Wall Street Steward Blog

A Tutorial For Discovering Fraud

When I started this blog, I decided to always remain hungry regarding new ideas.  One NEVER knows where the next great idea will come from.  This entry is no exception.

A few weeks ago, my wife and I were sitting on our couch decompressing (watching TV) after a long day.  Mine at the office, and hers raising 3 young children.  After all of the gremlins were sleeping, we decided it was safe to work our way through the DVR.  A vast roster of shows is precisely maintained on our DVR hard drive, but that night in particular we chose one of our newcomers.  The lucky winner was a show called American Greed.

The topic was not as important as what the show inspired…a new blog entry

On American Greed, a true story was being told involving yet another financial advisor punk ripping off their clients with an intricate scam.  We were about halfway through the episode when my wife said to me “pause the show…I have a question.”

“If something happened to you, and I had to hire someone else to manage our investments, how would I know if that person was legit?  What are the warning signs?  How would an average person know what to look for?”

BINGOFireworks  Blog wheels turning.  Another late night date with my laptop! 

Let the record show that I began writing this one at 10:47 pm. 

Let me begin this analysis by saying that each scam is different, and they are executed by people of varying intelligence levels.  Also, none of the warning signs I list below are dead giveaways that anything is fishy.  When sniffing out a rip off, use a “preponderance of evidence” approach rather than a “beyond the shadow of a doubt” deal.  Disclaimer accomplished…now onto the good stuff.

Unreasonable Returns:  Any good salesperson knows the phrase “under promise, and over deliver.”  Well, if the opposite occurs, run the other way.  If the culprit guarantees ANY type of return, or uses feel-good phrases like “we are going to make you big money,” let that be a red flag.  Any return that sounds too good to be true, IS.  RUN, don’t walk, to the door. 

Risk Minimization:  All investments have some degree of risk, and I am most thankful for that.  If something is truly risk-free, then it is also reward-free.  This business is all about trying to make money for people, and that involves risk.  If something is a “sure thing” that “you can’t lose money in,” please stretch out your running legs and pull a Usain Bolt to the door. 

Short Time Period:  The nature of a profitable investment typically involves a longer term holding period.  Sometimes we can get lucky and buy something at the perfect time, but it IS luck and any kind of promise to be able to repeat that is nonsense.  True wealth is not created quickly.  There are no free lunches.  The people on the late night infomercials are paid to say the things the company wants them to say.  Short term profits usually smell, but…..

Non Liquid Investments:  Liquidity = ACCESS TO YOUR MONEY.  If an investment involves locking up your funds to the point that you cannot access it without significant penalties or waiting periods, let someone else own it.  This has been the downfall of several of the largest Ponzi schemes in history.  When many people want their money at the same time, the whole thing crumbles.  Therefore, if the con man can convince half of the investors that they cannot access their money, it buys them time to pay the others…….And to flee the country

Irregular Statements:  A lot of scams revolve around fictitious statements.  Think about it…if you get quarterly statements saying that your account is appreciating 10% per quarter, how likely are you to pull the plug?  Would you sell out to buy a depreciating asset like a car, or leave your money in to earn a huge rate of return?  My recommendation would be to NEVER rely on electronic statements alone.  Sorry tree huggers, I want my paper copies as well as online access to see exactly what is going on.  The closer the investor is watching, the more likely they are to notice any irregularities.

“Black Box” Investments:  If an investment is pitched as a “think tank” or as an “incubator” rather than disclosing exactly what you are buying, be wary.  No matter the “opportunity,” it should be clearly explained in terms that YOU, the investor, can understand.  Try this drill:  explain to your neighbor the exact investment you are considering and see if you can describe it in detail.  If not, find something else. 

Lavish Lifestyles:  In almost every case, a scam artist has an insatiable desire for more and more $m$o$n$e$y$.  $1 million is not enough for these people…nor is $10 million, nor is half a billion.  They will become greedy and will not stop until the law catches up with them.  This is E-A-S-Y to detect.  The next time you are in the person’s office, look around.  Are they wearing a Rolex watch accompanied by an Armani suit while sitting behind a $25,000 mahogany desk?  Are you overwhelmed by the technological capabilities of the 12 flat screen plasma TVs?  warning This does not mean that your advisor should not be successful.  If they drive a Mercedes, that is no reason to fire them but warning over if they own their own Jet and charter flights all over the world, something is probably awry.  They could be spending your money on the finer things in life.  If they resemble a mob boss….women, drugs, money, gambling, women, cars, Jets, expensive jewelry, women….you get the idea, get the heck out of dodge!

Niche Marketing:  I must be careful here, because working with a specific niche is something many legitimate advisors also do.  However, if a firm caters to only “doctors” or to “entrepreneurial business owners,” that is going to make me nervous.  The reason for this is because they could be relying too heavily on word of mouth referrals…or aggressive testimonials.  If 2 CEOs are playing golf, and one of them blurts out “you gotta meet my broker, he has made me a M I N T and he only deals with corporate executives like us,” hesitate before you write that advisor a big check.  People are suckers for referrals, especially if the person referring is a credible person.  The best way for a con man to leverage referrals is to minimize the potential client list to a very exclusive group of people.  Only people in a certain Country Club, only Plastic Surgeons, etc….

Outside Business Opportunities:  This is where the criminal begins to offer investments outside the scope of their expertise.  If they are handling your stocks, bonds, IRAs, etc. and then call with a real estate deal or a start up business venture, be concerned.  For that matter, if your Real Estate Agent calls you with an idea that involves internet consoles, run from them too!

Advisor is Unreachable:  For some reason, many of these people do not return phone calls or e-mail in a timely manner.  I have no idea why, because one would think that if a criminal communicated with the clients on an ongoing basis it would make them more comfortable, allowing the person to milk even more money out of them.  However, with several of the popular cases, the victims say things like “he was impossible to get on the phone and he would never return my e-mails.” 

Limited Time OfferPersonally, I have never been pressured into making a good decision.  If it is limited time, once in a lifetime, never before seen deal that will “never last if you do not jump on it right now,” please pass.  NEVER buy because you feel pressured.  In fact, if I get pressured, I will NOT buy just due to principle.  Yet another red flag is the “red light special.”

CLOSING = Preponderance of Evidence

Trust your gut instincts.  This is not nearly a complete list, but it should provide a good road map to help avoid the pot holes.  If one or two of these characteristics are found, it DOES NOT mean your advisor is a criminal.  However, if I nailed them on 6-8 of them, I would transfer my money in a New York Minute.  Speaking of minutes, it is now almost 1 am and my children will be awake in 6 hours! 

Bye for now.

Creative Commons License photo credit: Picture Perfect Pose