Investor Fraud – Anatomy of a Scam – Identifying a Ponzi Scheme and Scammers – Part II of III

After the onset of the Great Recession in 2009, it didn’t take an expert to identify a henchman and his Ponzi scheme – the outbreak made the front pages of every major newspaper in the United States and abroad. The arrest and prosecution of pinless scammers has been an epidemic.

The Ponzi scheme defined is the simplicity model: the scammer uses the money of the new investors to pay the return of the investment to the original investors, instead of paying the ROI of the income obtained in legitimate investments or risky work. In short, the only source of income is the investment group. There is no real investment of that money or a legal business model that generates new income. The only “business model” involved is the Ponzi scheme itself.

To perpetuate fraud and maintain the illusion of legitimacy, the architect behind the Ponzi scheme must constantly grow his pool of investors in order to pay returns to the original investors. Original investors may see dividends, but they will never see a return on principal, as some of that goes into the scammer’s pocket and the rest is used to pay false dividends to other investors. The investor pool is the only source of income from which dividends are paid. The more investors there are, the higher the annual dividend payments, the more new investors it will take to meet the promised returns and keep the ruse alive.

The narrow margins involved in the scam often result in an end game in which the scammer exhausts his deception and leaves town to start the Ponzi scheme all over again on new hunting grounds, or is arrested with few or no identifiable assets of those. which can order restitution or award civil damages. This common scenario is one of the main reasons this crime is such an insidious type of financial fraud: even after the perpetrator is prosecuted and convicted, the victim rarely recovers.

Scammers, like their Ponzi schemes, take many forms. A serial scammer must avoid a criminal pattern that could identify him as the author of a new financial fraud. They must be discreet, discreet and chameleonic, with constantly changing personal and professional characters. Since a Ponzi scheme in its pure form has a simple structure and is easily detected, the skill of the henchman behind the scam determines its success. If the scammer is skilled in his art, investors are unaware and uninterested in the details of his “business”; the inner workings that would identify it as a Ponzi scheme.

One of the red flags that indicate financial fraud is the absence of a business plan: details and specifics. Keeping things nebulous allows the scammer to avoid accountability. This is often accomplished by instilling an air of exclusivity, privilege, and mystique around the business model. By doing so, prospective investors are less likely to ask the tough questions. Through social engineering and charisma, the scammer persuades his brand that it will be part of an investment opportunity that is only extended to a select few. This psychological manipulation can be accomplished in a number of different ways, one of which is the affinity scam, in which the scammer will target people of similar ethnicity, race, or religion. Often there will be a staged investigation of the prospective investor, presumably to determine whether or not they are qualified under SEC guidelines; that is, if the investor has the net worth and / or sophistication, understanding and experience necessary as a precondition for participating in a particular investment fund. In reality, this prequalification is an empty exercise: a stance to reinforce the company’s legitimacy traps. The reality is that the scammer’s only concern is that the mark is willing to part with your money; not if you are able to part with your money as a reasonably prudent investor.

Ponzi schemes are not limited to the stock market. They are as varied and numerous as services and products to sell. Because financial fraud can take an unlimited number of forms, it is impossible to create a comprehensive guide to avoiding it. The best way to stay alert is to be alert to the scammer’s presence and not the scammer himself. If you can identify a scammer, you can avoid the scam.

Behaviour: Observe the behavior of the suspected scammer and be on the lookout for any evasiveness when asked direct questions. Look for concrete answers to specific questions. As noted above, the proof is in the details; the nuts and bolts of the paradigm. If the broker is hesitant to provide you with those details, the specifics of your investment model, walk away. Remember that the background check goes both ways – just as the money manager has the responsibility of qualifying investors, the investor has every right to check the broker’s references and audit their Wall Street or Main Street track record. At the very least, execute all contracts and documentation with a trusted securities attorney and accountant who is a certified financial planner.

Discretion and professionalism: While an asset manager is not obligated to disclose their client list to you, if they are a henchman with a top-notch client base, they will often go out of their way to do just that. This absence of discretion sets you apart from legitimate brokers and is an integral part of creating a mystique around the investment firm. You will find that most henchmen choose brands that are neophyte investors or possess only rudimentary knowledge of stocks, bonds, and portfolio management. They may be A-list celebrities, but they are rarely A-list financiers and businessmen. Madoff was the master of this calculated discrimination, turning away the more sophisticated investors who may have realized that “the emperor had no clothes. “and embracing less intelligent celebrities whose star power would be a draw to other deep pockets.

Inflated Returns Promise: The old adage, “if it’s too good to be true, it probably is” applies here. An ROI that is unrealistic most likely is. Madoff guaranteed select investors in his fund annual returns of more than 46%. An absurd figure that should have sparked skepticism and more aggressive scrutiny from regulatory agencies.

There is nothing a good scammer says or does that identifies you as such. Here’s the challenge: His entire approach is stealth like manipulation of perception, ingratiation, charm, and deception. It’s a form of psychological warfare, and one of the reasons scammers prey on vulnerable populations in society like retirees. They also tend to indulge the narcissistic tendencies of their investors, which is one of the reasons actors are such easy brands. The art of scam is just that: art, not science. It has much more to do with mastering psychology than with finances.

Common thread: There are few common denominators in this game, but there are some clichés. If you take something from this op-ed, make it this platitude: A skilled con artist is one who identifies a need in your brand and convinces you that you can meet that need.

The reality is that the scammer rarely has the intention, ability, or desire to deliver on his promises, but has the intention and ability to follow your mark by believing that a great payday is a certainty in the near future.

Bernard Madoff and Allen Stanford set the bar very high for institutionalized grafting with contras that yielded up to $ 65 billion. It wasn’t just the size of the shot, but the longevity and complexity of these cons that set them apart. They represent one end of the continuum both in the scale of the economy and in the enormity of crime. You’d think the klieg lights aimed at these men and their public mainstay would have had a chilling effect on like-minded corrupt money men. That was not the case. Shortly after Madoff and Allen’s apprehension, con artists Paul Greenwood and Stephen Walsh were arrested for defrauding their investors $ 554 million.

Climate and Zeitgeist: As with avoiding any plague, the best way to protect yourself against the threat is to ensure a robust immune system that is unattractive to the virus. Over the past two decades, increasing deregulation and lax enforcement of the rules that existed created an ideal climate to disappoint seasoned investors and newbies alike. It has been a breeding ground for scammers and Ponzi schemes.

We the People: Government agencies set up to safeguard public trust were afflicted with political paralysis, inaction, and indifference. They were more concerned with public relations than with policing Wall Street. The Securities and Exchange Commission and the Federal Trade Commission doubled as prep schools for future Wall Street funders. The agencies became revolving doors for federal employees seeking higher-paying, more powerful, and prestigious jobs from the very companies they were charged with regulating. It is difficult to effectively investigate a company for securities fraud while treating the audit as a job interview. I can tell you from first-hand experience in my efforts to bring a high-profile scammer to justice that the SEC’s approach to investigating investor fraud is more like a “duck and cover” drill from the decade of 1950 than to a serious, probative and aggressive drill investigation into the possibility of criminal conduct. Arguably, these past two decades, such agencies, whether by design or negligence, only served to insulate the corrupt and criminals from scrutiny and exposure. Inaction is action. In these last twenty years of deregulation, that inaction has often escalated to the level of criminal conspiracy, but unintentionally. The FTC, the Treasury Department, and the SEC were mere powerless organs of a sick and incestuous Wall Street culture that led to a crisis situation.

The very fact that the biggest con man in our nation’s history, Bernard Madoff, enjoyed a stint as Nasdaq chairman and literally had a niece in bed with an SEC regulator is irrefutable proof of a fractured base. When the SEC was at times pulled out of its state of nepotism, lethargy, and active evasion of disrupting the status quo, his chronic delinquency left him at the crime scene as a coroner to record the time of death, and not in his intention. role as bailiff to deter homicide. Too often, the SEC’s role was that of an undertaker who tagged and bagged bodies, falling far short of its intended role, as defined in section 4 of the Securities Exchange Act of 1934. .

Part III of III This series of articles on Ponzi schemes will examine an ongoing scam in the real world, the scammer behind it, and the investors victimized by the criminal enterprise.