How a Fake Broker Convinced Me to Pay $70’000?

Ignoring so many red flags taught me a lot about myself.

I was on an international assignment in China for several years earning much more than I could spend. Everybody keeps telling me that you need to make your money work for you because the value decreases over time if it just sits in the bank.

If only I had a good opportunity to follow up on.

Red flag 1: Cold call

If some unknown broker calls you up and speaks very quickly about an amazing trade opportunity, hang up. Of course! And I did that about two times. The third time I kept listening. Just curious.

Being in biotech myself, it made sense that the stock of “Axx”, a small biotech, could increase after a successful clinical trial. The broker (#1) knew from a good source that the trial results will be very positive. So I bought the minimal amount of $6K, thinking that I can finally let my money work for me.

A month later, a different broker (#2) of the same company, had another deal. He had information that the company “Bxx”, another biotech, would be taken over soon. And we both knew what that would mean for the stocks. More money that would work for me. I bought the minimal amount of $12K.

Red flag 2: Super good information

Soon afterwards, the broker (#2) knew exactly how much the new stock price would be. The stocks would be almost double the price.

What a great opportunity!

Red flag 3: New Deal

The stocks could be sold at the future value before the takeover would be public. It wasn’t inside trading because nobody of company “Bxx” would be part of the deal. (OK?) To get access to this deal, the minimal amount was 4 times the initial minimal amount. It turned out that this is not a retail trade but an institutional trade. My broker could piggyback on the institutional deal providing access to private clients. Of course, the identity of the institutional trader is confidential and would only be disclosed after the deal was concluded.

If they have a buyer already and the price is fixed, what would be the risk? Only 1% commission. The broker needs to make at least some money. Sure, that makes sense. So I paid another $36K and sold my “Axx” stock to fund it.

Why diversify your stocks if there is no risk?

Red flag 4: Little information about the brokerage company on the internet

But what if this is some kind of boiler room scam?

Let’s ask many questions and talk to many people of the company. I talked to the receptionist at the switch board, someone from client services, two people from the compliance office and another broker. Everyone was very professional and sounded very trustworthy.

Let’s look online to see how many references and reviews I can find. Almost nothing. A few hits on some obscure lists of companies in the APAC region but without any reviews. However, they are on Twitter, Facebook and LinkedIn. Just a handful of posts though that started last year and the last one was from three months ago. Not very active. But then again, they are a finance company that is probably very private. Their website looks very professional and they are even hiring analysts.

I’m sure this is a real company!

Red flag 5: Exact address unknown

The brokerage company works in Seoul, South Korea, and getting in contact was often difficult because China’s Great Firewall interfered with the brokers telephone system. The brokerage company is using VoIP (Voice over Internet Protocol). It usually took 4 attempts to get through. On a good day.

Coincidentally, I learned that a friend of mine works for a company that is located in the same tower as the brokerage company. Only one WeChat message away to investigate how reliable the company looks like.

It turned out that there is no brokerage company in the tower. I confronted my broker (#2) with my discovery. No worries! The website address is just to meet clients. The company itself is located in the suburbs of Seoul. But when I’m in Seoul, the broker would be more than happy to show me around the office. Sure, that makes sense.

Red flag 6: Deal changed again

So when will I get paid out? To guarantee a quick payout, within one month, I just have to buy an additional 25% of the total amount of shares to ensure that I have the minimal amount of preferred shares.

Great! Done deal. I was so lucky that I could pay into this deal.

Red flag 7: An another change to the deal

The proceeds will be paid out soon, however, the broker is waiting for just one final signature of the major shareholder in this institutional trade. The issue is that the SEC might investigate the major shareholder for tax evasion. Next day, it was confirmed. The hedge fund that was key in the deal would be investigated. But all is not lost. If all minor shareholders would buy additional shares than the deal is alive. So let’s make my money work and invest another $10K.

Done! I’m so lucky that I have saved enough to last to the end of the deal.

Red flag 8: Too many different brokers

Another broker (#3) called to organize the payout. She is an expert in institutional trades so she will take over to finalize the details. What details? If she is the specialist, then why was she not involved from the beginning?

The proceeds will be significant and this might trigger some flags with the banks and authorities. So she advised me split the amount into two bank accounts. She suggested to open an account in Singapore. Pretty crazy, but it kind of makes sense, I thought.

Red flag 9: “what is this money for?” Asks the receiving bank.

The broker (#3) forgot to mention that I need to pay the unknown institutional trader a fee of 8% on the proceeds, which covers paperwork, legal fees and research. After receiving my obligations, the proceeds will be transferred.

What is another 8% if I can earn more than $120K. It will only hurt temporally. The profits are high. The math is in my favor. And the head of compliance will send me a guarantee letter that I will be paid out, unconditionally, in full upon settlement of the funds.

Except, one day before the guaranteed payout date, the receiving bank sent back my money. They didn’t know the purpose of the funds. How is this possible?

No problem. The broker (#3) quickly sent me a new account of another escrow agent. Somehow, the previous escrow account already reached the insured maximum to hold money. That makes sense. The broker must have a lot of clients.

Red flag 10: Previous stock trade was not fully executed

One day before the new payout deadline, another broker (#4) got back to me (broker #3 was on a business trip). It turned out that the escrow agent has my proceeds but cannot pay me because I used “Axx” stocks to pay for some of the initial “Bxx” shares. Although, I got a receipt of the sale it turned out it wasn’t sold. How? The brokerage company just credited me the money. Really? This minor issue somehow goes against the contract conditions of the payout. But, no problem! I just have to pay the original $6K again, quickly sell the “Axx” shares at retail price and then I can finally receive the payout of my “Bxx” shares.

Another coincidental twist in the story?

I have a receipt of the “Axx” trade sale? How can the stocks be “credited”? 4 months ago broker #2 clearly told me that the shares were sold. I have a very clear guarantee letter stating that I would get paid out unconditionally upon settlement of my 8% obligations. The broker said many times that everything is above board. Nothing could go wrong!

Get your story straight! This must be an elaborate scam!

…Fool me ten times, shame on me. I’m not paying anything anymore.

But what if they are right? What is another 6K if you’ve invested 70K? Maybe I’m just paranoid?

What stopped me from paying anymore was coming home. No more expat salary, meant no more extra money to spend on risky deals. No longer surrounded by intense consumerism and wealth that is so typical to the active lifestyle in China’s major cities.

I consider myself a smart person. So how could I ignore so many red flags? How could I believe this story of “free money”?

Was it simply greed? Lack of patience to be financially more secure? A sense of entitlement that I deserve to be lucky?

It can happen that a deal goes sideways. The brokers were very knowledgeable in the financial details. And everyone in the company spoke with a perfect British accent. They sounded so very trustworthy. They were men and women of their word. Just like me. All the red flags were just a coincidence…

Extraordinary what stories we can tell ourselves to believe what we want to believe.

Losing $70K hurts. It will take several years to earn it back.

Yet, I’m relieved that it is over. Stressing out for 6 months. Always wondering whether or not it’s a scam or not. Trying hard to believe the story that the brokers were selling me. It was toxic.

I’ll probably spend a few days watching many self-help YouTube videos on “how to overcome failure and loss?”. Not sure if I’ll go through the 5 stages of grief, going straight to acceptance is just more efficient.

The strange thing, though, is that losing a significant amount of money feels like a burden is lifted. Less to care about. But having less financial security is a burden… Why is life always so paradoxical?!

At least I’m walking away from this a little bit less naive. Scars like this help to be more unshakable and waver stress with more confidence.

Next steps? Embracing the minimalist life style, saving aggressively, and triple-checking the credentials of every financial company.

I’ll just get that Rolex a little bit later than planned. Practicing temperance is virtuous.

Aspiring polymath: Bioengineer, PhD, Martial artist, Writer, and Stoic. — Aim to apply mental models and first principles to everyday life.

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