Fraud Alert: “Creating” Hedge Fund Investors

September 25, 2007 |

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Hedge Fund Launch readers, please feel free to send us information on any questionable investment ‘opportunities’ that come across your desk and we will be happy to review them and discuss them on our blog.

This post is the first in a new ongoing series that will highlight what we perceive as potential fraudulent situations in the hedge fund and general investment industry.  Our aim is to point out obvious red flags and to help investors make informed decisions when it comes to “too good to be true” investment schemes.  Hopefully by bringing some of these situations to light, the masterminds behind these schemes will re-evaluate their offerings and get out of our sandbox.

Our first installment comes courtesy of Arizona Equity Group, Inc.  Our friends here offer the following:

“A turn-key money making machine which is about as close to printing money as you could possibly get! This will allow anyone with a good credit score to quit their day job and focus on what you want to focus on, or just be lazy and do nothing! Before I tell you how this works, let me tell you who I am. I have been an entrepreneur and network marketing professional for about 7 years now. I got started in the network marketing industry right out of high school. After about 6 months, I was able to officially retire from Corporate America at the age of 18! OK, now here’s how it works: Lets say for instance you have a good credit score (660 or higher). Because of our performance and track record, we’re working with Chase, Commerce Bank, Citi bank, and Wells Fargo to get people approved for business lines of credit under an LLC that we set up for you. We can get you approved for $15k-$50k per bank, (so $60k-$200k). Whatever you get approved for, your LLC at that point becomes a hard-money lender. Your LLC loans that to Arizona Equity Group, INC and we invest in Arbitrage foreign currencies. If you don’t know what the foreign exchange market is, it’s trading currencies, for instance the Japanese Yen, or the Euro. This is way bigger than the stock market and where the “big boys” play! In fact, $1.9 TRILLION IS MOVED EVERYDAY WORLDWIDE in the foreign exchange market! We have amazing traders that have outstanding track records in arbitraging foreign currency. Because of our traders’ performance, we are then able pay you back 5% per month interest on the loan for 2 years. (so $3k-$10k per month). After 2 years of earning 60% a year on the amount, you have a choice if you want to re-sign for another 2 years and continue to earn your 5% per month interest, or we will return the original loan amount back to you. This all of course is in a written signed contract. To sum this all up, if you have good credit you can quit your job right now and focus on what you really want to do! What would you do with an extra $3k per month? For many, it’s enough to retire on! Maybe you have someone that might benefit from this as well. We are paying a 2% referral commission on the loan amount!”

O.k., lets start with the obvious.  Judging by the photo I saw on his Myspace page, we have a kid in his early twenties with no college education that retired from “corporate America” at age 18.  Hmmm, now which corporation would have hired this kid and made him an executive at such a young age without a college degree or any experience.  But you’re saying “Hey, Michael J. Fox pulled it off in ‘The Secret of My Success’”.  Good point.  But this guy? I don’t think so.

Go ahead and Google “Arizona Equity Group” and you will only find one mention, this kid’s myspace page.  You would think an experienced marketing professional would have an actual website with a legitimate URL, and other various mentions pointing out his previous experience and success.  No, not this crack operation; instead you get a cheesy myspace page with the above description, and all sorts of babes that I’m sure this guy goes clubbing with.  How about the fabulous photos of his fancy house, car, pool, and LCD televisions?  Fruits of a pyramid scheme or some severely maxed out credit cards … I’m not sure which. 

Now generally I wouldn’t pick on someone just because they have a Myspace page, but the mistake that this guy made was actually contacting Hedge Fund Launch and trying to pitch us.  He let us know that he wants to “create” hedge fund investors by following this method.

Buddy, do your homework, read our bios, we’ve been in this business for a while and there’s no way we would ever underwrite something like this.  Frankly, I’m a bit insulted that you would pitch us.  Hence why I’m outing you.

Now the investment scheme: we lend this guy money at 5% per month while he purports to trade currencies to pay us back.  First off, how is this a hard money loan?  Will you be giving us real collateral at an LTV of 60% or better?  If I max out all of your banking relationships and give you $200K, is the equity in your house, car, and LCD’s going to get me a 60% LTV?  How about if you borrow from others?  What sort of collateral coverage do we have?  Pretty thin.

How about your big name banks that are going to loan me money?  Apparently you have not been watching CNBC, but all of those banks have tightened or stopped lending activity to even some of their best institutional clients.  Not quite sure they are going to give me $50K each to lend to you unless I pledge them real assets at a 70% or better LTV.  I’m pretty sure they are going to also ask me what I will be using the money for.  When I tell them they are rediscounting to me, to lend to you to trade currencies, I guarantee they will have security show me the door, and no lollipop.

Oh, and when is the last time you looked at the average monthly returns for the Barclay currency trader’s index?  Last time I looked (today) the average was 0.73%.  So you have found a group of traders that are beating the Index by more than 400 basis points?  And without volatility?  You know you can’t have volatility if you want to make a monthly interest payment, right?  And given that you need to purportedly take a spread for yourself, let’s say at a bare minimum 100 basis points, then your traders need to be pumping out better than 500 basis points over the index every month.  If you have traders that can do that, run the numbers, and you will find that you will be economically better off by letting them invest your personal money and giving them a 1% and 20% fee, or better yet starting a hedge fund that allocates to these traders and taking an overriding fee for yourself.  That’s what the “big boys” do.  I’m a bit perplexed as to the rationale of the hard money loan part of this.  Oh, did I forget to mention that they want to invest in Mexican real estate too?

All in all, this really seems like a great recipe for a pyramid scheme or just outright theft.  Caveat emptor my friends; this one smells real funny.
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