich investor money. And because most of the trades are big block trades, he could then participate in the big trades and make enough money in one trade to pay off the bank and make a lot more, and it would probably take about a week.

I’d heard enough. It was now my turn to ask “Moss” some questions.

Needless to say, his answers were so unbelievable, impossible, or just plain ignorant that I found myself switching between wanting to laugh and wanting to explode in anger – and struggling to control both urges.

The bottom line: He apparently didn’t like the questions I asked, and he now won’t take any more calls from me or from Raymond.

Spotting a Scammer’s “Tell”

Here’s what you need to know to avoid becoming a victim of this gambit.

First, there’s no such thing as “buying” a “leased instrument.” In fact, if you just consider it for a moment, it doesn’t even make logical sense.

Second, there’s no such thing as putting money into an escrow account so someone else can leverage it to trade against. Here’s the hint: If the trader loses money, how are they supposed to get at the “blocked” money to settle up?

Third, there’s no such thing as “risk-free” trading – period.

There’s no such thing as special programs where you can get high returns on investments because you’re going to use the money you make to build a factory to employ people or to fulfill some other philanthropic void.

There’s no such thing as a secret trading platform where prime bank debentures or any other instrument is secretly traded by global banks or the super rich.

There’s no such thing as unlicensed traders trading in some “European” or cyberspace market where they are not registered. And to imply that they are governed by the International Monetary Fund (IMF), the World Bank, or some other international body such as the International Chamber of Commerce (ICC) is just plain stupid.

Don’t be stupid.

And don’t be greedy.

There’s no such thing as making 100% per a month, or a week.

They were going to get Raymond’s money by forging his signature on the escrow agreement, by talking him into writing a check for some non-existent leased instrument, or through any one of several other pathways they could lead him down – before parting him from his money.

Don’t just take my word for it. Do an Internet search on “bank debentures trading scam” (to see the results of that search, please click here). As you’ll see, there are literally pages upon pages of information on these ugly and expensive scams. A lot of sophisticated people have been drawn in and duped. These scammers are pretty sophisticated themselves.

Epilogue: It turns out that “Moss” was once a member of the Florida bar, but is not licensed to practice law in Georgia. I followed up on his e-mail contact information, which included an address at an Atlanta law firm. I contacted the firm and found that he actually had been hired there to do some research work, but then was fired for lack of performance. The partners of the firm were obviously not happy to hear that their good name was being employed as part of a scam. But they were obviously grateful that I alerted them to the problem.

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