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Tuesday, November 30, 2010

Advanta Investors, Promised 11 Percent Profit, Will Lose Up To 36 Percent

Posted By on Tue, Nov 30, 2010 at 2:40 PM

click to enlarge There's one born every minute...
  • There's one born every minute...

An investment offer advertised in the San Francisco Chronicle by the bank Advanta promised 11 percent annual interest at a time when savings accounts typically offered less than 2 percent. As we noted in an article and blog post shortly thereafter, the offer was too good to be true.

Now comes news that Chronicle readers would have done better with a normal savings account -- or even a piggy bank. But Advanta investors could have potentially done worse, considering they'd put their money into what former bank regulators referred to as a Ponzi scheme.

According to press statements issued earlier this month, a deal reached in bankruptcy court will have the bank repaying buyers of advertised Advanta investment notes between 64.4 percent and 100 percent. While losing 36 percent of one's capital is worse than earning 11 percent, it sure beats the sob stories that go along with similarly dodgy investments.

Even while advertising 11 percent investment notes in the Chron, Advanta, a bank specializing in credit cards used by small businesses, stopped issuing new cards -- and prohibited its existing cardholders from making new charges. The company was left as an empty shell, and faced with the task of collecting $2.7 billion in outstanding credit card balance.

Neither the advertisement nor the prospectus accompanying the investment offer, however, noted that the bank was essentially in liquidation mode.

We quoted retired bank regulator William K. Black, author of the book The Best Way to Rob a Bank is to Own One, as saying the Advanta offer in the Chronicle was equivalent to a Ponzi scheme.

The only way you can do this is like a Ponzi, and grow extremely

rapidly. Even using these kinds of ads, and seeking out people who they

perceive as the ultimate suckers in the marketplace, you're not going to

be able to grow rapidly enough to stay alive all that long.

Ponzi investors, such as victims of Bernard Madoff, don't usually end up getting back between 64 and 100 cents on the dollar, however.

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