This is the second installment in our four part series that uncovers commons types of scams that occur after a natural disaster.
Floods, hurricanes and other natural disasters don’t just tear up homes, trees, and roads—they also attract scammers. Unfortunately, fraudsters see times of tumult as golden opportunities to take advantage of disaster victims and often advertise investment scams, which they claim are lucratively linked to recovery efforts but are unlikely to deliver any returns.
After Hurricane Katrina, some scammers claimed that investors could earn sky-high returns by getting in on the ground floor of rebuilding programs, only to pocket the money.
Terry Parks, of Montana, for example, sold phony investments to people hoping to rebuild hurricane-damaged areas. Parks advertised “well-secured” promissory notes that offered a 24 percent return. Unfortunately, the notes were not secure, nor did they offer any return on investment. In fact, state officials began investigating when investors complained they were unable to get their money back. As it turned out, Parks wasn’t registered to sell investments in Montana, nor were the notes registered in the state. One poor investor lost $55,000. Monica Lindeen, the Commissioner of Securities and Insurance said at the time, “To predators like Terry Parks, even a heart-wrenching natural disaster like Hurricane Katrina is just another tool to swindle investors out of their life savings.” Parks was ultimately sentenced to 10 years in prison.
William C. Lange was sentenced to nearly 22 years in prison for operating a $10 million scheme that targeted people who were trying to help rebuild after Hurricane Katrina. Lange claimed he operated a business that had funds available for loans to homeowners and builders seeking to rebuild damaged property in exchange for a 10 percent down payment. Instead of providing loans, however, Lange bought three Harley Davidson motorcycles, among other things. This fraud has another important lesson for investors: The lump sums that people sometimes receive as compensation from insurance companies after a natural disaster can make victims of hurricane damage a target for scammers.
Then there was Christopher McPherson, who also sought to take advantage of the damage caused by Hurricanes Katrina and Rita through a fraudulent real-estate investment scam. McPherson purchased classified ads in the Houston Chronicle to lure investors into sending him money to buy FEMA trailers that he said he planned to refurbish and resell for a significant profit. McPherson made some investors sign contracts that specified both the vehicle identification numbers of the trailers McPherson was going to repair and the amount investors could expect to be repaid for their loans. Unfortunately for investors, those VIN numbers were made up out of thin air. McPherson was sentenced to five years in federal prison and ordered to repay victims $278,428.
In response to the uptick in fraudulent activity, the Financial Industry Regulatory Authority issued an investment alert warning consumers to expect “unsolicited faxes and spam about investments that exploit a variety of hurricane-related opportunities. Best bets for scams include stocks associated with clean-up or rebuilding.”
While anyone is at risk of fraud following a natural disaster, those who are recipients of insurance payouts should be particularly careful. If you’re approached with an investment opportunity, checking with the SEC, FINRA and your state’s securities regulator to make sure that the offer—and the person making it—are legit. And remember: Promises of getting a big return very quickly is usually a telltale sign that an investment opportunity is too good to be true.