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Consumer Sourcebook

Preface | User's Guide | Table of Contents | Print Sourcebook Adobe Acrobat Reader Symbol

Schemes, Swindles & Scams

Each year, thousands of consumers fall victim to one of the many varieties of fraudulent schemes or con games, losing anywhere from a few dollars to thousands of dollars. Con artists are skilled at preying on both our fears and our best instincts: we want to help someone in a jam, we don't want to get someone into trouble, we want to be able to provide for our families. Swindlers may offer a "great deal" that "won't be available tomorrow," or the investment opportunity that is "too good to pass up," or the chance to split a large sum of money they just found. The old saying "better safe than sorry" is a good one to follow. The best way to avoid being scammed is to treat any offer of a "wonderful opportunity" with a great deal of skepticism. If the "deal" will not be available tomorrow, then it probably is not much of a deal, because any reputable business will allow you the opportunity to shop around and compare prices.

Common frauds include pyramid schemes, ponzi schemes, phony job offers, false billings, bogus investment opportunities, and fraudulent home repair services just to name a few. Several specific deceptive business practices are covered elsewhere in this guide. A complete overview of New Hampshire's Consumer Protection Act, the primary statute governing unfair and deceptive business practices, is given in the 1st WORD section. Information on deceptive advertisements is given in the section entitled Advertising. Telephone solicitations are covered in Telemarketing and 900 Numbers. Contests and charitable solicitations are in the Prizes and Sweepstakes and Charitable Solicitations sections respectively. Some of the new scams that are perpetrated on the Internet are described in E-Commerce. Presented below are descriptions of several of the "old standards" in hope that recognizing the basic elements of a fraudulent scheme will help you to avoid it.

Pyramid Scheme

Pyramid schemes are also referred to as "chains" or "referrals" and are simply a variation on the chain letter. No matter what this scheme is called, the basic premise is the same: the buyer or participant buys the right to enlist others to also enter into the "marketing process," i.e., to buy a franchise or whatever. These types of sales schemes are prohibited in New Hampshire (RSA 358-B) as they are in all states.

Example: Daisy Lou receives an invitation to attend a seminar on a "fantastic" business opportunity for those with the entrepreneurial spirit. Daisy goes to the seminar and is told by Mr. E. Figg that if she acts "right now" she can get in on the bottom floor of this incredible franchising opportunity. For an initial investment of merely $2500, she will have her own vending machine franchise. But that's not all! She will also be able to franchise parts of her franchise. She can get her friends to benefit from this GREAT opportunity by investing a mere $2500 with her. She then gives Mr. Figg a 50% commission on whatever she receives. And the people she recruits can franchise off part of their franchises for $2500. They will give Daisy a 50% commission on each $2500 they bring in, and she gives Mr. Figg a 50% commission on that amount. Daisy won't be able to lose! If she gets just five people to buy franchises from her, and they each get five people to buy from them, why! within a matter of a few weeks she could make almost $50,000!

This is how a pyramid scheme works:

  • A seller or recruiter offers the opportunity to invest in a "distributorship," franchise, or other business opportunity for a specified sum of money.
  • Your "investment" gives you the right to sell similar distributorships (and so forth) to other "investors." The selling of actual products may or may not be involved but is usually incidental to the rewards for recruiting new "investors." Because more money can be made from selling the distributorships (or whatever), investors typically concentrate on recruiting more investors.
  • The money that you bring in through recruiting new "investors" is split with the one who recruited you, usually 50-50.
  • Each person you recruit, in turn, shares with you the "investment monies" received from those they recruit (and then you split that money with your recruiter). And so on down the line.

pyramid scheme

If you are fortunate enough to be one of the early (top of the pyramid) investors, you may actually make some money. But the scheme is doomed for failure because with each "layer" of recruits, more and more people have to be found. For example, if each investor enlists 10 new investors, in ten "rounds" the entire world population would be recruited.

The pyramid scheme is not limited to a particular type of product or service. According to the Better Business Bureau, in recent years pyramid scheme promoters have been targeting social and religious organizations as a method of fund-raising.

Note: While multi-level marketing formats in which participants receive a percentage of the actual sales from their recruits, may not be strictly illegal, the promises of potential earnings by some multi-level marketers should be viewed with skepticism.

Tip Offs

  • Unbelievable claims about the potential return on your investment.
  • The profits gained from the sale of products or services are minor compared to the profits to be earned from selling franchises or recruiting new investors or members.

Ponzi Scheme

Ponzi schemes are named after Charles A. Ponzi who defrauded hundreds of investors during the 1920s. A ponzi scheme is similar to a pyramid scheme, but offers investment opportunities rather than business opportunities.

The "promoter" enlists investors by promising an extraordinarily high rate of return over a relatively short period of time. At the end of the "investment period," the promoter offers to pay the investor his or her initial investment plus the promised rate of return, or the investor may reinvest the total amount. More investors are recruited because the "investment" appears to be legitimate and highly profitable. How the investors are paid off is the problem. No actual "investments" are made by the promoter/swindler. Investors who want to pull out are paid off with funds from other investors. The "chain" works until the promoter/swindler disappears either because a number of investors decide to take their earnings (and the scheme begins to collapse), or the swindler decides he or she has made enough profit.

Tip Offs

  • Unbelievable return rates on investment over a short period of time.
  • Vague description of the actual investment offering (no prospectus, or only a very sketchy one, etc.).

The Bank Examiner Scheme

At least two people are needed to pull off the bank examiner swindle. One person will stand near a customer (the potential victim) in a bank and secretly get his or her name, account number and account balance. Only those with sizable bank accounts become victims. One of the swindlers will contact the victim either as the victim leaves the bank or later at home. The swindler poses as a bank official, police officer, or FBI agent who is trying to trap a bank teller suspected of embezzling. The victim is asked to assist by going to the particular teller's window to withdraw a specific large sum of money. The victim is then instructed to bring the cash to a "bank official" (who is the swindler's partner) who will be waiting outside the bank. The "bank official" will supposedly redeposit the money into the victim's account when the suspected embezzler is arrested. Once the victim has handed over the cash, the "bank official" thanks the victim profusely and disappears with the victim's money. No bank official, police officer, or FBI agent would ever ask a person to withdraw money from his or her account under any circumstances.

Tip Offs

  • A person who introduces him or herself as a bank official, or other person of authority, who asks you to help "catch a thief."

For your information … Deceptive Mail Prevention and Enforcement Act

This federal law is designed to protect people, especially the elderly, from sweepstakes scams. Sweepstakes sponsors are prohibited from implying that buying a product will increase one's chances of winning a big prize. Standards have been established for sweepstakes mailings, skills contests, and facsimile checks related to contests.

The Pigeon Drop Scheme

The pigeon drop is a variation on the bank examiner swindle. The swindler convinces the victim that he or she has just found a large sum of money (in a bag on the street, left behind on a park bench, etc.) with no way to identify the owner. The swindler is willing to share the money with the victim if the money is not claimed. Both the victim and the swindler agree to withdraw a substantial amount of cash from their respective bank accounts as a gesture of "good faith" to the other which will be held by a "trusted third party," usually a "lawyer friend" of the swindler. After the victim and swindler give the withdrawn cash to the "trusted lawyer," the swindler allegedly heads off to take the "lost money" to the police. The victim never sees the swindler nor the cash again. And the "trusted lawyer" has disappeared, too.

Tip Off

  • A person who wants to share with you some cash that he or she found.

Home Improvement Scheme

Every homeowner knows that eventually something around the house will need to be fixed. Most plumbers, electricians and contractors are legitimate, providing the service or repair promised. However, occasionally someone who is little more than a rip-off artist will bilk a homeowner out of hundreds or thousands of dollars. Scams may involve roof or driveway repairs, plumbing or electrical repairs, or siding installation, or any number of other possibilities.

The most typical scenario involves a salesperson or "contractor" coming to the victim's door saying something like: "We were repaving a driveway on the next block and have some hot-top left. We can repave your driveway for a very low price if we do it right now." Or, an "inspector" will come to the door and insist on "inspecting" after which something is found to need immediate repair.

Because the work must be done "immediately" the victim is coerced into having that particular repair crew do the work, with no opportunity to compare prices. The victim may also be required to give a substantial down payment for the work to begin. The victim gets substandard materials and shoddy workmanship. Repairs may be started but never finished. When the victim tries to contact the "contractor" to finish the job (or repair the repair), he or she finds that the contractor has left the state.

Sometimes people will find that they have been charged many times the true cost of the materials and labor for work that was done. Sometimes people find that the contract they signed for the repairs gives a finance company a security interest in their homes.

Example: Mr. Homoner, who is 82 years old, is raking his leaves. A dump truck drives slowly past, stops and backs up. The driver, a burly man who says his name is "Jay," says: "Me and the boys was just up the street aways fixing your neighbor's driveway. We got some hot top left over and we'll fix them holes in your driveway for a buck a foot." Mr. Homoner, who has been meaning to get his driveway fixed, agrees. When half his driveway is torn up, Mr. Homoner learns that the price is $10 a square foot. "Jay" and three massive "helpers" crowd around him telling Mr. Homoner that he must have misunderstood the price and demanding payment in cash. They offer to drive him to the bank to get it. Mr. Homoner should call the police and the Consumer Protection Bureau immediately before he pays "Jay" and associates any money.

Tip Offs

  • Any contractor who stops by your house unannounced because he or she "just happened to be in the neighborhood" and noticed that your house, driveway, chimney, etc. needs repair. He or she can give you a really good price, because some materials are left over from a job just finished.
  • A contractor who arrives in an unmarked truck or van, with little equipment, and/or out-of-state license plates. A contractor who is unable to give you a business card with an address and telephone number.
  • A contractor that will give you an unbelievable low price for the work so that he or she can use your house as a "model."
  • A contractor who will not give you time to get other estimates. Or who tells you that he or she cannot come back another time because of another job in another town.

Watch out for … Office Supply Scams

Businesses, churches, municipal governments, and other users of office supplies like copy toner, cleaning supplies, and stationery complain from time to time about companies that call by telephone, posing as the user's regular product supplier, and claim that it is time to "reorder" the product. These callers often claim to offer a "special price" for the product that is good for "today only." The company then sends the product (usually at a greatly inflated price) to the user, who discovers that the product has not been ordered from the regular supplier.

Where it may be argued that your business or organization has "ordered" a product, but did so because it was given misleading information, you should:

  • Contact the company in writing and cancel any "order"
  • Refuse delivery or try to return the product
  • Refuse to honor invoices for the product
  • Determine whether the person who placed the "order" actually had authority to make such a purchase
  • Educate everyone in your business or organization who may receive such calls about the nature of this scam.

Be suspicious of phone calls about reordering supplies that are inconsistent with your regular supplier's normal methods.

If you find your office has fallen victim to this type of fraud, contact the National Fraud Information Center at 1-800-876-7060 (toll free).

The Better Business Bureau has information about Office Supply Scams available through its Web site.

Points To Remember

  • Businesses, churches, municipal governments, and other users of office supplies like copy toner, cleaning supplies, and stationery complain from time to time about companies that call by telephone, posing as the user's regular product supplier, and claim that it is time to "reorder" the product. These callers often claim to offer a "special price" for the product that is good for "today only." The company then sends the product (usually at a greatly inflated price) to the user, who discovers that the product has not been ordered from the regular supplier.
  • Where it may be argued that your business or organization has "ordered" a product, but did so because it was given misleading information, you should:
    • Contact the company in writing and cancel any "order"
    • Refuse delivery or try to return the product
    • Refuse to honor invoices for the product
    • Determine whether the person who placed the "order" actually had authority to make such a purchase
    • Educate everyone in your business or organization who may receive such calls about the nature of this scam.
  • Be suspicious of phone calls about reordering supplies that are inconsistent with your regular supplier's normal methods.
  • If you find your office has fallen victim to this type of fraud, contact the National Fraud Information Center at 1-800-876-7060 (toll free).
  • The Better Business Bureau has information about Office Supply Scams available through its Web site.

Where To Go If You Have A Problem

As stated above, if you are suspicious of someone, call your local police.

Contact the NH Consumer Protection & Antitrust Bureau.

NH Consumer Protection & Antitrust Bureau
33 Capitol Street
Concord, NH 03301-6397
603-271-3641

Contact the Better Business Bureau for information on contractors (they can tell you if they have received a complaint about a business), or to report a complaint.

Better Business Bureau
25 Hall Street, Suite 102
Concord, NH 03301
224-1991 or 228-3789 or 228-3844

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New Hampshire Department of Justice | 33 Capitol Street | Concord, NH | 03301
Telephone: 603-271-3658