Fraud cases highlight need to remain vigilant
March is Fraud Prevention Month. Why should you care? You may find it hard to imagine it could ever happen to you, yet each year thousands of Canadians of all ages and from all walks of life are defrauded. There is no “typical” fraud victim – everyone is susceptible.
Fraudsters will go to great lengths to get between you and your hard-earned money. After all, that’s their job! And investing by its very nature involves risk, so you can’t 100% protect yourself from being scammed. At the same time, knowing what to look for can help you to avoid the fate of other investors who lost money, sometimes their life savings, as a result of encountering a scam artist. Lessons on spotting the warning signs can be learned from our enforcement files and these recent cases of investment fraud in action.
Fraud awareness is fraud prevention.
The empty promises of the Ponzi scheme
From January 2006 to December 2012, Kevin Zietsoff took in over $15 million from more than 80 victims in Canada and the U.S
He persuaded people to invest with him through various falsehoods, including that he was a successful trader with a proven system and that the securities he was selling, which he offered with interest rates as generous as 72%, were “low risk or risk free.” He convinced some investors to borrow against their homes or withdraw from their RRSPs, and perpetuated his lies by encouraging them to roll over their investments into new ones that reflected the apparent increase in value from any unpaid interest.
In the early years, Zietsoff obtained funds from family and friends. As time went on, he either sought out or was approached by other investors, often through his relatives and their personal connections. Some investors, inspired by hearing word of Zietsoff’s knack for trading, were anxious to be accepted by him.
In reality, Zietsoff was never a successful investor and had a record of consistent and near total trading losses. He sold investments without a prospectus, was not registered and lost over $10 million of investors’ money on bad trades. He did pay out $5 million as interest or repayment of principal. This behaviour is what’s known as a Ponzi or pyramid scheme. Typically, investors are recruited through promises of high returns and early investors often receive returns fairly quickly. The catch is that the investment doesn’t exist. Those returns are paid from investors’ own money and the contributions of new investors rather than from any profits earned. The scheme eventually collapses when the number of new investors drops.
That’s exactly what happened in this case. When the money was all gone and Zietsoff could no longer find new investors or keep up the charade, he turned himself in.
We imposed permanent trading, registration and director/officer bans on Zietsoff. Also, he pled guilty to fraud charges under the Criminal Code and was sentenced to four-and-a-half years in prison and ordered to pay some $11 million in restitution.
An affinity for deceit
Another ruse we encounter is affinity fraud, in which a fraudster approaches prospective investors on the basis of a shared identity, such as religion or nationality, and exploits their trust and friendship. The story of Pastor Marlon Hibbert and his parishioners is just one example.
Hibbert’s victims gave him money – often everything they had – after learning through their close friends about his investment success and work with charitable organizations. They were told that he offered a generous rate of return, that no risk was involved and that their principal would be guaranteed. Investors also took comfort in the idea that Hibbert was a “Man of God” and that some of the profits he made were being used to support good causes internationally.
When a victim with financial industry experience became suspicious of the high returns being promised, he did ask whether the pastor was registered with the OSC. Hibbert assured him that he was and produced a document affixed with an OSC stamp as proof.
The truth is that Hibbert was never registered (an online search of the National Registration Search database or call to our Contact Centre could have confirmed this), misappropriated funds for his own use and provided falsified account statements to reflect investment results that simply didn’t exist.
By virtue of Hibbert’s dishonesty, many of his investors lost their entire investment. They’re owed more than $8.2 million to say nothing of the promised returns of over $13 million.
Pay now, and pay again later
In another case of investors giving money to an individual or firm that isn’t registered, a company called Nest Acquisitions and Mergers misrepresented itself as seeking to purchase – at inflated prices – shares from investors. As part of the sales pitch, these investors were told they’d have to pay advance fees in order to guarantee the transaction and receive the promised purchase price.
Advance-fee scams attempt to convince someone that they’re the recipient of a financial or other gain, which they’ll receive only if they pay a particular sum of money beforehand. When the victim pays the fee, it doesn’t bring them any closer to enjoying the gain. In fact, the victim risks losing even more money as the fraudster is encouraged to contact them yet again to request additional fees for the same transaction.
Nest Acquisitions claimed in one instance to be prepared to pay some $350,000 to an investor for his shares in a Canadian business so long as he first forwarded the company approximately $10,000. He did so and initially got his money back after he was told the deal fell through. Unfortunately, that was only the beginning of the end for this victim. The company again got in touch with him. This time, he was informed that almost $15,000 was needed to secure the funds for his redeemed shares. The victim eventually gave Nest Acquisitions virtually all of his savings, around $70,000 in total, under the false pretense that he’d recoup much more than that. Instead, he got nothing in exchange for his fees and the fraudsters all but disappeared…until we caught up with them and proceedings were brought against them as a result of their misdeeds.
You may hesitate to report a scam because you’re embarrassed or fear being seen as unfit to manage your own finances. But investment fraud can happen to anyone, even the financially savvy. Indeed, victims are often educated and successful people. If you’ve been victimized, please tell us. Our Inquiries & Contact Centre can take your call at 1-877-785-1555 or your e-mail at email@example.com.
Your story is invaluable in helping us to take action where appropriate and save other investors from falling victim themselves. Every little bit counts in making it as difficult as possible for wrongdoers to be successful.
Fraud prevention toolkit
From learning the basics of investing to where to go when you need more help, the following can help you to be better informed and stop fraud in its tracks.
Check that an advisor or firm you’re investing with is registered
Suite of OSC-endorsed materials on how to protect your money
Before you invest
Don’t invest if you don’t understand the product, the risks and how much it costs. Ask:
- How does this investment work?
- How will it help me reach my goals?
- What are the risks?
- What are the costs to buy, hold and sell it?
- Is my portfolio properly diversified?
Before you hire a financial advisor
Choosing a financial advisor is a big decision. An advisor can help you set financial goals, choose investments and track your progress. Ask:
- Are you and your firm registered?
- What are your qualifications?
- What products and services do you offer?
- How are you paid?
It’s always worth doing your research, including a google search on the person bringing an investment to your attention and checking whether they’re registered with us.