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You can be as rude as you like to these people

Fraudsters touting fake shares have become a serious threat to investors. Tom Bulford explains how to avoid getting caught out - and what to do if you're approached.

At the end of last month Michael McInerney was sent to jail for four and a half years and disqualified from being a company director for seven years. I'd say he got off lightly. His crime? He was the banker in a racket that conned 1,700 investors out of £27.5m.

McInerney was working with a group responsible for share scams. This is a simple con trick. Share scammers sell shares in companies that do not exist. By the time the unwitting investor finds this out, he has paid his money and will never see it again.

In fact, you could be a target of this kind of scheme yourself. I strongly advise you to take a few minutes out of your day to read this article and make sure that you do not fall prey to these scoundrels.

75,000 people are being targeted right now

Things could be about to get worse. The Financial Services Authority has uncovered lists of private investors that have been circulated around potential fraudsters. The FSA has begun to contact 75,000 unwitting investors, warning them that they may get a call from out of the blue purporting to offer them an attractive investment.

As one who has criticised the FSA, I think it is only fair to say that in this matter, it does a good job. It gives plenty of publicity to the subject and it has an excellent website that you can find here.

Last year, the FSA received 5,000 calls from people who thought they were victims of these frauds, often called boiler room' scams. While this number has been going up, it does seem that investors are wising up, because fewer of them parted with their money.

All the same, the FSA knows of 770 people who invested in a scam last year and given that this is the sort of thing that many would rather not admit, you can be sure that the true number is higher.

Most of these victims are probably elderly, and clearly gullible. They have probably never heard of the FSA and somehow I doubt that they surf the net for background information. So they probably will not read this column. But here is what could happen.

Alarm bells should be ringing

I am not aware of share scammers making contact via email (although the notorious Nigerian fraudsters certainly do), so the initial contact will most likely be with a telephone call. But remember firms authorised by the FSA are not allowed to sell an investment opportunity over the phone, so immediately a warning bell should ring. The schmoozer on the other end of the line will then engage you in conversation before offering you an investment opportunity.

This could be an investment in a fictitious plot of land with potential development value; it could be in equally non-existent vintage wine; but it is most likely to be in the shares of a company. The cold caller will describe the exciting possibilities of this company and then explain why you should invest in it now. A common tactic is to say that this company is now private but will soon be made public with a stock exchange listing that will multiply its value.

Alternatively, the schmoozer might offer to buy from you a genuine share that you hold, offering you a price well above that quoted in the stock market. This will come with a request for money up front as some form of security, which the scammers say they will pay back if the sale does not go ahead. The sale will not go ahead and you will not see your money again.

What to do if you think you're being scammed

If you suspect that you are being contacted by a fraudster, this is what you should do. Under no circumstances agree to pay any money or reveal your bank details. Check the name and number of the caller and his firm. Check that against the list of authorised advisers on the FSA website. Anybody who is not on that list is not permitted to give investment advice. You can also check the FSA's list of unauthorised firms here.

If the caller is offering you shares in, for example, Antarctic Oil, do an internet search and see if you can find any such company, or if the shares are being offered by an FSA authorised broker. If you cannot, you can bet that it does not exist. You should report any suspicions to the FSA. Make a note of the name of the firm that has called you and the nature of the investment opportunity. The FSA has a consumer helpline on 0845 606 1234, and in my personal experience they are genuinely helpful and glad to hear of any possible scams.

The most important thing to remember though is that nobody is allowed to ring you up out of the blue and offer you an investment. The unsolicited phone call is a warning bell in itself. If you get such a call, do not be polite. They will only call again. So be as rude as you like and then say that you will report them to the FSA. That way you should never hear from them again.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

Important Information Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

Managing Editor: Frank Hemsley. The Right Side is a regulated product issued by Fleet Street Publications Ltd.

Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. https://www.fsa.gov.uk/register/home.do

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