Common Fraud Tactics

We all know about the Bernie Madoff “Ponzi scheme” scandal, but many other similar crooked schemes exist. As explained by the SEC, “a Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.”[i] The Madoff fraud targeted financially savvy rich people; it’s not unrealistic to expect that smaller Ponzi schemes might be aimed at average people.

 

It can happen anywhere. We had a Ponzi scheme operated by a financial advisor in our little town of 30,000 people. In the town where I practice, a financial advisor moved in, made friends, held swanky events, visited the sick, gave to the poor, established an investment fund, and founded a school…until he was arrested for swindling those “friends” he advised. At his trial, he apologized by saying: “I did love them dearly. My clients were my life. ... I just hope they don’t lose trust in people.” My heart goes out to the people he cheated.

 

“Educational” Websites and Events with Ulterior Motives

How about a free dinner in exchange for listening to an “educational” seminar? This selling tactic is popular, and although it can at times be safe, it usually comes with a hard sell that is tough to resist. After all, they paid for dinner, right? I come from Mennonite people, and I hate to pass up anything free. Complimentary coffee at Publix? Yes, no matter how weak. Free pen? I realize I have a drawerful at home, but you never know. EVERY sample at Costco? Well, not anything with fish in it. But when someone offers a free dinner at one of the fanciest restaurants in town just for listening to a presentation on retirement planning, I would have to say no. Why? Folks, if any finance- or money-related entity offers free breakfast, lunch, or dinner in return for an “educational seminar,” you must say no, even if, as Jane Byrant Quinn writes, “you think you're strong enough to go only for the food.”[ii] These sales events try to stick you with expensive products and will often not provide accurate information. The people who offer these meals are trained salespeople, and they know the psychological techniques to get you to buy. They may not necessarily be evil or crooked; most have a legal product to sell, but if they are giving a free meal, the product is likely to be overpriced. Quinn goes on to say that “the products they sell might come from reputable companies but are often entirely wrong for someone in your personal situation. If you succumb, count on paying high and hidden costs (these salespeople earn big, big commissions for roping you in). So much for the ‘free’ lunch.” Another temptation is that many of these events are run by young people, and if you are my age, everything young is beautiful. I am much more at risk of parting with my money to help the sales record of an earnest young woman or man like my own daughter or son. Even financial advice at church can sometimes be suspect. If you attend church-related financial seminars, make sure you understand the true costs of the service or product being sold.

 

Keep in mind that most investment advisors or financial advisors or financial planners offer a free consultation where you can learn all you need to know about their services. Our firm, Wilson David Investment Advisors, offers one or more free meetings for potential clients to get to know us. I also hold free educational seminars at libraries, colleges, and community groups in which sound advice is offered and nothing is for sale; my mission in these sessions is to promote financial literacy and is separate from my business.

 

Too Good to Be True

If something seems too good to be true, it probably is, especially when it comes to financial return on investment. Although a few people may have the luck to score a windfall, most investors make about the same amount from their money based on the risk level of the investment vehicle they choose. Basically, the safer the investment, the less money you will make. U.S. government bonds are almost risk free, and that’s why you only make about 1% when you invest in them. You have no guarantees in investing: a corporate bond or biotech stock could give you a 50% return – or the company might go out of business and you would earn no return AND lose the entire amount of principal you invested. A good guideline is to compare your returns with the general accepted returns that comparative investments are making. The New York District Court documents on the Bernie Madoff scandal point out that in the Madoff case, the “the investment performance achieved by [the Madoff Securities] funds…is so consistently and significantly ahead of its peers year-on-year, even in the prevailing market conditions, as to appear to good to be true – meaning that it probably is.”[iii] In the Madoff case, his clients were earning a steady return on their investment that was consistently far above what other similar investments were making – that’s a classic red flag. The Ponzi scheme Madoff ran was fake, and when it collapsed, his clients lost the money they had invested with him.

 

[i] “Ponzi Schemes.” U.S. Securities and Exchange Commission. 9 Oct. 2013. Web. 2 July 2016. https://www.sec.gov/answers/ponzi.htm.

[ii] Quinn, Jane Bryant. “Can You Trust a Financial Advisor?” AARP. August 2013. Web. 15 Nov. 2015. http://www.aarp.org/money/investing/info-08-2013/can-you-trust-a-financial-adviser.2.html.

[iii] Schwartz, Matthew and Barbara A. Ward. “Madoff Verified Complaint – Exhibit D.” United States Attorney for the Southern District of New York. 6 Jan. 2014. Web. 7 July 2016. http://jpmadoff.com/wp-content/uploads/2014/09/2014-01-06%20DFA%20Exhibit%20D%20-%20USA%20v.%20$1,700,000,000%20Verified%20Complaint.pdf.