No Return Without Risk

People invest their money in the expectation of generating a return, but there is no such thing as risk-free investment.

For some time now, many asset classes have generated practically no return. Against this background of historically low interest rates, investors may be tempted to entrust their money to providers who promise significantly higher returns. However, the general rule is: the higher the return, the higher the risk. Temptingly high returns are often a sign of a dubious provider. In other words, the higher the promised returns, the more closely investors should scrutinise offers and providers before making an investment decision.

When investors lose money, it is usually because they have entrusted their capital to a company which is operating illegally. This usually takes the form of loans or the sale of worthless shares. Illegal providers – and fraudsters in particular – are extremely inventive and are constantly working on new schemes for relieving unwary investors of their money. The two real-life case studies below illustrate how unscrupulous financial service providers abuse the trust of investors. We have changed the names of the companies involved.

Geothermal power stations as a sales angle: the misleading advertisements of XYZ Crash AG

According to its literature, XYZ Crash AG was an investor in projects relating to the construction of geothermal power stations in Germany. To attract predominantly German investors for these projects, the company employed a large number of intermediaries, staged costly promotional events and advertised extensively through an attractive website. Potential investors were promised very high returns. From its base in Switzerland, XYZ Crash AG accepted funds totalling several million francs. However, the investments proved worthless and investors lost practically all the money invested.

XYZ Crash AG continued to assert that the first power station would come online in 2013. Customers who placed their trust in XYZ Crash AG invested the surrender values of their pension saving and mortgage contracts, with XYZ Crash AG promising them a multiple of what they could expect to receive if they held the contracts to maturity. In total, XYZ Crash AG raised over 50 million francs from more than 4,000 investors. Even though the company's investment strategy contained no such proposals, much of this money then was channelled to a subsidiary which then passed on ten million dollars to another company as an unsecured loan.

Following complex investigations in Switzerland and abroad, FINMA liquidated several companies in Switzerland, including XYZ Crash AG. FINMA served an advertising ban on the leading figures at the company; this ban was published on FINMA's website for five years.

The machinations of Main Capital Solutions

Henning Blechschmid, the owner of Main Capital Solutions, used a Bermuda-based company, which he owned, to buy shares in a number of small companies. He then sold these to investors through a specially founded company with its registered office in Delaware, a US tax haven. What investors did not know was that Blechschmid was selling them the shares at a much higher price than he had paid for them, even though the purchase contracts specifically stated that investors would pay the original purchase price for the shares and that Blechschmid would only receive 20% of any net profit on the investment.

Once this fraud was detected, the Zurich public prosecutor's office began proceedings against Blechschmid and froze the remaining assets. In this case FINMA was able to rely on documents seized by the public prosecutor during a search of Main Capital Solutions’ offices in Zurich. It rapidly became clear that the Bermuda-based company was operating out of the Zurich offices of Main Capital Solutions and not from Bermuda. In other words, Main Capital Solutions and the Bermuda-based company were carrying out unauthorised issuing activities from within Switzerland, raising around 60 million francs from around 30 individuals.

FINMA ordered both companies to be liquidated. Since they were illiquid and overindebted, FINMA launched bankruptcy proceedings. In addition, FINMA banned Henning Blechschmid, the company's owner, from carrying out any activity requiring authorisation. The ban was published on FINMA's website for a period of five years.

There are many examples of companies which persuade investors to part with their money by means of attractive offers and apparently marvellous returns. It is impossible to overstate the risks posed by such offers which are, of course, too good to be true. Often they turn out to be pyramid schemes or other embezzlement and fraud scenarios promising high returns. Initially, the promised returns may actually be paid out in order to bolster investor confidence. In the end, however, the investments are not repaid. By the time the case becomes known and the authorities become involved, most of the assets have already disappeared. Investors in such schemes often end up losing most of their money. It is then up to the criminal prosecution authorities to take appropriate legal action against those responsible.