The Watchdog Report

By Comptroller General Richard Eckstrom

 

 

Combine the lure of an unusually high rate of return with the natural desire to be an “insider” and you have the basic sales pitch for a prime bank scheme.   Victims in such schemes are offered a rare chance to invest in supposedly the same international trading programs used by top Wall Street financiers and backed by the world’s largest banks.  Furthermore, victims are promised gains of 100% or more with little or no risk.

 

Over the years various regulatory agencies and international organizations have warned about these “investment” programs, yet prime bank schemes continue to flourish.  High-yield prime bank notes as described above simply do not exist.  Unfortunately, the human drive to be a part of something so exclusive and so profitable often overrides basic common sense.

 

Prime bank schemes are complex schemes in which promoters claim access to secret trading markets of the world’s top or “prime” banks.  The “prime” banks are said to trade in some form of bank security such as guaranteed notes or debentures.  These notes can supposedly be bought at a discount and then sold at a premium yielding huge returns with little risk.

 

The victims of prime bank schemes are often manipulated by being asked to sign non-disclosure or confidentiality agreements because of the so-called “secret” nature of these trading arrangements.  In reality the agreements only add a layer of protection for the promoters.  To create further allure, promoters often go as far as to claim that banks, if asked, will deny that such markets exist because they too are bound by similar secrecy agreements.

 

The promoter goes on to explain that since trades in prime markets are designed for institutional investors at extremely high levels (typically $100 million) the money from smaller individual investors must be pooled for an accumulated trade.  The victim is asked to deposit money in an offshore account designated for pooling the funds.  To add insult to the coming injury, victims are told that since profits will be so high, they must agree to contribute a portion of the proceeds to a charitable cause.  Once the victim deposits money into the offshore account it is gone for good.  The only “cause” that receives a benefit is the illegal promoter of the scheme.

 

The money is not pooled to buy bank instruments.  In every case the money is used to enrich the promoter.  Sometimes a portion of the money is used to further the scheme.  If the masterminds believe more victims are readily available through the victim’s network of acquaintances, they will “pay” early investors some of their own money as interest.  The unknowing victim will often then use the “interest payments” as evidence to encourage friends and family to also invest.

 

According to the Securities and Exchange Commission every “prime bank” opportunity they’ve encountered is fraudulent.  The simple truth is that “invitation only” secret trading markets simply do not exist.  

 

Any investment opportunity that requires extreme secrecy should raise a red flag.  There is good reason why such opportunities are sometimes described as “the best kept secret in the banking industry.”  The only “secrets” are that the scheme is fraudulent and that the promoters will be the only ones who profit.

 

The standard advice we’ve discussed in previous columns applies equally to prime bank schemes.  If it sounds too good to be true, it usually is.  Understand that inordinately high rates of return represent inordinately high risk.  Special or “insider” investment opportunities often benefit only the true insiders who are running the scheme.

 

Investors should be particularly vigilant against prime bank schemes.  The marketing structure that promotes those schemes appeals to the most basic human instincts.  A chance to take part in a trading market that has been historically reserved for the wealthy and elite can be difficult to resist.  However, as a knowledgeable watchdog you are now equipped to easily recognize the sales pitch for exactly what it is….a prime lie.