Sniffing out a possible scam
A reader is tempted by the promise of huge returns from an investment Web site. Money Magazine's Answer Guy points out the many red flags.
NEW YORK (Money) -- Question: I'm a 60-year-old male with about three years until retirement. Someone at work recently recommended I put some money into a company called Legisi.com - not an investment, but a loan. I wonder if you are familiar with this. - Name Withheld, Bayside, N.Y.
Answer Guy had never heard of Legisi.com before your letter, and the company doesn't disclose a lot of information about itself on its Web site.
But the little information that the company makes available is enough to make Answer Guy tell you this: Don't put any money into it. Please. Really. For the sake of your retirement.
Legisi, according to its Web site, is a company to which you can lend money in relatively small amounts (as little as $1,000 at a time), and which says it pays back at least 10 percent per month in interest. That's a whopping amount of money, especially in light of the fact that a high-yield corporate bond mutual fund currently yields only 7 percent per year.
So what's not to like about Legisi? Plenty. The problem is that such a return on this kind of loan seems too good to be true. Ask yourself: Why would a company need to pay that much in interest to borrow some cash? If any schmo can get a credit card charging 14 percent annual interest, why would a reasonable company operated by reasonable people want to pay lenders ten times that amount? And what is the company doing with the money anyway?
Answer Guy doesn't know, and Legisi isn't telling him. A.G. left several voice and e-mail messages last week for Legisi.com "boss" Greg McKnight, who - the Web site says - is based in Flint, Mich. But last Friday, his assistant said that McKnight, who had done interviews in the past that hadn't been well-received, wasn't interested in doing this one.
So A.G. sought the opinion of Joe Borg, director of the Alabama Securities Commission and president of the North American Securities Administrators Association, an organization of state and provincial securities regulators. After studying Legisi.com's Web site, Borg said, "This is suspicious, and I'd recommend any investor stay away from it." He adds, "It has signs of other organizations that have ended up being Ponzi or pyramid schemes."
A Ponzi or pyramid scheme is a type of fraud in which early investors enjoy magnificent returns - chiefly because they're paid off by money pouring in from subsequent investors who have heard about the serious cash that earlier investors are making. Eventually, the scheme always collapses and most investors lose everything.
So what do Legisi and known Ponzi schemes have in common, according to Borg?
Borg said that he would bring Legisi.com to the attention of Michigan securities regulators, and this week Answer Guy - pretty alarmed at the thought people would be investing their retirement savings in this thing - did the same thing, placing a call to the state's Office of Financial and Insurance Services.