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29 May 1998
412/028
News Release
PRIME BANK INSTRUMENTS AND OTHER ODDITIES
(See also: news release)
The Securities Commission repeats its warning to the public not to invest in schemes appearing to offer very high returns through "Prime Bank Instruments", or related schemes claiming to make high returns through trading in international bank instruments.
The Commission has observed a number of these schemes being promoted to the public in New Zealand. They pass under the names of "Prime Bank Guarantees", "Standby Letters of Credit", "Letters of Guarantee", "Leveraged Investment programmes", "Bank Instrument Trading programmes", "Leased Funds Investment programmes", or similar. Some of the names given to the schemes and the instruments involved appear to be fictitious. It is becoming increasingly common also for these schemes to use the names of legitimate financial instruments in order to lend credence to their claims that the trading is undertaken by major banking organisations.
The essential element of these schemes is the claim of an international market on which "prime bank" instruments are traded to produce very high returns on relatively small outlays. In the experience of international regulatory authorities, no such market exists. These schemes are often a front for fraudulent activity, aimed at gullible investors who seek to participate in the huge returns promised.
The schemes that have come to the Commission's attention have appeared in various forms. The most common invites investors to deposit a sum of money into a trust account, with the promise that this money will be returned at the end of the investment term, together with interest at between 40% and 800% per annum. Investors are usually assured that no money can be released from the trust account until a bank guarantee has been received from a "prime bank" or "top 100 world bank". Investors are told that their money will be leveraged to acquire Prime Bank instruments which will then be traded for very high returns. These claims may be false. The guarantee provided to the trustee may be invalid or forged, and the funds will disappear offshore, leaving investors with no recourse to recover their funds. The appellations "Prime Bank", "Top 100 World Bank", or "Top 25 European Bank" appear to be meaningless.
Another type of scheme appearing recently invites investors to pay a sum of money directly to the organiser of the scheme, as a fee in exchange for which the investor will be "leased" a large sum of money for a period of time, allegedly permitting that person to purchase a Prime Bank instrument and participate on the trading market for returns of around 700% to 800% per annum. These schemes may state that a certain number of investors are required to contribute before the organiser is able to obtain the funds "lease", and that investors' funds may remain in a trust account for a short time before the lease is obtained. This is generally a delay mechanism, with the schemes being simple advance fee frauds. Investors are unlikely to receive anything for their money.
Similar schemes have been promoted overseas in differing forms. The common element is a promise of very high returns over a relatively short period, usually based on a trade in fictitious or non-tradeable financial instruments. Investors may be told that it is necessary for the market in Prime Bank instruments to remain secret, that entry to the investment is by invitation only, or that they are being given a unique opportunity. Investors may be told that their investment is "safe" or "free from risk". These claims will usually be false. Investors are highly likely to lose any money they contribute towards such a scheme.
While the threshold for investing in schemes such as these is often stated to be over $100,000, the Commission is aware that at least one intermediary in New Zealand appears to be seeking smaller contributions from members of the public to form syndicates to invest in such a scheme.
Invariably the offer documents for these schemes do not comply with the disclosure requirements of the Securities Act, and the securities are offered to the public without either a registered prospectus or an investment statement. As such, the documentation provided to prospective investors usually lacks important information which would be relevant to a legitimate investment.
Most Prime Bank instrument schemes originate overseas, beyond the control of New Zealand regulatory authorities, and use New Zealand firms for local promotion. It seems that in many cases the New Zealand promoters of a scheme are unknowing of the underlying fraud. Some New Zealand intermediaries appear to promote the schemes in good faith. It has been common practice for such schemes overseas to involve professionals such as lawyers or accountants as intermediaries in order to lend authority to claims that the schemes are legitimate and safe. Anyone asked to act as a broker or intermediary for a scheme that appears similar to those described here should investigate the scheme thoroughly before agreeing to represent it. Anyone approached to act as a trustee for money invested in these schemes should be careful to examine any claims made by the scheme promoters.
Any allotment of securities offered to the public in respect of which there is no registered prospectus or investment statement (unless the subject of an exemption at law) is void at law. The directors of the issuer and every promoter of a security offered in contravention of the Securities Act could be liable personally for refund of any sums invested plus interest and could face criminal charges.
Contact:
Catherine Chapman, Communications Officer, 04 472 9833 ext 840