Filed under: Ripoffs and Scams, Fraud

China doesn’t grant Multi-Level Marketing (MLM) schemes or pyramid schemes, period. The government grants single level direct sales if a company has a proper license. But no recruiting is allowed and no multi-level structure is granted.

While we often think of China as being behind the times compared to the United States, those of us who study the ill effects of MLM wish that our government took such a hard line against this abusive business structure. Despite the laws against MLMs in China, there are people and organizations who do businesses there anyway. Companies have discovered that it is impossible to make money with the single level selling that the government allows, but that the MLM structure thrives with over a billion people available to be recruited. Usana Health Sciences and Herbalife are just two MLMs that have been found doing business illegally in China by undercover investigators.

And now a promoter of an Ant Farm pyramid has left thousands of Chinese consumers penniless. Liaoning province is fast becoming the hub for illegal pyramid schemes and illegal MLM activities in China. It was there that the Yilishen Tianxi Group offered an “opportunity” to buy a box of ants for the equivalent of U.S.$1,375.

Purchasers were to feed and water the ants until they died, which is about 90 days after they’re born. A Yilishen representative was then supposed to pick up the dead ant and take them to a factory that would use them to produce products that the Chinese believe cure many ailments. “Investors” were offered an annual rate of return upwards of 32% on their investment, and many bit. They believe strongly in the healing power of dead ants, and therefore were convinced this was a legitimate opportunity.

Thousands of people lost all their money, and the organizer of the scheme is in jail. But the scheme lasted for eight years and affected many people. An identical scheme which ran from 2002 to 2004 in the same area collected an estimated U.S. $390 million from people.

China is making some attempts to crack down, but the rampant cheating among business promoters is proving to be a large problem. Last year, 600 fraudulent schemes in 14 provinces and cities were busted. And that represents only a fraction of the business opportunity schemes.

These schemes are growing — in part due to the huge population in China, and in part due to the corruption of government officials. The future of pyramid schemes in MLMs in China is uncertain in the long-term, but the schemes are likely to grow in the short-term.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

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Filed under: Cards, Ripoffs and Scams, Fraud

Nancy Trejos, a personal finance columnist for the Washington Post had her identity stolen and her debit card and bank account compromised. She was lucky. Her bank called her while someone was trying to purchase over $800 of merchandise with her debit card number.

The writer found herself in an uncommon position. She had given up her credit card in favor of a debit card, hoping to become debt-free by avoiding credit cards. Trejos used her debit card a lot, and each time she used it, she was putting her bank account at risk. Each time we use our credit card, we’re putting our accounts at risk as well. It’s just the nature of the beast. Use a card, and the number is exposed to someone.

Trejos swiftly found out that the thief had more than just her debit card number. She also had lots of personal information and the security code from the back of the debit card. How did that happen?

While she pondered her situation, she set herself up with a “fraud alert” at one of the credit bureaus, filed a complaint with the FTC, and reported the situation to the police. It would now be harder for Trejos to get credit, as each credit issuer would have to verify her identity before approving a new account, but it’s a hassle worth dealing with if your identity has been compromised.
Trejos didn’t find out how or where her information got in the hands of criminals. But surprisingly, the police have been investigating and may be close to charging someone with a crime in the case. That’s unusual because often, the police don’t even want to bother with these types of cases. Trejos still doesn’t know where she went wrong, but she had her debit card canceled immediately, and a new one was issued.

Debit cards are a great idea when trying to live within your means, but not so great when identity theft is involved. While credit cards generally protect you against all fraudulent buys, debit cards do not necessarily do the same. And even with the cards that do protect you, your wait to have the money put back into your bank account could be burdensome. If you’re committed to using a debit card, do so infrequently, and have it linked to a bank account with only a small amount of money in it, to limit your losses if your number is stolen.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Bookkeeping, and is the author of Essentials of Corporate Fraud.

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Filed under: KKR, Providence Equity Partners, Cerberus Capital, Private equity industry

According to a study by Moody’s, the buyout firm KKR is actually less likely than other similar firms to do what many critics say buyout firms do: replace assets with debt in order to take a big payday, thereby leaving their target companies in precarious financial condition. Examining 176 deals over the last five years, the Moody’s study paints a surprisingly positive view of KKR in this regard, at least when compared to similar firms.

In details discussed over at Deal Journal, KKR traded large money for large debt — a process known as “dividend recapitalization” — less than half the time over the five year period. By contrast, Providence Equity Partners and Cerberus Capital Management took that route in the majority of cases.

Another surprising bit of data: KKR is the only major private equity firm that saw the debt ratings of its target firms rise after the majority of its buyouts.

So state what you want about the savage pirates at KKR — it turns out that they are actually the nicest pirates you’re prone to encounter in the financial markets.

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Filed under: Private equity industry

The Wall Street Journal reports that the German economics ministry is drawing up new rules for foreign investors who want to buy German companies. The goal of the new regulations is to block the takeover of German companies by increasingly powerful and active sovereign wealth funds, and by companies owned by foreign states.

However, not all foreign countries are included in the new rules. Significantly, EU countries are exempt. This leaves a much smaller group of potential countries that may fall under the regulations. China, Russia and a few Middle Eastern stand out, and it’s probably not a stretch to say that worries about the growing power of those countries inspired the new rules.

The new rules would, of course, represent a significant restriction on the global flow of capital. The massive question is whether this move is part of a growing fear about the power of foreign investment and the beginning of a more restrictive investment environment. Sovereign wealth funds now control over $2.5 trillion of assets and are growing rapidly. Efforts to restrict their reach could have an effect on global growth.

This development might, however, be peculiar to Germany. Germany’s political climate is very different from the U.S. when it comes to the status of financial investors of all stripes. In fact, the basic operation of capitalism itself is sometimes brought into question in Germany in ways that are unimaginable in the the English-speaking world.

In 2005, Franz M

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Filed under: Ripoffs and Scams, Fraud

Matthew Mitchell, a fan who has been going to New York Yankees games since 1984, is suing the team over the steroids scandal that pointed the finger at 20 current and former Yankees. He states the Yankees committed “consumer fraud,” and he wants a refund of $221 for tickets he bought and a public statement from the team.

Is he kidding? He’s asking for $221??? This screams publicity stunt to me, and I’m almost ashamed to be giving him the attention he desires.

He says he’s suing the team because he didn’t get what he paid for - steroid usage changed the game and he says that’s not what he bargained for. So far, the Yankees are ignoring him, as they should.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Record-keeping, and is the author of Essentials of Corporate Fraud.

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Filed under: Ripoffs and Scams, Shopping, Fraud

Have you heard about “binding arbitration” clauses in contracts? They’re the part of the contract which says that if you’ve a dispute with the other celebration, you can’t take them to court. You agree, instead, to go before an arbitration panel with your dispute. (Note that many claim the arbitration panels are notoriously unfavorable to consumers!)

Binding arbitration clauses are all over the place these days. They’re in most credit card agreements, and are very often found in vehicle buy documents, home construction contracts, and all sorts of other contracts. And you may not even realize you’re concurring to this mandatory arbitration.

Have you ever made a buy online and failed to read the fine print? You just clicked on “I concur to the terms and conditions”? Well if you did that at Overstock.com, you’ve concurred to mandatory arbitration.
A judge recently dismissed a lawsuit filed by Shandie Deaton against Overstock.com for claimed violations of the Fair Credit Reporting Act (FCRA). She states that Overstock.com violated that law by printing too much credit card information on the receipt for her purchase from the company. A class action suit was filed on behalf of her and everyone else who had credit card information printed on their Overstock.com receipts in violation of the law.

But the lawsuit was dismissed because each time a customer buys something on Overstock.com, they enter into this binding arbitration clause. That means no lawsuit filed in court. Customers must go before the arbitration board if they want a remedy to the wrong, and they have to go one by one. No class action status.

Think this through the next time you’re making a buy and this clause is in the contract. Do you really want to give up your right to go to court? Do you really want to give up your right to appeal a decision? Because decisions in arbitration are final. There is no appeal and there’s no do-over if something was handled inappropriately.

Consumers need to stand up against these binding arbitration clauses and refuse to give their money to companies like Overstock.com that force this arbitration clause upon them.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

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