How Do You Know Who To Trust?

Each month, my articles are generally on businesses rather than individual fraud schemes.  My goal as a Certified Fraud Examiner has been to help reduce the risk of fraud in small businesses because let’s face it fraud is much less expensive to prevent than to detect.  As time progresses, new cases come into light which make me want to share more information on how a business or individual can protect their money.

I have recently finished an investigation that from the outside was a small business venture, but on the inside had the markings of a real estate Ponzi scheme that brought in unsuspecting investors to buy real estate in another country.  The outcome of this case is pending however the devastation and damage to the investor’s finances are catastrophic.

When we talk about Ponzi schemes, most people actually think of Bernie Madoff and not the guy who the scheme was actually named after “Charles Ponzi”.  Most people also put themselves on a different playing field and truly believe that they would never fall for a scam such as this, but honestly the actual victims felt that way as well.

Ponzi schemes have specific characteristics which are:
(Warning signs and characteristics from the SEC’s website)
·        

• Promise of a high return on investment with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
• Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
• Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
• Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
• Secretive and/or complex strategies. Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.
• Issues with paperwork. Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.
• Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.

Most people who put large sums of money into an investment whether real estate or an investment broker do so based on trust.  Whether they know the person they are trusting with their money, or the person was referred to them, somewhere in the sales pitch they were so good at what they do, they gained the trust of the victim.  Once they have won that trust, the victim will believe what the scam artist tells them thinking their money is safe and yielding a high return.

Last week I went to the District Court in Fort Collins to sit in on a Ponzi case.  Outside the courtroom I met a couple who were there to watch this case so it could help them with their up and coming fraud trial.  For over an hour I listened to them explain to me how they planned their life out so they could retire and how they lost it all in a Ponzi scheme.  They reached their retirement years, had paid off their house, and saved enough so they could travel.  They didn’t owe any credit cards or have any car loans and thought they did it all correctly.  A few years prior, they met an investor through a family member.  This investor convinced them to deposit all of their retirement money in a local bank which in return would invest the money into a fund that had a decent ROI.  For the past few years they would receive statements from the bank showing where their money was invested and how much it was worth.  They had no idea that those statements were fabricated until the Colorado Attorney General contacted them.  That’s when they found out their life savings was gone.  Now in their late 60’s they both had to go back to work and are on the verge of losing their home – the one they paid off –  They also maxed all of their credit cards just to survive.  I do not have all of the facts for this case, only hearsay, but hearing this couple explain their story and the probability that it is true really makes you step back and think about who you can really trust.

So, how do you know who you can trust and who you can’t?  If a bank employee can fabricate false statements on a phony investment and the SEC can get annual notices for ten years from Certified Fraud Examiner Harry Markopolos that Madoff’s hedge fund was a Ponzi scheme and not do anything about it then due diligence is taking on a whole new meaning.

My best suggestion to anyone who was offered an investment opportunity and is really considering it - after you did your due diligence –

“Never give away more than you can afford to live without” Ponzi schemes seem to be on the rise so if you have friends or family members who are talking about an investment of a lifetime, make sure you put all of your red flags up and really make an honest assesment of who you are trusting with your money.
Julie A. Aydlott, CFE
Business Fraud Prevention, LLC

Fraud Cases provided by our partnering sponsor  Marquet International Downlaod the 2011 Marquet Report on Embezzlement

Nevada Woman Sentenced For Embezzling $1 Million From Friend's Business (Nice friend!!)

Carolyn Sue Causey, known as "Super Sue," 62, of Sparks, Nevada, has been sentenced to 10 years in prison for embezzling nearly $1 million from  ERA Realty, owned by her friend, Pat Schweigert.  According to authorities, over a period of about 4 years, between 2007 and 2010, Causey siphoned the funds from the company by issuing fraudulent checks, doctoring accounting logs and creating bogus accounts and payments for her own benefit.  Causey reportedly stole the money to support a gambling addiction.  In addition to the prison time, Causey has been ordered to pay $479,364 in restitution. 

Read the story here and here.