My dear Friends,

do you remember Bernie Madoff, the investment advisor? He was a con artist – and the first to be active on a global scale. Madoff was the mastermind of the largest Ponzi scheme in history, worth about $64.8 billion.

I remember that some of my friends lost a considerable amount of money. It seems surprising that for almost 40 years, nobody spotted the con artist who so cleverly played the super trustworthy investment advisor.

There was a public outcry over how little regulatory boards or any other legal authority seemed to do to stop such con artists.

But it seems little has changed since then. Con artists are busy as ever in successfully stealing investors’ money. The toolbox has changed little, and they are still difficult to spot.

Victims are not only the vulnerable, the inexperienced, the greedy, the naive, women, or the desperate, but also seasoned investors.

As much as you should not judge a book by its cover, it takes some digging to spot that your investment advisor is a con artist.

Hustlers, swindlers and con men

Corporate fraud scandals that separated investors from their money litter the investment landscape.

2022

FTX, Sam Bankman Fried and Theranos, with its CEOs Elisabeth Holms and Sunny Balwani, are the most recent cases. They literally “transferred” millions of investors‘ money into their own pockets by financing either business ventures unrelated to their business model or simply to pay for an extravagant lifestyle.

2020

Wirecard, Germany’s biggest corporate fraud cases. Wirecard found itself in the spotlight when it declared insolvency in 2020 after authorities discovered $1.9 billion was missing from the company’s accounts amid allegations from German regulators that the money never existed at all. One of its CEOs is on the run and most likely hiding in Russia. The other three CEOs currently face trial in Germany. So far, 2251 investors have sued the company for fraud.

2019

Luckin is a beverage retailer in China selling mainly coffee and tea. Its stock rose from $20 per share to $50 in a year’s time following a monster 2019 initial public offering. In early 2020 internal financial analysts discovered the company’s growth was artificially inflated by $ 310 million. The sum was created from bulk sales to businesses linked to the company’s chairman. Investigators also found that Luckin management had fraudulently engineered the purchase of $140 million in raw materials from suppliers. Investors fled when those investigations became public, and the company’s share price slid. Luckin was ultimately delisted from the Nasdaq, and its CEO and COO were both fired. Now, debt and equity investors sue the company for fraud.

2008

Bernard Lawrence “Bernie” Madoff was an American financier who executed the largest Ponzi scheme in history, defrauding thousands of investors out of tens of billions of dollars over the course of at least 17 years, possibly longer.

Madoff attracted investors by claiming to generate large, steady returns through an investing strategy called a split-strike conversion.

In fact, he simply deposited their funds in an account at Chase Manhattan Bank and let them sit. According to one estimate, the bank may have made as much as $435 million in after-tax profit from those deposits.

When clients wished to redeem their investments, Madoff funded the payouts with new capital, which he attracted through a reputation for unbelievable returns and grooming his victims by earning their trust. Madoff also cultivated an image of exclusivity, often initially turning clients away. This model allowed roughly half of Madoff’s investors to cash out at a profit. These investors have been required to pay into a victims’ fund to compensate defrauded investors who lost money.

He was also a pioneer in electronic trading and chair of the Nasdaq in the early 1990s. He died in prison at age 82 on April 14, 2021, while serving a 150-year sentence for money laundering, securities fraud, and several other felonies

2000

High on the list of the largest corporate fraud cases of the 21st century is Enron. Formed in 1985, the now-defunct dot-com darling made a fortune trading natural gas and other commodities. In 1999 it rolled out its own digital commodity trading platform. In August 2000, Enron shares reached a high of $90. A year later, Enron‘s CEO was warned that a massive accounting scandal was brewing under its roof. Enron admitted that it overstated profits by $600 million and the SEC announced a full investigation into Enron’s finances. Enron’s stock eventually fell to a few cents per share. On Dec. 2, 2001, the company declared bankruptcy.

1920

Charles Ponzi, born in Lugo, Italy, in 1882, decided to set sail for the US in pursuit of a better life in 1903. As the legend goes, he arrived on American shores with only $2.50 to his name, having gambled the rest of his money away on the ship.

The early years

Ponzi soon moved to Canada, becoming an assistant teller at the Banco Zarossi in Montreal. It was there that he first witnessed in action what would later become known as the Ponzi scheme. The bank was in severe financial trouble on the back of a number of real estate loans that went sour. As such, founder Luigi “Louis” Zarossi attempted to remain afloat by funding the interest payments using customer deposits from newly opened accounts. The bank failed, however, and Zarossi fled to Mexico with much of the bank’s money.

By 1919, began devising various schemes to make money. Then, he discovered the international reply coupon (IRC) created by the United States Postal Service (USPS). This coupon allowed a sender to pre-purchase postage and include it in the sent letter. The recipient in another country could exchange the IRC at a local post office for airmail postage stamps that could be used to send the reply correspondence. Ponzi first encountered the IRC in a letter from a business correspondent in Spain. He had an IRC coupon for 30 centavos. This IRC could be exchanged for five cents in the US—significantly more than its value in Spain.

As such, Ponzi figured out that purchasing massive quantities of coupons from weaker European economies and selling them for higher prices in the US could net him huge sums of money.

The scam

He turned his business into a scam, setting up his Securities Exchange Company in early 1920 and persuading people to invest in the business in return for an additional 50 per cent in interest within 90 days. Such eye-watering returns were too enticing to pass up, and interest from investors mounted. Whenever he was asked to reveal the inner workings of his operation, he simply said that he needed to conceal such information from the public to prevent competitors from emerging.

Finally, one reporter, financial journalist Clarence Barron, calculated that covering the volume of investments made through Ponzi’s scheme would have required around 160 million coupons to have been traded. Yet, only 27,000 coupons were in circulation.  Also, Ponzi had previously told journalists that he invested his own money in real estate, stocks and bonds. This thus begged the question: Why did he prefer traditional assets that would yield him 5-per cent maximum returns to his own scheme that claimed to offer 50 per cent returns?

But as Ponzi enjoyed a meteoric rise in wealth and fame, suspicion over his dealings soon followed. Soon, Ponzi’s office was raided by regulators. An audit of his business revealed that he was in possession of a grand total of $61 worth of postal coupons. Ponzi eventually surrendered to authorities. He served three and a half years in prison plus an additional nine years on state charges. He died in poverty in Rio de Janeiro, Brazil, in 1949.

Tricks of the trade

Sadly, investment advisor fraud is a growing problem; the rate is likely much higher than reported, and the con artist is usually difficult to spot at first sight.

Many victims of financial advisor scams are too ashamed to come forward. A study also found that many investors do not know how to spot the red flags of investment fraud.

The Signs

The red flags

Depending on individual country laws, almost anyone can call themselves a financial advisor, wealth advisor or financial planner. Few specific qualifications are needed.

In some cases, an advisor may claim to have professional qualifications. They might, however, be invented or based on a home study course that took only a few hours to complete.

In some countries, the term investment advisor is subject to registration with a financial regulatory body. This, however, does not prevent con artists from working as investment advisors. And it is certainly no guarantee that they can be spotted more easily

The only advantage is that the investment advisor, once exposed, can be made liable for the damage. However, being lucky enough to be reimbursed for damages depends on the advisor’s financial situation and liquidity.

But how can the investor spot the con artist while choosing a trustworthy investment advisor?

Well used strategy

• suggest liquidating all or a substantial part of the portfolio to put the proceeds into a single product.
• doesn´t seem interested in exploring the investor’s needs and personal risk preferences.
• tells you the investment is only available through them.
• offers a contract that includes taking a share of any financial gains you make.
• is focused on one area of finance only and seems widely inexperienced in different types of investment.
• refuses to detail fees or will not tell you how they earn their money.
• asks you to pay in advance for their services or to make a check out to them rather than an organization or institution in which you want to invest.
• invites you to lend to them or sign a loan guarantee.
• promises unrealistic returns on investment while claiming it is perfectly safe.
• urges you to act quickly following a sales pitch, information event, or one of their investor seminars.
• boasts about “special connections”, “secrets”, or “inside” information not available to the general public. 
• asks you to commingle or aggregate your assets into a pool with other investors.

Educated individual investors are the front-line defense against investment fraud.

Spot the con artist

The con artist takes great pains to look, sound and speak like you or other members of your peer group. Often, con artists make sure to blend in with your peer group. They quickly get to know many people in the group, so they can count on a common bond to spread the word about their questionable investments and reel in unsuspecting investors.

Smooth, professional and successful

They work very hard to come across as smooth, professional and successful. Con artists usually dress very elegantly and work out of posh offices. Often the office is at a prestigious-sounding address.

The right product

Financial institutions offer a wide range of financial products, many of them with highly complicated structures. Of course, the con artist knows this, stands ready to save you, and is quick to take over full responsibility for your investment decisions, and he would have the right product, of course.

The Chance to shine

Con artists also appeal to the visionary in you. Investing in untested technologies to save the world or cutting-edge medical products before anyone else does. That certainly gives you the feeling of being a true trailblazer. The promised benefit, of course, is that you make tons of money. The advisor will promise you the investment chance of a lifetime without giving you any meaningful written information on the product, a timeline, specific milestones or a proper cost plan. Possible pitfalls, of course, do not occur.

Insecurities

Skilled con artists can bring out your worst traits, like greed, fear, and insecurity. This type of investment advisor will try to make you feel inadequate if you don’t believe them. They use your fear of making the wrong financial decision or your insecurities about your financial future to make you feel little. In addition, con artists know how to make you believe that if you lack confidence in them, this is because you lack financial intelligence.

Downplaying the risks

Be especially careful if the “advisor” downplays any downside or denies that risk exists. Con artists usually are not very good at answering essential questions. He will make the investment sound too good to be true. Trust your inner voice if you hear claims like these:

Manipulation

• “I just got a hot tip from an inside source that this stock will go through the roof.”
• “Insiders tell me that this deal is ready to take off.”
• “Your return is guaranteed. There’s no way you can lose money.”
• “Gotta get in on the ground floor now, or you’ll be left out in the cold. In fact, we’ll send a messenger over tomorrow to pick up your check.”
• “Where else can you earn such a large return?
• “In just a short while, your profits will come rolling in.”
• “This deal is so great. I invested in it myself.”
• “If this doesn’t perform as I just said, we’ll refund your money“.
• “Everyone else that invested in this did very well.”

Investigate investments thoroughly, boost your financial intelligence, and report suspicious activity to regulators.

Vital Rules

Avoiding being hurt by a con artist is no rocket science. Do your homework before you invest. If you usually make investment decisions based only on your emotions, watch out!

The checklist

Ask questions first

Before you commit to working with an investment advisor, check out at least five others and ask the following questions:

10 Crucial Questions

Danger

Before you invest, con artists are super friendly. Each time, they tell you even more good things about the investment. You may feel you’re being pressured into investing. You are; no illusions here!

However, once you have invested your money, contact with the “advisor” usually dwindles and then stops altogether. This may signal danger if you cannot get answers to your questions following your investment.

Your job is to make life difficult for such kinds of con artists and thoroughly investigate any proposed investment. However, paramount is educating yourself and boosting your financial competence so you can spot and report suspicious activities to regulators.

Keep a close and regular eye on your investments, and act swiftly if you suspect things are wrong.

Quick Notes

Corporate fraud scandals that separated investors from their money litter the investment landscape, and shady investment advisors have been around forever.

The strategies of these con artists changed little over the centuries. Investors must learn to spot the con artist while choosing a trustworthy investment advisor.

This kind of advisor will come across as smooth, professional and successful and will quickly blend in with your peers. He or she will have the right product for you and help you “stand out” while bringing out your worst traits.

Avoiding being hurt by a con artist is no rocket science. Do your homework before you invest. If you are in the habit of making investment decisions based only on your emotions, you need to be extra careful!