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

Following the onset of the Great Recession of 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 pin striped with men has been epidemic.

The Ponzi scheme defined is the model of simplicity: the scammer uses money from new investors to pay return on investment to original investors, rather than pay ROI from income earned on legitimate investments or venture 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 the fraud and maintain the illusion of legitimacy, the architect behind the Ponzi scheme must constantly grow his pool of investors to pay returns to the original investors. Original investors may see dividends, but they will never see a return on principal, as some of it goes into the scammer’s pocket and the rest is used to pay bogus dividends to other investors. The group of investors 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 are required to meet the promised returns and keep the ruse alive.

The slim margins involved in the scam often result in an end game in which the scammer exhausts their bluff and leaves town to start the Ponzi scheme again on new hunting grounds, or is arrested with little to no identifiable assets. to 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, just like their Ponzi schemes, take many forms. A serial scammer must avoid a criminal pattern that could identify him as the perpetrator of a new financial fraud. They must be discreet, discreet and chameleon-like, with ever-changing personal and professional personalities. Since a Ponzi scheme in its pure form is simple in structure and easy to detect, the skill of the henchman behind the scam determines its success. If the scammer is an expert in his craft, 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 warning signs of a financial fraud is the absence of a business plan: details and details. Keeping things nebulous allows the scammer to avoid liability. This is often achieved by instilling an air of exclusivity, privilege, and mystique around the business model. By doing so, potential investors are less likely to ask tough questions. Through social engineering and charisma, the scammer convinces their brand that they will be part of an investment opportunity that only extends to a select few. This psychological manipulation can be accomplished in several different ways, one of which is the affinity scam, where the scammer will target people of similar ethnicity, race, or religious beliefs. Many times 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 the sophistication, understanding, and experience required as a precondition for participating in a particular investment fund. In reality, this prequalification is an empty exercise: a posture to reinforce the company’s legitimacy traps. The reality is that the scammer’s only concern is that the brand is willing to part with their 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’s impossible to put together a comprehensive guide to avoiding it. The best form of vigilance is to remain alert to the scammer’s presence and not the scammer himself. If one can identify a scammer, one can avoid the scam.

Behaviour: Watch the behavior of the suspected scammer and pay attention to any evasiveness when asked direct questions. Look for concrete answers to concrete 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 details of their investment model, walk away. Remember that vetting goes both ways: Just as the money manager has a responsibility to qualify investors, the investor has every right to check the broker’s references and audit their history on Wall Street or Main Street. At the very least, have all contracts and paperwork executed by a trusted securities attorney and accountant who is a certified financial planner.

Discretion and professionalism: While an asset manager is not required to disclose his client list to you, if he is a henchman with an A-list client base, he will often go out of his way to do just that. This lack of discretion sets it apart from legitimate brokers and is integral to creating a mystique around the investment firm. You’ll find that most confidence men choose brands that are either novice investors or have 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 more sophisticated investors who may have realized that “the emperor had no clothes.” “and taking on less-savvy celebrities whose star power would be an attraction to other deep pockets.

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

There is nothing a good scammer says or does that identifies them as such. This is the challenge: their entire approach is based on stealth such as perception manipulation, flattery, charm, and deception. It’s a form of psychological warfare and one reason scammers prey on vulnerable populations in society, like retirees. They also frequently pander to their investors’ narcissistic tendencies, which is one of the reasons actors are such easy targets. The art of scamming is just that: art, not science. It has much more to do with a mastery of psychology than finance.

Common thread: There are few common denominators in this game, but there are some platitudes. If you take one thing from this opinion piece, let it be this truism: A master scammer is one who identifies a need in their brand and convinces the brand that they can fill that need.

The reality is that the scammer rarely has the intention, ability, or desire to keep their promises, but has the intention and ability to stick with their brand by believing that a big payday is a certainty in the near future.

Bernard Madoff and Allen Stanford set the bar high for institutionalized bribery with scams that produced as much as $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 in both the scale of economics and the enormity of crime. One would think that the lights of the klieg directed at these men and their public pillar would have had a chilling effect on similarly minded corrupt men of money. That was not the case. Shortly after the arrest of Madoff and Allen, fraudsters Paul Greenwood and Stephen Walsh were arrested for defrauding their investors of $554 million.

Climate and Zeitgeist: As with preventing any pest, the best way to protect against the threat is to ensure a robust immune system that is not attractive to the virus. In the last two decades, the increasing deregulation and lax enforcement of existing rules created an ideal climate for defrauding experienced and novice investors alike. It has been a breeding ground for scammers and Ponzi schemes.

We the People: Government agencies authorized to safeguard the public trust were plagued by political paralysis, inaction and indifference. They cared more about public relations than policing Wall Street. The Securities and Exchange Commission and the Federal Trade Commission doubled as preparatory schools for future Wall Street financiers. 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 approaching the audit like a job interview. I can tell you from first-hand experience in my efforts to bring a high-profile fraudster to justice that the SEC’s approach to investigating investor fraud is more like a “duck and cover” classroom drill. ” of the 1950s than to a serious, probationary and aggressive mentality. investigation into the possibility of criminal conduct. Arguably these past two decades such agencies, whether by design or negligence, have only served to insulate the corrupt and criminal from scrutiny and exposure. Inaction is action. These past twenty years of deregulation, that inaction has often risen to the level of criminal co-conspiracy, but by the absence of intent. The FTC, the Treasury Department, and the SEC were powerless mother organs of a sick, incestuous culture on Wall Street that led to a crisis situation.

The very fact that the biggest con artist in our nation’s history, Bernard Madoff, enjoyed a term as Nasdaq chairman and had a niece in bed with, literally, an SEC regulator is damning evidence of a fractured foundation. . When the SEC was at times shaken from her state of nepotism, lethargy, and active avoidance of upsetting the status quo, her chronic delinquency left her at the crime scene as a coroner to record time of death, and not in her intended role as sheriff to detect homicide. Too often, the SEC’s role was that of an undertaker that tagged and bagged bodies, falling far short of its intended role as defined by section 4 of the Securities Exchange Act of 1934.

Part III of III In this series of articles on Ponzi schemes, you’ll examine an ongoing real-world scam, the scammer behind it, and the investors who are victims of the criminal enterprise.

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