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.

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.

Recommended

The Federal Reserve has turned inflation-fighter – how do you invest now?
US Economy

The Federal Reserve has turned inflation-fighter – how do you invest now?

The US Federal Reserve has become much more hawkish on inflation and less concerned with the markets' reaction to rising interest rates. John Stepek e…
27 Jan 2022
Whether it’s cryptocurrencies or investment trusts, make sure you know what you’re investing in
Investment strategy

Whether it’s cryptocurrencies or investment trusts, make sure you know what you’re investing in

Many people scoff at cryptocurrency speculators pouring money into an asset they may barely understand. But the same could be said of investors in man…
26 Jan 2022
How to invest in energy and metals as tech stocks crash
Commodities

How to invest in energy and metals as tech stocks crash

It’s been a terrible week for stockmarkets. But not everything is crashing – “real” assets such as metals and energy are holding up well and should ha…
26 Jan 2022
Shareholder capitalism: the world’s most powerful asset manager wants you to have your say
ESG investing

Shareholder capitalism: the world’s most powerful asset manager wants you to have your say

Under shareholder capitalism, the owners of the companies the big fund managers invest in are us – yet our voice is rarely heard. Now one asset manage…
26 Jan 2022

Most Popular

Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022