Great frauds in history: Hannu Kailajärvi

Kailajärvi claimed to have discovered a way to make huge returns from foreign-currency trading. For a fee, investors could join the club.

Hannu Kailajrvi was born in Finland in 1972 and went on to complete a computer science degree at a technical college before dabblingin various entrepreneurial schemes with his wife. These included a restaurant, a music bar and then an internet marketing firm.

All of these ventures ended in bankruptcy. Undeterred, he set up WinClub in 2005, an investment club based on foreign-currency trading. Its name was later changed to WinCapita when the media started to query what was going on. At its peak, the scheme had 10,000 members with more than €100m (£93m)invested in it.

What was the scam?

Kailajrviclaimed to have discovered a way to make huge returns (of 260% a year) from foreign-currency trading.For a fee, investorscould join the club, which would give them the right to invest money in the scheme.

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Those who bought a premium level of membership could gain additional money if they persuaded their friends to join up, as well as getting a share of their "profits" turning it into a pyramid scheme. No actual trading took place and the money "invested" either disappeared, or was used to repay early investors, as in other Ponzi schemes.

What happened next?

The club's website suddenly disappeared in March 2008. This led to a police investigation that resulted in Kailajrvi being arrested in December 2008. The club's remaining assets were then seized and redistributed to investors. Despite this, some investors found it hard to accept that Kailajrvi was a fraud some even alleged that they had been the victims ofa government conspiracy.

Eventually, Kailajrvi was convicted of fraud, along with some other of his associates, and sentenced to four years in prison in 2011. About half of the €100m put into the scheme was paid out to investors during the life of the fund. Most of the payments went to those who withdrew their money before the collapse; later victims only got a share of €17m. Indeed, estimates suggest that 70% of the revenue went to only 5% of WinCapita's members.

Lessons for investors

The terms "Ponzi" and "pyramid" are frequently used interchangeably to describe such frauds, but the latter are particularly toxic as they encourage people to expand the number of investors involved. Promises of bonuses for bringing in new people, or a share of their returns/fees, are a massive red flag.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

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