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Kansas City is Just the Latest Stop for Internet Investment Scheme

Posted on: Wednesday, 20 July 2005, 21:00 CDT

Jul. 21--Kansas City is only the latest stop for an Internet investment scheme based on fake securities regulators.

Missouri regulators ordered a halt last week to the Securities Compliance Department. The operation claimed a Kansas City telephone number and address but was nowhere to be found.

Similar scams have surfaced in New Jersey, Colorado, Alabama, Florida, North Carolina and Wisconsin. Real regulators in Australia and Austria have posted online warnings, including a list of fictitious agency names the schemers have used.

The schemers seem to target foreign investors and purport to operate from the United States, regulators said. They carry off the scam with key information about their targeted victims, elaborate fake regulator Web sites and multiple phone numbers thanks to cheap Internet telephone service.

In one case, New Jersey officials seized $2.5 million in a Florida bank account tied to a fake regulator scheme that claimed perhaps hundreds of victims. That scheme used different regulator names but the same modus operandi as the one Missouri regulators found last week.

"Obviously, we think it's related. There probably are too many similarities to be a coincidence," said David Cosgrove, Missouri securities commissioner.

So far, no one has been charged or even identified in the schemes. Regulators hear about them when investors call.

Missouri regulators learned about the Securities Compliance Department when an Australian investor called. He had been contacted by the group and told it could recover money he had lost in an investment scam if he paid $20,000. The caller had given him a Kansas City phone number and address.

But when Kansas City police visited the address, they found no sign of the group in the Two Pershing Square building or its leasing records.

Similarly, an investor in the United Kingdom called Wisconsin regulators about the International Securities Department, supposedly based in Madison. Investigators walked the seven blocks to the address and found an abandoned church.

Colorado authorities visited a Denver address listed on the Web site of the Regulatory Compliance Commission. They found an empty building.

New Jersey's regulators visited a Trenton address listed by Heritage Financial Inc., which an investor in St. Lucia, West Indies, had said led him to the Regulatory Compliance Commission Web site. They found a patch of ground.

"It's like the Blues Brothers using Wrigley Field as their home address," said Fred Joseph, Colorado securities commissioner, referring to the popular movie.

Regulators also do not know who they are chasing.

Missouri's Cosgrove issued cease-and-desist orders against the Securities Compliance Department and three individuals, but believes the names are as phony as the regulatory agency.

The New Jersey attorney general in April sued Heritage Financial, five supposed regulatory bodies, five individuals and 50 John Does. None is known to have a valid address, its filing said.

Not even the phone numbers in the schemes were what they seemed, though they worked when investors called.

In the New Jersey case, investigators found phone numbers that investors used to call Heritage Financial and the fake regulators traced to one source, a VoIP account. The letters stand for "voice over Internet protocol." With one of these accounts, anyone can turn a computer into a telephone -- lots of telephones.

New Jersey's investigation found that Heritage's VoIP account had 51 different telephone numbers that stretched across 22 area codes. It included the phone numbers that investors had called to reach Heritage Financial, the Regulatory Compliance Commission, the International Securities Department, the Securities Protection Agency and the International Exchange Regulatory Commission.

The VoIP account had so many numbers from such a broad swath of the country that Heritage seemed to be in Miami, Cleveland, Denver, Nebraska, Wisconsin, Tennessee, Georgia, Connecticut, New Mexico, Arkansas and Indianapolis at the same time.

"I wish I could tell you where the bad guys are. We don't know," said David Cohen, supervising attorney for the Wisconsin Division of Securities.

Regulators suspect that the people placing the calls and posing as regulators on the phone were somewhere overseas. If they are right, it creates another problem for regulators -- jurisdiction.

"If it's in the country, we have a chance to reach the perpetrators," Joseph said. "If they're somehow using these front (phone) numbers from outside the country ... then it's a whole lot harder."

In two schemes described in documents from the New Jersey case, callers with Heritage Financial offered to buy investors' shares in obscure companies at prices well above the stocks' recent market value. The Heritage callers also led the investors to a fake regulator site to show that Heritage was legitimate.

For example, the West Indies investor was offered $18 for each of his 4,000 shares of a company called Millennium Broadcast Corp., which the investor believed to be worthless. He asked for more money, and the caller offered $32.90 a share.

The caller also gave the investor a phone number for the Regulatory Compliance Commission, where he was directed to check out Heritage on the fake Web site.

To complete the sale, however, the investor was asked to forward $9,332 as a "refundable penalty restriction bond," which he did.

Later, the investor got a fax from the Securities Protection Agency saying he had to pay $44,000 to cover warrants attached to the shares. Instead, his banker called New Jersey regulators.

Similar calls have tempted investors in Bermuda, Finland, Scotland and Denmark, who also contacted state regulators where the fake regulators had purported to be.

The fake regulator Web sites look much like what an investor might expect of a regulator's site. Two sites that New Jersey officials examined used seals that appeared to be a knockoff of the one used by the U.S. Securities and Exchange Commission. They are filled with investor alerts, cautions against investment scams, educational material and more. The Web sites also purport to identify illegitimate companies, lending credence to the caller's offer.

In the scheme Missouri regulators described, the caller was the fake regulator.

The Australian investor had fallen for an advance-fee fraud several months earlier, sending $46,596 in withholding taxes to ensure that a Nebraska company would buy his shares of Security Plus Inc.

The caller from the Securities Compliance Department said he was making sure the $342,401 stock deal would go through, but the investor would have to send $20,000 to cover warrants attached to the stock.

Instead of sending more money, the investor called Australian regulators, who referred him to the Missouri Securities Division.

Regulators say they don't know much about the operators, partly because the scheme is in its early stages. The scheme probably has or will be copied by others, said Wisconsin's Cohen.

One other key element of the con still puzzles regulators: How did the schemers know which stocks the investors owned?

"That's the part that's really strange. I don't have a good answer to that one," said Joseph, the Colorado securities commissioner.

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Copyright (c) 2005, The Kansas City Star, Mo.

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Source: The Kansas City Star (Kansas City, Missouri)

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