Derek Pain: Rip-off merchants are always on the prowl - so invest with care

No Pain, No Gain

The City of London is making life much more difficult for investment crooks. But this despicable breed, obtaining money by fooling unsuspecting (often elderly) shareholders, is still belligerently on the prowl and, I suspect, will this year make more trusting souls regret that they responded to that cold call. I have been accosted dozens of times by a variety of miscreants offering once-in-a-lifetime opportunities to buy sensational shares, and even invited to sell shares that had clearly surrendered any value.

Share scams have always been part and parcel of the investment scene. A distant episode was the infamous South Sea Bubble, which spawned a horde of highly imaginative but completely phoney companies that suckered cash from vast numbers, ranging from Lords to parlour maids. When I started reporting on events in the City more than 50 years ago, one of the favourite scams was selling shares in derelict mining companies. Another was takeover bids, sometimes for biggish companies, that had no chance of succeeding but allowed "those in the know" to benefit from the subsequent upsurge in the share price.

Over the years, City frauds have become more sophisticated. The advent of so-called "boiler rooms" flogging no-hope shares is a relatively new dimension. Besides shares, they offer other temptations, such as land and wine. Many are based overseas, making the task of Britain's regulators that much more difficult.

In the past year, I have received two letters from the Financial Services Authority, warning that I appear on lists used by fraudsters. I am not surprised that I am regarded as vulnerable. After all, like every shareholder, my name and address are obtainable from the shareholder registers of quoted and unquoted companies. And I have sailed close to the wind once or twice.

Another anti-fraud response I have noticed comes from Capita, a leading registrar. Last month, I sold some shares. A few weeks later, I received a letter from Capita asking if I had authorised the sale. It is, of course, an old dodge selling shares belonging to another party. It must be much more difficult to do so in these days of much tighter security, with identification passwords and secret codes. Still Capita's inquiry suggests it still goes on. As the registrar's security team says: "This letter is sent in the interest of shareholder security so that you can let us know if we have processed a transfer that you did not ask for." The FSA asks investors to get in touch if they have had a boiler room approach. Last year, it sent approaching 100,000 letters to individuals warning of the dangers

Probably my most audacious approach, involving about half-a-dozen calls, was in connection with a redundant share that I knew was worthless although the company still traded. The callers, who said they were based in Canada, wanted to accumulate shares ahead of mounting a takeover bid. They offered to buy my holding at a quite ridiculous price, but it soon became apparent that it would cost me a considerable up-front payment before the deal could be completed. If I recall correctly, the accompanying message suggested that my cash was needed to satisfy some obscure (obviously non-existent) Canadian investment rule.

Other scams investors should watch for include pump-and-dump exercises when false claims, usually involving penny stocks, are circulated. The instigators sell as the shares advance, netting a nice little profit. At one time, such stories were mainly spread by whispers in City bars and by shady telephone calls. The internet now makes it much easier to get a story, often about a bid or a discovery, going the rounds. A possibly legal but dubious ploy is when fringe organisations buy a parcel of shares in a small-cap company and then, at inflated prices, place them with investors on their books.

Prosecutions have been successfully undertaken but rip-off crooks are still on the rampage. Clearly, they continue to make easy money. However, if investors are vigilant their rewards could disappear. The crackdown on investment crooks is to be applauded but penalties often seem too lenient. And many fraudsters are out of reach because overseas. So, at the end of the day, it is us investors who can defeat these parasites by ignoring their sophisticated blandishments.

yourmoney@independent.co.uk