7.5.1 Case study: Prime bank investments
Greg, a retired policeman, sat in his favourite coffee shop thinking about ways to make his retirement more comfortable. He began to chat with a well-dressed gentleman seated at the next table. As they spoke, the man revealed that he was once a bank manager, but quit after he found another way to make money.
He told Greg about an investment called prime bank instruments and how it works:
- Companies lend money to banks all the time for short periods. The banks pay high interest rates on these loans.
- Most individual investors don't have enough money to do this on their own. But if they pool their money together—just as people do in a mutual fund—they could get in on the high rates of return.
- The investment is risk-free and the money is held in trust in a lawyer's bank account.
Greg was a little suspicious because he'd never heard of this type of investment before. He liked the idea of investing with a bank, though. He decided on a cautious approach.
- First, he invested $5,000 as a trial. One month later, the gentleman handed him $5,000, plus $2,500 in interest.
- Greg decided to invest another $10,000. One month later, Greg received a cheque for $10,000, plus $5,000 in interest.
Then, the "former banker" asked Greg if he would like to make some "big" money. The retired officer took out a $100,000 mortgage on his paid-off home and gave the full amount with the expectation of making a double-digit return on his investment.
Three months later, he'd yet to see a penny of his money back. Greg had been a victim of a prime bank instrument fraud, a scam that has been around since the 1980s.
Lessons Greg learned:
- Only trust investment advice from a reliable, registered advisor.
- Scam artists know they have to get your trust. They often let you make money first, before they scam you.
- If it seems too good to be true, it probably is. It may even be illegal.
For more information see Your risk for fraud quiz.
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