The headlines of the Wall Street Journal feature on Aug. 9 were eye-catching - "Confessions of a Scam Artist." This piece by Glenn Ruffenach featured a lengthy prison interview with Eric Stein, a scam artist who bilked 1,800 investors out of $34 million.

Financial scams have a way of popping up when regulated markets for stocks and bonds offer investors little return or less hope. The granddaddy of scam artists, Charles Ponzi, realized this when he bilked investors out of $15 million in 1920 (that's about $150 million in today's dollars). At that time the stock market was in a dive, and the country was going into a very sharp, but short depression.

Ponzi sold investors a "too good to be true" investment scheme. He made it work by using new money coming in to pay off earlier investors. Eventually investigators discovered the fraud and his house of cards collapsed and he went to prison. His technique of enticing new money into a fraud by paying off earlier investors bears his name, a "Ponzi," and is at the heart of most modern day scams.

Eric Stein started out with a legitimate business proposition that needed money. He discovered that he could raise money by employing sophisticated telemarketers and promoters, and by packaging his idea into a glamorous, can't miss, proposition.

While his business faltered, his fund raising prospered. He paid original investors their promised returns from new money coming in. But, like Ponzi, he soon caught the eye of investigators and wound up in prison.

His promoters found the new money by targeting groups they considered the most vulnerable - people close to retirement or who have recently retired. These are folks who have been hammered by the stock market, perhaps never had a business opportunity when they were younger, and dreamed of an easy income source.

The French have a slang term for these targets - "mooches." A mooch is someone with the right personality traits - they've got to have a deal. Typically, they're in their 50s, or they're entrepreneurs who have accumulated some wealth. Their names can be purchased from list companies.

List companies find mooches by soliciting information in shopping malls, for example, where one might be asked to fill out a simple questionnaire, or off the Internet where the unsuspecting are asked for information in return for free products or services. These names are sold for up to $100 a name to professional sales promoters.

Stein found that it was not necessarily the unsophisticated or economically uneducated that made easy targets. His favorite mooches were white-collar types with lots of cash - doctors and particularly dentists were at the top of his list. Small business owners who are risk takers also were easy marks.

As he told the Wall Street Journal, it's all in the packaging. Make it easy to understand, make it glossy and professional, make it sound good, wrap it in phony testimonials, pay off the first ones in the door and soon their neighbors will follow with cash in hand.

Mr. Stein left the author with these tips. Never talk to a financial salesperson on the phone whom you don't know personally. Don't respond to unsolicited business promotions sent through the mail or by e-mail. Never purchase unregistered securities. Never purchase any financial product that is described as "low risk, high yield," or "safe" because a friend, relative, religious leader or parishioner has recommended the opportunity to you. Finally, never answer any survey or enter a contest while shopping in a mall or while online.

The opinions expressed are those of Wendell Cayton, a registered investment advisor in the states of California and Washington, and not those of any company with whom he is associated. He may be contacted at


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