Rare earths – the elements of a new investor danger

20th July 2012

The article also stated that many carbon credit pedlars had moved – sometimes overnight – from landbanking, a scam where victims are persuaded to buy a small part of a field on the promise that it would gain residential planning permission.

Now the scammers have started to move on – changing yet again to insert "rare earths" into the script. They play on investor ignorance, offering overpriced deals for which there may, or may not, be any genuine asset backing, while promising amazing gains.

Legitimate markets exist

As with land and carbon credits, there is a legitimate market in those elements. But just as most equities are sold honestly, that does not stop rip-off equity sales from boiler rooms. The scammers continually reference the real market to justify their own claims.

According to the Financial Services Authority, dodgy carbon credits have only been pushed at innocent and trusting investors for just over a year now – the racket first came across the FSA radar in May to June 2011.  But while some quickly netted millions from victims, an increasing number have been shut down in the public interest by the Insolvency Service.  One recent closure in the public was Tullett Brown which, a judge said, had cold-called and deceived investors out of £3.2m in both land and carbon activity.

Moving from carbon sales to rare earths is easy. The sellers realise that investors know very little if anything about these elements (in the same way they play on lack of knowledge of carbon credits) but they also know that they can spin a convincing story. So, once they have gained the victim's confidence, it is easy to convince them that they are "experts" and that they are selling an asset that "will double or treble in value."

Cold calls and spam

And as warnings multiply over land and carbon, scammers know there will be a window of opportunity before investors realise that the only winners from rare earths are those who sell them to the unsuspecting and trusting. They intend to exploit this with cold calls and spammed emails.

A rare earth – often known as rare earth elements – is the description of a number of metals, many used in electronics and other high-tech applications. There are 17 on the traditional (as in school chemistry labs) periodic table of elements.  This starts with hydrogen and ends with uranium. The "rare earth elements" include scandium, yttrium, and lanthanum.

They are called "rare" because they are mixed up with other elements in metal ores and are considered difficult to purify rather than due to any lack of them in the world. And as many are used in electronics, including your laptop and smartphone, recent recycling advances mean there are new sources.

Everyday use

The rare earth scamsters play on their use in expensive, often necessary, industrial and consumer goods such as x-ray machines, smartphones, electric or hybrid cars, and flat screen televisions. Just as the carbon credit racket plays on "Kyoto" and "combating global warming", the rare earth hucksters love "green technology".

Here's some typical lines: "You can benefit from a market boom – these rose 200% over 2010-2011 so there are big profits. These are rare, they are used in 80% of all global industry, they are essential and they cannot be replicated synthetically. The Chinese control this market – they have all the metals in their country."

There is a grain of truth in all these statements as in all good fraud lines. But what they don't say is that you end up paying many times the real value of the commodity – and you have an asset that is also almost impossible to sell, even at a loss, in amounts that a private investor might buy.  Dealing in metals is for professionals and those with specialist knowledge.

Claims of FSA approval

The sellers will make a great play of FSA involvement. Again, this only has the barest element of truth and is intentionally misleading.

Some will talk about an "FSA-approved money handling and escrow account".  It is easy for investors to be convinced that this is somehow the same as an FSA approved investment or financial adviser. All it says it that your money will pass through some form of bank account and that this account is FSA approved – almost all banking in the UK is regulated by the FSA.  But this is meaningless.

That money goes from your account to their pockets via an FSA-approved bank or other facility is no indication of value or indeed of the trustworthiness of the person making this transaction.  A safe deposit company does not care whether you keep something worth £1 or £100,000  in one of its boxes provided you pay the storage fees.

Even worse is "FSA Verification". The FSA has no idea what this means as assets such as metals and other commodities are not under FSA regulation. The FSA does not verify anything, let alone a piece of metal ore. But salespeople, on commissions that can grab up to a third of investor money, will say anything if it ensures potential victims trust them.

There's an old adage that says "if anything looks too good to be true, then it is too good to be true."  But investors should add: "If this is supposed to gain so much in such a short time, why on earth is someone I have never heard of selling this to me?"

 

More on Mindful Money:

The Carbon credit trading scam

What will the Top 10 companies be in 2050?

Banking connections – the more there are, the greater the risks

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