Investor's Watchdog.com: Stock, finance and investment protection for investors

The U.S. Securities and Exchange Commission (“SEC”) has charged Derek A. Nelson and his company Capital Mountain Holding Corporation, and two other companies that Nelson controls, Systems XXI, Act I, LLC (“Act I”) and Systems XXI, Act II, LLC (“Act II”) (collectively “the defendants”), with conducting a fraudulent offering of promissory notes.  According to the SEC, the defendants sold the promissory notes through a Canada-based investment club and through a website.  As with other recent schemes, Nelson told prospective investors that he would use their money to buy distressed properties and generate the promised returns by improving the properties and either renting them out or reselling them at their true value. The defendants promised returns of between 18 and 21 percent per year.

According to the SEC, the defendants used investor money to make Ponzi payments to earlier investors, thus maintaining the illusion of profitability and allowing the scheme to continue.  The SEC also claims that Nelson used $3.6 million of the $25 million he raised to support his luxurious lifestyle. He used $1 million to buy a home.

Notice three things about this case.  First, notice that the central claim of the scheme involved buying distressed properties.  Everyone is aware of the recent flood of such properties.  Foreclosure rates have been in the news for months now.  Scam artists often structure their schemes around developments in the news.  It provides them with a head start in creating the illusion of legitimacy.

Also, notice the promised returns.  While 18 to 21 percent is an outrageously optimistic claim, it is still south of the ridiculous claims of some scam artists (50 to 100 percent).  Bernie Madoff taught all scamsters that promising a return more within the realm of reason will not only attract more investors, but also allow the scam to continue much longer.

Finally, notice the extravagant spending.  Scam artists almost always spend like a trust fund baby on a weekend spending bender.  If the person who has control of your nest egg has the spending habits of a Hollywood starlet, he is likely spending your money not his own.

A tsunami of investment fraud has broken over the planet.  It will flood the investing landscape for the nest twenty years, at least.  Those who make their living by scamming others bring skill, experience, and determination to the task.  They are good at it.  Even sophisticated, highly educated investors are no match for an experienced scam artist.  If you care about the nest egg it took you so long to build, get help from someone who has seen hundreds of cleverly-disguised scams.