How to Avoid Getting Fleeced

Con artists excel at exploiting your financial ‘Achilles’ heel’

Bernie Madoff’s fraud victims included Steven Spielberg, a $16 billion fund of funds (Fairfield Greenwich Group) and the largest bank in Europe (Banco Santander).  Madoff also fleeced corporate moguls, politicians, attorneys, accountants, securities dealers, insurance companies, universities, foundations, country clubs and as many as 8,000 ordinary folks just like you.

It doesn’t matter how much money you have or how sophisticated an investor you are, some unscrupulous stockbroker, investment adviser, financial planner, insurance agent or oil & gas, gold or real estate speculator out there may have your number.

Surprisingly, investment fraud victims tend to be highly educated and financially literate, with men outnumbering women by a wide margin, presumably because financial scammers know how to play on the male ego.

Investment fraud losses – in Ponzi schemes, pump & dump stock manipulations and fictitious businesses — amount to as much as $40 billion annually in the US alone.  Unreported losses are estimated to be of the same magnitude since victims are often too ashamed of their gullibility to admit it.  Surprisingly, investment fraud victims tend to be highly educated and financially literate, with men outnumbering women by a wide margin, presumably because financial scammers know how to play on the male ego.

iStock_000013684207XSmallInvestment fraudsters are typically smooth operators.  They seduce their prey by ferreting out their common interests and homing in quickly on their most sensitive financial concerns.  They exude confidence in establishing their investment credentials and offer their targets ‘silver bullet’ solutions the victims have never heard of or couldn’t otherwise access.  Con artists typically pressure their marks to act right away, forcing the victims to react emotionally rather than rationally.  The usual pay-off is a quick, outsized or consistent return, with ostensibly little or no risk.  Regardless of how they find their victims, professional fraudsters trick their targets into trusting them without the victims’ feeling the need to further investigate the scammers’ personal backgrounds or investment offers.  Con artists may also overcome hesitation on the part of impressionable victims by letting them peek into their lavish lifestyles.

The most vulnerable marks are the elderly, especially if they are in frail health or in mourning.  They may have lost their retirement nest-egg in the financial crisis, be managing their assets for the first time or be heavily concentrated in a single stock or piece of property.  Curiously, recent studies show that elderly fraud victims tend to be overconfident in their investment knowledge, even as they experience palpable cognitive decline.

Other natural targets for skilled scammers are people of all ages and stripes who like taking a risk, who are open to new ideas or who are trying to make up for past financial setbacks, especially at times when investment options are generally unattractive (like now).

Among the most common investment scams are affinity frauds.  Once one member of a close-knit religious, ethnic or country club group has been drawn into a get-rich-quick scheme, the scam often goes viral since people have a tendency to follow what their like-minded friends are doing.   Group members pass onto one another the irresistible deals promoted by seemingly trustworthy financial experts who in many cases have joined such affinity groups precisely for the purpose of fleecing them.

Fraud experts offer a laundry list of tips on how to avoid being conned by an investment fraudster.  In their book Financial Serial Killers1, trial attorney Tom Ajamie and Wall Street journalist Bruce Kelly counsel anyone solicited by a self-proclaimed investment guru to check the supposed expert’s employment and disciplinary record, regardless of whether he operates by himself or is associated with a well-known financial outfit2.  Be wary of brokers, for example, who frequently move from firm to firm.

Ajamie and Kelly also advise against agreeing to invest over the phone, falling for any scheme hyped as the “biggest” or “best” deal ever, investing in any financial instrument you don’t understand or any business whose operations or discoveries are impossible to verify (such as gold mines or oil & gas wells).  You should be particularly wary of any investment proposal that requires your borrowing money or (re)mortgaging your home and always get second opinions on any prospective investment involving a material amount of your money from independent investment, legal or accounting professionals whom you trust.  You should always get a written description of the investment, which is commonplace for legitimate deals but anathema to con artists.

Similarly, never invest with an investment adviser who also has custody of your assets.  Your assets should always be safekept at a money-center bank, trust company or brokerage firm not controlled by your adviser.  Your money should always be held in an account in your name and not commingled with the assets of other clients (unless you are investing in a fund which has been legally formed for that purpose).  Also, you should avoid any investment that requires your opening an offshore account since it can be easily obscured and difficult to trace.

A final ‘red flag’ is for any sales pitch you are told to keep secret.  That admonition is designed to feed your need to feel special and to detach you from a more dispassionate consideration of the investment being touted.  It reminds me of a money manager who years ago tried to sell Bear Stearns on a ‘no-lose’ investment proposition which the CEO of the firm summarily rejected on the ground that “if it’s so foolproof, why would he want to share it?”

1Financial Serial Killers by Tom Ajamie and Bruce Kelly (New York: Skyhorse Publishing, 2010).

2You can check the disciplinary records of stockbrokers, including their customer complaints, at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/; of SEC-registered investment advisers at www.adviserinfo.sec.gov; of state-registered investment advisers at www.nasaa.org; of financial planners at: www.cfp.net; and of insurance agents at www.naic.org. Details of both publicly-traded companies and privately-placed investments can be found at www.sec.gov/edgar.shtml.

  • carol raskind rance

    This clarifies an aspect of the Madoff affair that’s always puzzled me: How could so many seemingly sophisticated investors fall for such an outlandish scheme? Now I get it. Not everyone may be looking for a fast fortune, but everyone (And I do mean every living, breathing being) is susceptible to ego-stroking. Let the “strokee” beware! Actionable, sensible information.