State and federal regulators continue to warn investors about new investment scams, especially during a time like this when people are looking desperately for better returns in a declining market.
But two tried and true scams - pyramid and multilevel marketing schemes - keep trapping investors.
Almost all pyramid promotions are illegal because members earn money primarily from getting people to pay to participate in the operation. The pyramid eventually collapses when new members can't be recruited.
With a legitimate multilevel marketer, participants make money selling products or services and by getting commissions on sales made by their own recruits, not just by paying a fee and getting others to pay a fee to join the organization. It is difficult to distinguish legitimate multilevel marketing schemes from pyramid schemes.
A friend of mine recently allowed Georgia-based Financial Independence Group LLC to give a presentation to a small group at her home. She was so skeptical that she asked me to sit in.
What I heard at that meeting raised a dozen or more red flags for me and for law enforcement officials I contacted afterward.
Frederick C. Lee Jr., the founder of Financial Independence, said in a telephone conversation that his company "teaches money movement strategies." For details about his company, Lee said to contact his attorney.
The attorney, Brian M. Douglas, of Atlanta, did not answer e-mailed questions and did not return phone calls.
Angela Garnett, a regional manager for Financial Independence, made the presentation at my friend's house.
"If I can show you how to make a 400 percent return on your money in seven days, would you be interested?" Garnett asked the group.
Here is how I could get that fantastic return: I had to pay a $100 membership fee. If in seven days I recruited five people and two of them decided to refinance their mortgages through the company, I could earn a $500 bonus. My $100 investment could net $400, thus the 400 percent return.
Garnett said the company uses an outside lender's wholesale loan department to assist homeowners in refinancing their mortgages. She showed illustrations of how homeowners could earn hundreds of thousands of dollars by investing the equity from their home.
Using equity to invest is highly risky, said Joseph P. Borg, president of NASAA.
"In my opinion this is dangerous unless a lot more information was given and a proven record was shown," Borg said.
Garnett would not provide me with any written materials.
She mentioned several times that the company has been in business for 10 years - a fact I tried to verify.
I started with the company's Web site (www.findependence.net) where it lists an address in Tampa, Fla. However, the filing with Florida's Division of Corporations indicated that the company was registered in April 2007.
Garnett said the company was based in Georgia. The Corporations Division in Georgia also showed an April registration. In that filing, the company listed its business jurisdiction as Delaware.
The Delaware Division of Corporations shows Financial Independence Group LLC registered in November 2006.
The more questions I asked, the more agitated and defensive Garnett became. To get more details I had to pay the $100 membership fee, she said.
"Why do I have to become a member before learning more about the company?" I asked.
"Membership has its privileges," she quipped.
Finally Garnett asked, "Who invited you here?"
"My friend," I said.
"Would your friend introduce you to anything that is crazy?" she asked.
That was a huge red flag for me and should be for you if you should ever hear similar words at any business or investment promotion. Friends can unknowingly pull you into a scam or risky venture.
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