Oklahoma City, Oklahoma
"The Fraud of the Century" 
For Immediate Release
Friday, March 07, 2003
Contact: Irving L. Faught
  Oklahoma Department of Securities
Oklahoma City/////  Prime Bank Instrument Fraud, The fraud of the 20th Century, is rapidly becoming even bigger in the 21st, although under many different names. While Prime Bank is still a good way to refer to the fraud for descriptive purposes, the negative publicity attached to these schemes has caused promoters in recent cases to avoid explicitly referring to Prime Banks. Now it is common to avoid the term and underplay the role of banks.

The con men are calling these same kinds of investments “risk free guaranteed high yield instruments” or something equally deceptive and finding creative ways to hook their victims.

Irving Faught, Administrator of the Oklahoma Department of Securities, said: “The fraud often involves a variety of commercial, financial instruments including letters of credit, standbys, guarantees, high-yield instruments, RWAs (ready, willing and able letters), bonds, notes, or bills.” However, the fraud may not even involve a financial instrument at all. “A con artist may, in a related scheme, induce the victim to hand over money with the promise of big returns on a sure thing, using communications guaranteeing returns printed on letterheads of well-known or fictitious corporations or foreign governments,” Faught said. “Regardless of how the fraud is presented, the schemes promise return disproportionate to the risk involved, a risk that is lessened or profits enhanced by the involvement in some way of a major bank, corporation or government.”

We have seen the use of the infamous Nigerian 419 Scam Letter in a “Prime Bank” scheme. In that case the promoter was a building contractor involved in local commercial projects. He told the victims that he had an opportunity to invest in and provide construction services to a large scale building project in Africa that would benefit underprivileged children. He said that the International Monetary Fund was bidding the contract out and would guarantee payment on the contracted services. In addition to the contract on the project, the promoter could invest in related contracts and sell them at a profit – if he invested at least a hundred million dollars. He claimed he would pool victims’ monies, leveraged by funds to be obtained from a Nigerian government official, to meet the minimum requirement. As proof, he showed victims a letter from a former government official of Nigeria promising funds for helping them transfer money out of their country. He said that by providing the victims’ funds to that official, they could provide collateral for the IMF contracts. The promoter made all the representations common in prime bank schemes – that this is a super-secret deal and the U.S. government and banks would deny these deals exist, just because rich people participate in these deals all the time and they want to keep all the profit for themselves.

Faught said, “When the expected payment date passes and no money is returned to the investor, the promoter has a litany of explanations for why it will take “just two more weeks” for the deal to come through. Often the excuses get more complex and incredible as time goes by.” In the case of the building contractor, the first excuse was that the investment was tied to the builder's construction contract and the builder was having difficulty obtaining his international builder's license. Later the victims were told the U.S. government was investigating the transaction and would not allow the IMF to release the funds. Finally, the victims were told that the bank was holding up the money and they needed additional money to get it released. When the excuses run out the promoter simply stops returning the victim's calls and absconds with the money.

“Another recent case involving a variation of the prime bank scheme hits even more closely to home,” Faught said. The recent drop in home mortgage rates has made this scam possible. In this variation, a homeowner is approached by a "real estate loan broker" and offered the chance to pay off their home in five years. The "loan broker" explains that the "program" will not cost the homeowner any money out of pocket and may even reduce monthly mortgage payments. In return for a fee, the "loan broker" will arrange to get the homeowner's home refinanced and roll the home equity into the principal balance on a new note. That equity is used to pay the loan broker's extremely inflated fee - as much as seventeen percent (17%) of the appraised value of the home. Part of the loan broker's fee will be used to purchase a "rebate coupon" that is redeemable in five years for the value of the homeowner's property.

Should the investor question why an investment today of 17% of their home's value will appreciate to equal their home's value in a mere five years, the loan broker explains that the rebate coupon represents an interest in a “prime bank loan”. At the redemption time the homeowner will have no money from the coupon and substantial additional debt. Faught said: “This "home loan" scheme was a way for prime bank promoters to get significant amounts of cash from people who did not even know they had it since they had never thought about refinancing.” In an attempt to avoid implication of the securities laws, the loan broker's story will be that he gets this fee merely for brokering the homeowners loan and in turn the broker gives a “gift” to the homeowner of a "rebate coupon".

Faught said: “Key considerations when presented with any investment promising high yield and low risk:

People want to believe that there are secret ways to make fabulous amounts of money. Prime bank promoters promise a window into the secret world of sophisticated "prime banks," multi-millionaires, and international investing. All they can deliver are financial headaches.

Promoters of prime bank schemes often need only a veneer of sophistication and complex-sounding financial jargon to separate victims from their cash.

Investors may be hesitant to question promoters' methods out of a fear of appearing naďve or unsophisticated. However, when it comes to your money there are no dumb questions.

There are a few things one can do to avoid these kinds of scams: ask questions; demand plain-English answers and investigate before you invest.”

Working together, state and federal law enforcement officials can make our markets safer for investors and put white-collar criminals where they belong -- in prison, Faught said.
This press release, and related information, is available on the Department of Securities' web site at www.securities.ok.gov, by phone at 405/280-7700, or in writing at:  Oklahoma Department of Securities, 204 North Robinson, Suite 400, Oklahoma City, OK 73102