The underperforming shares scam

If you've bought shares that are underperforming, an offer far above what you can expect to make on them on the Stock Exchange can seem tempting...

Imagine you bought shares for £1 each in an obscure investment trust some years ago. They did not perform well and are quoted at around 50p. To make matters worse, you know it is very difficult to find buyers for the 200,000 shares you own. If you tried to sell this tough to trade stock, the market would move against you and you would probably end up with 40p a share – perhaps 45p if you were lucky.

These shares were in a “venture capital trust” (VCT), a scheme offering complex income and capital gain tax relief benefits for the well-off (which you are). A VCT buys shares in new and unquoted companies that have uncertain prospects. In your case, the risks were greater than the rewards. But no one ever pretended that VCT investment was a safe home for cash.

Now imagine that, out of the blue, the phone rings with someone offering to buy your shares – all of them. And this is not the 40p or so the stock market will pay but an amazing £8 a share. A quick bit of arithmetic shows this is anything up to twenty times your expected sale price, giving a huge profit.

Tempting? You bet!

Now for the reality check. Why on earth would anyone offer £8 for something they could buy in the stock market for around 50p? If a firm wants to make a takeover to acquire a whole company, it will generally have to pay a bit more – this “bid premium” may often be 20% to 30% but 2,000%?

Are you smelling a rat? This all sounds very fishy and, happily, one shareholder contacted me - many others involved phoned IFA Bestinvest, for help and elucidation.

My advice and that of Bestinvest are identical. Investors were told the calls were a scam and far from making big money for them, they would end up losing even more.

What these investors – some in Core VCT (whose shareholder list was used) but also in other similar hard to exit VCTs – had run into was a “recovery room”. This is a high pressure sales operation which calls owners of poorly performing shares, offering extremely high amounts for their stock. The caller explains that an investor, whose identity has to be kept secret, wants to buy their shares as – take your pick of the following reasons - “the company is needed as a springboard for corporate action” or “the company could be broken up to release value” or “the company can be developed for its patents and other prospects.”

This all sound great but it's nonsense. There is no buyer – at £8 or even 8p. Recovery rooms make their money by insisting on upfront fees – usually several thousands – and making victims sign a “confidentiality agreement” to dissuade them from complaining when the “buyer” evaporates.

Those who fall for the costs for “confidentiality” will be hit for more thousands for other items such as “transfer fees”, “registration expenses” and “compliance costs”. Potential losses can be in the tens of thousands.

These investors were contacted by Jacobson Group which gives a central New York address. Take a look at its website. This seems impressive but it is very short on detail such as the names of directors. A closer look at the pictures on the site shows they are from photo libraries (I hope Jacobson paid for them but as they still have library logos on them they may not have done.) The “news” tab tells you nothing about Jacobson or its supposed investments but is merely a feed from CNN world news headlines.

Jacobson has a phone number but no one picks up or responds to messages. And its New York address is a condominium of luxury flats, not an office block.

Jacobson Group is now on the FSA warning list of unauthorised investment firms targeting UK shareholders. And you only get on that list after substantial investigation.

But even if Jacobson Group was not listed, any unknown firm which calls you, no matter how enticing the deal, is up to no good. There is no “probably” or “likely to be” - there are absolutely no exceptions to the rule that cold calling is bad for your financial health. It's an attempt to get their hands into your bank balance.

Award-winning scams expert Tony Levene explains why he's writing a blog about scams and why he is The Scam Magnet!