Investment fraud: easy money or not
Bob AInsworth
I have inside information XYZ stock is about to double. You don't want to lose out on this opportunity, but I need an answer right away. I'm XXX (fill in an ethnicity or other group affiliation) just like you, and I want all the members of XXX like you to become rich. This investment will double in 90 days, 120 at the latest. You've invested $1,000 and done great: Now it's time for the kill, invest $25,000. Think of how proud your family will be when you take command of the finances.
Investment fraud comes in as many shapes and sizes as shoes, and con artists will try all of them until they find one that fits you and rob you.
Bernie Madoff used an affinity scam by focusing on fellow Jews and then perpetrated a Ponzi scheme where he used new investor money to pay extraordinary investment gains to the earlier investors. He effectively bribed the investment advisors who funneled their client's money to him by paying them a larger than normal finder's fee. Those bribes allowed Madoff to get away with limiting the due diligence the financial advisors should have performed and to insist his name be kept out of any marketing materials. He was the Babe Ruth of investment fraud criminals.
Investment scams aren't always on the grand scale of Madoff's $30 billion and prey on millionaires. A Metrowest criminal convinced dozens of his similar ethnic group to invest with him because he was smarter and he knew the investment world better than they did. They scraped together $5,000 here and $10,000 there and turned their life savings over to their trusted friend. The trusted friend then spent the money on trips and gifts for himself.
Sometimes the criminals are brazen in publicizing their activity. Two men were charged by the Securities & Exchange Commission with creating a hedge fund in the U.S. allowing investment in a Canadian hedge fund. They actively solicited investors, and 50 people believed their story and gave them $15 million. They used the money on personal spending and to pay off investors in two other hedge funds.
Fake accounting is another way to steal money. A registered Massachusetts broker dealer had the authority from his clients to buy and sell stocks for their accounts. He would buy blocks of stocks and then allocate the gains or losses to himself or his clients. You can guess what happened: He took the gains, and his clients took the losses. He took $1.3 million.
Now that you want to keep your money in a mattress, there are ways to protect yourself.
Websites offer great tips: FINRA.org (the Financial Industry Regulatory Authority), FBI.gov, the Securities and Exchange Commission has the website Investor.gov, and the Massachusetts Secretary of State has sec.state.ma.su has a section entitled, “Investor Education.”
There are basic tips.
1. Avoid unsolicited investment schemes. They are looking for suckers.
2. If it sounds too good to be true, it is. For some perspective, stocks generally over the long term earn 8 percent, bonds 4 percent and money markets 2 percent. Returns exceeding these averages may hint at fraud.
3. No returns are guaranteed. Returns are a way of being paid for taking a risk. A guarantee means no risk. The only guaranteed security is by the U.S. government.
4. Invest right now, or you'll miss out. That is a pressure tactic. A good investment can be made any time.
5. Check out credentials. Call the state Secretary of State or the SEC or the accreditation organizations. Go to FINRA BrokerCheck to get information on brokers and investment advisors.
6. Invest because I am like you, trust me. As President Ronald Reagan said, trust but verify.
7. Discuss your decision before investing. Verbalizing an opportunity to a family member, another investment professional or your accountant is a good way to test its legitimacy.
8. Ignore social pressure. A deal needs to be right for you, not a crowd of people. Stay away from seminars or pitches relying on crowd thinking.
9. Use the internet. Search for the name of the investment offeror.
10. Watch for the “Go for the big kill” tactic. You make a profit on a small amount, now invest your entire savings and make a fortune.
11. Believe your gut. At the end, your gut instincts are good warning signs.
Bob Ainsworth, CPA is the former chief financial officer of New England Business Media, the parent company of Worcester Business Journal. He is the author of “A Fraud Of The Ponzi Kind,” a crime thriller featuring a fraud detective, Harold A. Bradford III.
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