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Briefing Paper for Minister of Commerce Hon Lianne Dalziel

3 November 2005

Annex 3 - Media release on share scams

Media Release
10 January 2005

DON'T BE A GULLIBLE KIWI - a share scam & how it works

A telephone call out of the blue and you're getting the low down on an American company poised to make a breakthrough with new technology or a medical discovery.

You're told that the company's shares are listed on the Nasdaq stock exchange but the company is little known and the shares are very cheap. If you buy now, just before the exciting breakthrough is announced, you will make a huge return.

The caller is convincing, pleasant, and persuasive. "Calls like this have resulted in New Zealanders losing millions of dollars overseas in the last few years," says Securities Commission Director of Enforcement, Norman Miller.

Overseas broker calls are an evolving scam. "These fraudsters regularly change their tactics, their names, and the countries they operate from - to avoid detection and to keep the money rolling in," Norman Miller says.

The first calls to New Zealanders were in the late 1990s. When a person sent money to the "broker" they either did not receive share certificates or, if they did, the shares turned out to be worthless. Often the broking firm did not buy shares at all, instead the money was quickly moved to other countries, to the people behind the scam.

Sometimes the fraudsters set up worthless companies in which they also held shares. Then by selling a very large number of shares to unsuspecting New Zealanders and Australians over the phone, the share price went up. The "brokers" then cashed in their own shares at the higher price, and laughed all the way to the bank.

The share price, of course, then crashed leaving Kiwi investors with worthless shares. This is an old scam known, elegantly, as "pump and dump".

The first calls to New Zealanders were mostly from Thailand, the Philippines, and Indonesia. The callers spoke English well, often had English names, and were extremely convincing. They could be very difficult to shake off.

They telephoned from "boiler rooms" where many callers operated for long hours. They often targeted people with small businesses, no doubt aware of the Kiwi liking for a bit of a punt and the idea of doing it yourself.

The pleasant approach could change dramatically if a person who bought shares wanted to sell their shares or pull out of the deal. The Securities Commission even received some reports of the "broker" firms threatening people with legal action.

Usually, however, when the person who bought the shares became disillusioned and tried to get documents or their money back, the "brokers" became impossible to contact.

If the victim did get them on the phone they were told that there was now no market for the shares, or that the broking firm had been taken over by another firm, or that it was relocating. Whatever the excuse, the person had no chance of getting their money back.

What did the Commission do?
"Where victims could tell us the names and contact details for the "brokers" we wrote to them about their non compliance with New Zealand law," Norman Miller says. "We also contacted our counterparts in the other country asking if the firm was registered to conduct securities business."

Invariably there was no reply from the "broker", and a "not known" reply from the securities regulator in that country.

In what turned out to be a world first the Commission published the names of these "brokers" on its website (www.seccom.govt.nz) warning people not to do business with them. Soon Australia, Hong Kong, and regulators from other countries were publishing similar lists. The lists have hundreds of names.

The Commission also issued many other warnings to the public about cold callers.

Asian regulators clamp down
Liaison between the securities regulators lead to actions in several countries against the boiler rooms. In 2001-2002 in particular the authorities in Thailand and the Philippines clamped down on these operators.

Publicity about this in New Zealand resulted in hundreds of calls to the Securities Commission revealing that people had sent many millions of dollars to these scams.

For a while it seemed that overseas broker activities were waning.

The first evolution - bogus legal firms
However, before long there was a new twist. People who had bought worthless shares were contacted by phone again, this time by a bogus "lawyer" who offered to take action to help them recover their money.

These phone calls were backed with faxed documents or referrals to websites which looked impressive and genuine.

Of course, more money had to be sent first. This was a continuation of the original scam. However, many people, anxious to recover their money were duped a second time.

The follow up scam
When some time has passed since people lost their first "investment" to an overseas "broker", the fraudsters decide to try the victim again.

This time it is a call from an apparently different broker who knows about the shares you hold. He has a client who wants to buy your worthless shares, possibly as a tax write off, and will trade them for much more valuable shares. Once again, of course, money must be sent first as a "clearance fee" or "transfer fee".

These calls are mostly from the United States and the Securities Commission currently receives several reports of them from the public each week.

The caller refers the victim to a "government agency" which they claim has approved or licensed them as brokers. The victim is given a telephone number to ring or a website to visit as verification of this. Chances are, of course, that the call to verify the broker is to the person at the next telephone in the same room.

The websites they refer people to look genuine, sometimes with web pages copied from the real regulators' websites. Investigations often show that the websites have only been operating for a few weeks or months.

The authorities believe that there are probably only a few people operating these scams. They move often, change their names, and set up new websites and call operations.

They continue to get rich at the expense of people who send money overseas on the basis of phone calls.

Yet another variation
Recently a new version of the share scam has emerged using private answering machines.

The target person finds an answerphone message, apparently a wrong number call, which gives hot share tips in little known United States companies. The messages are compelling.

This scam is reported as sweeping the United States where the fraudsters employ people to leave the answerphone messages. Many victims, tempted by this "inside" information, buy the shares, the price goes up, the fraudster cashes in, and the share price collapses. The pump and dump scam all over again.

Again the fraudsters have adapted the scam to new technology and conditions and continue to cash in.

How to avoid being conned by phone

Don't ever send money to someone known to you only by telephone.
Hang up on overseas callers offering you great share deals - why would they, except to get your money?
If you want to buy shares in overseas companies contact a New Zealand broker who is accountable under New Zealand law.
Remember that when money is sent out of the country it is very difficult to trace, and virtually impossible to recover.

Don't be a gullible Kiwi in 2005.

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