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Regulators Warn About "Prime Bank" Investment Scams

January 17, 2002 -

With low interest rates and volatile equity markets causing Americans to rethink their investment strategies, securities regulators across the country are urging investors to avoid putting their money in so-called "prime bank investments", the supposedly secretive portfolios of "prime banks" that promoters claim can yield huge returns with no risk.

In reality, according to Connecticut Banking Commissioner John P. Burke, neither prime banks, nor the instruments they claim to trade, exist. It is estimated that last year investors worldwide lost more than $1.5 billion to bogus prime bank trading programs.

The mode of deception used by prime bank promoters is relatively simple, explained Burke. In a typical pitch, increasingly made over the Internet, investors are promised access to secret, high-yield investments made through trades among the world’s top or "prime" banks. Prime bank promoters falsely claim their investments are guaranteed or secured by some sort of collateral or insurance. So many prime bank scams succeed that the Commercial Crime Bureau of the International Chamber of Commerce calls them the "fraud of the century."

Many victims of prime bank scams fail to report their losses because they don’t want to appear foolish. Others simply can’t believe close friends, trusted business associates, or people they met at church ripped them off. Over the past three years, state regulators across the country have brought actions on behalf of more than 41,000 people who invested at least $470 million in prime bank scams.

Fortunately, the securities officials at the Connecticut Department of Banking witnessed very few incidents termed to be classic examples of a prime bank scam. In one such case, Richard S. Markey, of Simsbury, using the name Marquis International, carried out a scheme to defraud investors by inducing them to send money to him on the promise that their money would yield a return of at least 70 per cent interest. Investors were told to send the money to a private mailbox rented by Markey in Simsbury.

According to Burke, Markey’s scheme involved the use of telephone conference calls in which potential investors were enticed to invest in "international bank debentures." Such investment instruments do not exist. While investigating Markey’s activities his agency learned that federal authorities were also conducting an investigation. The banking department then worked with the federal authorities to quickly shut down Markey’s illegal activities to ensure quick and decisive law enforcement action. In 1999, Markey was arrested and subsequently convicted by the United States Attorney’s office on a charge of wire fraud. He was ultimately sentenced to over 10 years in prison and required to make restitution to investors he had victimized.

"People want to believe there are secret ways to make fabulous amounts of money," said Burke. "But there are no shortcuts in investing. Simply put, prime banks don’t exist."

Securities regulators in other states have targeted a number of scams involving prime banks. Besides promising high returns with no risk, some prime bank scams appeal to conspiracy buffs and those who distrust government or want to avoid paying taxes through offshore accounts.

In Texas, for instance, a con artist promised returns of 6 percent to 8 percent a month through a secretive web of money dealers supposedly set up by a coalition of governments in 1914 to pay for World War I debt. The promoter claimed that seven "world traders" control the entire global money supply. The "world traders" were said to act as a sort of board of directors for 150 "licensed traders." In the end, the scam, titled "Economic Solutions," took over 300 investors for roughly $6 million.

Utah regulators, in cooperation with the U.S. Attorney, shut down Castlerock/IFR Trust, a $110 million prime bank scam that was funneling money to the promoters’ bank accounts in Latvia. One promoter prosecuted by Utah securities regulators falsely claimed to have ornate offices protected by former CIA agents and a staff that included former federal judges and U.S. attorneys. The promoter told investors he would help them avoid the attention of the Internal Revenue Service, Secret Service and Federal Reserve System. According to the U.S. Attorney’s office in Sacramento, California, top IFR managers led lavish lifestyles, using investor funds to buy a large ranch and expensive luxury vehicles for themselves and their relatives and make business loans to unrelated entities.

Prime bank scam artists come from all backgrounds. For example, in Alabama, a real estate broker, a community college professor and a licensed stockbroker joined forces to scam more than $2,000,000. Investors, including some of the professor’s students, were promised 40 percent to 50 percent annual returns through "the systemic purchase and resale of prime bank instruments with major world banks." In reality, investor funds were used to make mortgage payments, buy furniture, purchase expensive cars and pay for vacations to Europe.

Other regulators are fighting prime bank scams, too. Over the last three years, regulators at the Securities and Exchange Commission have shut down roughly three dozen prime bank scams, with losses totaling hundreds of millions of dollars. Promoters often used investor funds to lead lavish lifestyles.

Burke said one reason prime bank scam artists are able to mislead people is because the instruments they claim to be using – standby letters of credit, bank debentures and bank-secured trading programs, to name a few – mimic legitimate financial instruments closely enough to deceive people outside the specialized world of international banking. The con artists use a lot of financial jargon and the investors don’t question them because they don’t want to appear naïve. But, there are no dumb questions when it comes to your money, emphasized Burke.

Investors too often let a desire for above-market returns cloud their judgement, he said. When promised returns fail to materialize, con artists often use promises of ever-higher returns – in some cases upwards of 1,000 percent annually – to persuade their victims to "reinvest."

"In prime bank schemes, investors should ask themselves ‘Why me?’" said Burke. "If this scheme really works, why is some stranger in a hotel meeting room or on the telephone or the Internet offering to cut me in on it? Prime bank trading programs don’t pass the smell test."

Before making any investment, Burke cautions investors to ask the following questions:

  • Are the seller and investment licensed and registered by the banking department’s Securities Division? To find out for sure, call the Securities Division at (860) 240-8230 or toll-free at (800) 831-7225. If they aren’t registered, chances are they may be operating illegally.
  • Has the seller given you written information that fully explains the investment? Before you put up the money, make sure you get proper written information, such as a prospectus or offering circular. The documentation should contain enough clear and accurate information to allow you or your financial adviser to evaluate and verify the particulars of the investment. Watch for jargon that sounds sophisticated but makes no sense.
  • Are claims made for the investment realistic? Some things really are too good to be true. Use common sense and get a professional, third-party opinion when presented with investment opportunities that seem to offer unusually high returns in comparison to other investment options. Pie-in-the-sky promises often signal investment fraud.
  • Does the investment meet your personal investment goals? Whether you are investing for long-term growth, investment income or other reasons, an investment should match your own investment goals.

While Burke and his regulatory counterparts recognize that unscrupulous promoters will always be out there to take advantage of a consumer’s trust, they’re also confident that with the public’s help they can possibly identify these prime bank scams sooner and prevent what has been called the "fraud of the 20th century" from becoming the "fraud of the 21st century."

See also Informed Investor: Prime Bank Scams