and water. He had an associate draw up forged documents representing the contracts, but there were no actual carpets to restore. Investors looking into the business would be referred to the fake appraisal company, which confirmed the deals. One time, when an auditor wanted to look at a restoration, the company hurriedly leased a building and dressed it up to look like a work site. It fooled the auditor.
In 1986, Minkow took his ruse of a carpet-cleaning company public, and the market capitalization swelled to more than $200 million. His young age captivated the press, and he gained wide publicity, which served to further stimulate investor interest. The fraud began to unravel when word got out about Minkow's credit card overcharges. Once investigators began probing the company, the end was near. In 1988, Minkow was convicted of fifty-seven counts of fraud and sentenced to twenty-five years in jail. Investors lost more than $100 million.
THE FORECAST? STORMY
Many of the most successful investment scams work their prey slowly, reeling them in like a trout. That's how the forecaster scam works. A man who identifies himself as a broker calls or writes you and, insisting no obligation on your part, offers you an investment tip. He tells you about a stock to watch that he thinks is going to do very well in the near term. "I don't want you to buy the stock, or even think of investing any money with me," he insists. "After all, you don't even know me. Just keep an eye on this stock and see how it does." Ostensibly, his point is to demonstrate his market savvy, and the sort of market intelligence he's privy to. His real point is to set a trap.
So, out of curiosity, you watch the stock and, sure enough, it goes up. A couple of weeks later, he contacts you again and offers a second tip, a stock he dislikes that he predicts will take a beating. "I don't want you to short it or anything," he says. "Just notice how it does." Sure enough, that stock goes down. Now you're hooked. He calls again, and this time he has an investment opportunity for you, a sure-thing stock that he strongly urges you to buy. You've been mightily impressed by his uncanny feel for the market, so not only are you willing to invest, but also invest heavily. You send him $10,000 or $25,000 to buy the stock he suggests. He doesn't buy it. He vanishes with your money.
How was he so insightful about those two predictions? He really wasn't. He starts with a base of potential dupes. Say he identifies a hundred people. With his first call, he tells half of them that the stock he chooses will rise, and the other half that it will fall. It has to do one of the two, and so fifty people are going to be impressed with his prediction. Those are the fifty he calls back with his second prediction; again, he tells half a stock will go up and half that it will decline. He's left with twenty-five who have seen him be right two out of two times, more than enough to fleece.
PONZI SCHEMES - TRIED AND TRUE
One of the oldest investment tricks of scam artists is the notorious Ponzi scheme, a persistent type of securities fraud where money is never invested in anything, but instead the cash that comes in from new recruits is used to pay obligations to earlier investors. And the scam artist, of course, always keeps a healthy apportionment for himself. The fraud is named for Charles Ponzi, who defrauded Italian-Americans in Boston in 1920 with a scheme purportedly involving postal reply coupons, which were prepaid return postage used in foreign correspondence.
Ponzi schemes come in every imaginable variety. You read about a new one almost every week, and they always promise enormous returns for short periods of time. I have to laugh at how absurd the pitches are. Some years ago, a group of companies in Kansas touted a get-rich-quick investment involving fungus. They sold investors "Activator Kits" that would grow fungus cultures. Most people wouldn't imagine that much of a market for fungus exists, but these promoters convinced people that these cultures would be bought by a cosmetic manufacturer they were connected to for a hefty profit. To remove any worries, the promoters "guaranteed" the profit. Something like twelve thousand people in thirty states sent in their money. As in any Ponzi scheme, the promoter strung