Is A Finance Degree Better Than A General Business Degree Investor Fraud – Anatomy of a Con – Identifying a Ponzi Scheme and Scam Artists – Part II of III

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

Following the start of the Great Recession of 2009, one doesn’t need an expert to identify the self-confident man and his Ponzi scheme: the outbreak was splashed on the front page of every major newspaper in the United States and abroad. The arrest and prosecution of unpinned fraudsters has become a plague.

The Ponzi scheme that is defined is a model of simplicity: fraudsters use money from new investors to pay a return on investment to the original investors, rather than paying ROI from the income derived from legitimate investments or business work. In short, the only source of income is the investor group. There is no actual investment of that money or a legitimate business model that generates new revenue. The only “business model” involved is the Ponzi scheme itself.

To perpetuate the scam and maintain the illusion of legitimacy, the architects behind Ponzi schemes must continue to grow their pool of investors to pay returns to the original investors. Genuine investors may see dividends, but will never see a return on principal, as some goes into the pockets of fraudsters and the rest is used to pay fake dividends to fellow investors. The pool of investors is the only source of income from which dividends are paid. The more investors, the bigger the annual dividend payout, the more new investors needed to meet the promised returns and keep the gimmick alive.

The slim margins involved in the scam more often than not result in an endgame where the cheater spends his bluff and leaves town to start a new Ponzi scheme at a new hunting ground, or is caught with little or no identifiable assets. order restitution or provide civil damages. This common scenario is one of the main reasons this crime is a dangerous type of financial fraud: even after the prosecution and conviction of the perpetrator, the victim rarely makes a full recovery.

Scam artists, like their Ponzi schemes, take many forms. A serial fraudster must avoid criminal patterns that could identify him or her as the author of new financial scams. They need to be discrete, unobtrusive and chameleon-like, with an ever-changing personal and professional persona. Since a Ponzi scheme in its pure form has a simple structure and is easy to detect, the skill of the confident person behind the fraud determines its success. If the fraudster is proficient in his art, the investor is unaware and uninterested in the specifics of his “business”; inner workings that would identify it as a Ponzi scheme.

One of the red flags that signal financial fraud is the absence of a business plan — detailed and specific. Keeping things sketchy allows fraudsters to avoid accountability. This is often done by instilling an air of exclusivity, privilege and mystique around the business model. Thus, potential investors are less likely to ask difficult questions. Through social engineering and charisma, the fraudster convinces his brand that he will be part of an investment opportunity that is only given to a select few. This psychological manipulation can be done in various ways, one of which is affinity fraud, where fraudsters will target people who share the same ethnicity, race, or religious beliefs. Often there will be a staged vetting of the potential investor, perhaps to determine whether or not he or she qualifies under SEC guidelines; that is, whether the investor has the net worth and/or the required sophistication, understanding and experience as a prerequisite for participating in a particular investment fund. In reality, this pre-qualification is an empty exercise — a stance to reinforce the corporate legitimacy trap. The reality is that the cheater’s only concern is that the sign is willing to part with the money; not whether he can part with his money as a reasonably careful investor.

Ponzi schemes are not limited to the stock market. They are as varied and as numerous as there are services and products to sell. Because financial fraud can take an unlimited number of forms, it is impossible to create an all-encompassing guidebook to avoid it. A better way to be alert is to stay alert to the presence of the imposter and not the impostor himself. If someone can identify a cheater, you can avoid a cheater.

Attitude: Watch the demeanor of suspected fraudsters and be on the lookout for any evasion when asked sharp questions. Look for concrete answers to concrete questions. As mentioned above, the proof is in the details; the nuts and bolts of the paradigm. If a broker is hesitant to give you those details – the specifics of their investment model – then walk away. Remember that vetting goes both ways: just as a money manager has a responsibility to qualify investors, investors have the right to check a broker’s references and audit his or her track record on Wall Street or Main Street. If nothing else, have all contracts and documentation executed by a trusted securities attorney and accountant who is a certified financial planner.

Discretion and professionalism: While an asset manager is under no obligation to provide you with a list of his clients, if he is a confident person with an A-list client base, he will often take pains to do just that. This lack of discretion sets them apart from legitimate brokers, and is part and parcel of creating a mystique around investment firms. You will find that most confident people choose brands who are novice investors or have only basic knowledge of stocks, bonds and portfolio management. They may be A-list celebrities, but they are rarely A-list financiers and entrepreneurs. Madoff was a master of this calculated discrimination, rejecting the more sophisticated investors who might realize “the emperor has no clothes,” and embracing less intelligent celebrities whose star power would appeal to other deep-pocketed people.

Increased return promise: The old adage, “if it’s too good to be true, it probably is” applies here. The most likely unrealistic ROI is. Madoff guarantees select investors in its funds an annual return of up to 46%. An absurd figure that should spark more aggressive skepticism and scrutiny by regulatory agencies.

There is not a single thing a good cheater would ever say or do who would identify as such. Here’s the challenge: their entire approach is based on stealth such as perceptual manipulation, ingratiation, enchantment and deception. It is a form of psychological warfare, and one of the reasons fraudsters prey on vulnerable populations in society such as retirees. They also often pander to their investors’ narcissistic tendencies which is one of the reasons actors are such an easy target. Connoisseur art is just that: art is not science. It has more to do with mastering psychology than finances.

Common thread: There are some common denominators in these games, but there are some disclaimers. If you take anything from this thought, let it be this truism: a skilled hustler is one who identifies a need in his brand and convinces the brand that he can meet that need.

The reality is that fraudsters rarely have the intention, ability or desire to fulfill their promises, but do have the intention and ability to trace their trail believing that a big payday is a certainty in the near future.

Bernard Madoff and Allen Stanford set the bar high for institutionalized corruption with cons that generated as much as $65 billion USD. It’s not just the size of the pick up but the longevity and complexity of these cons that sets them apart. They represent the extreme ends of the continuum in both economic scale and crime magnitude. One would think the klieg lights directed at these people and their pillars in public would have a chilling effect on corrupt like-minded people. That’s not the case. Shortly after Madoff and Allen’s arrest, con artists Paul Greenwood and Stephen Walsh were arrested for defrauding $554 million from their investors.

Climate and Zeitgeist: As with preventing any outbreak, the best way to prevent the threat is to ensure a strong immune system that is unattractive to viruses. Over the last two decades, increasing deregulation and lax enforcement of existing rules created the perfect climate for defrauding seasoned and novice investors alike. It has become a breeding ground for scammers and Ponzi schemes.

We are the community: Government agencies hired to maintain public trust suffer from political paralysis, inaction and indifference. They became more concerned with public relations than watching Wall Street. The Securities and Exchange Commission and the Federal Trade Commission double as preparatory schools for future Wall Street financiers. These agencies became a revolving door for federal employees seeking better paying, more powerful, and prestigious jobs from the companies they had to regulate. It is difficult to effectively investigate a company for securities fraud while approaching an audit as a job interview. I can tell you from first-hand experience in my attempts to bring high-profile con artists to court that the SEC’s approach to investigating investor fraud is more akin to a 1950s “duck and cover” schoolroom exercise than serious, probative and aggressive thinking. investigate possible criminal acts. It can be said that in the last two decades such institutions, either intentionally or through negligence, have only served to protect corruptors and criminals from surveillance and disclosure. Inaction is action. The last twenty years of deregulation, that inaction has often risen to the level of criminal conspiracy, but for lack of intent. The FTC, the Treasury, and the SEC are simply the impotent organs of a sick and incest Wall Street culture that feeds into crisis conditions.

The fact that the greatest fraudster in our nation’s history, Bernard Madoff, enjoyed a tenure as chairman of the Nasdaq and had a nephew in bed, quite literally, with the SEC regulator is damning evidence of a fractured foundation. When the SEC is snapped out of a state of programmed nepotism, lethargy and active avoidance of disrupting the status quo, chronic delinquency leaves him at the crime scene as a coroner to record the time of death – and not in his intended role as a sheriff to prevent homicide. The SEC’s function too often as a regulatory agency and checklist falls far short of its intended function as defined by section 4 of the Securities Exchange Act of 1934.

Part III of III in this series of articles on Ponzi schemes will examine the real world, ongoing scams, con artists behind them, and investors who fall victim to criminal enterprise.

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