Government regulators and private fraud fighters give repeated warnings to avoid a “too good to be true” investment program. It seems like investors are bombarded by messages about what not to do with their money, yet many continue to pour their money into new and clever Ponzi schemes. Why is society unable to stop the onslaught of fraudulent investment schemes?
There are two sides (at least) to every transaction in a Ponzi scheme: (1) the fraudulent promoter of an investment scheme; and (2) the defrauded victim. We cannot control the fraudster’s conduct. The fraudster will continue to concoct new stories, deceitful schemes and believable promises, and there is nothing we can do to stem this damaging creativity that is intended to harm its victims.
The Limitations Of “What Not To Do” Investment Advice
However, we can control our own conduct. Investors start out holding their own money. They make the decision to hand it over to someone else’s control. The vast amount of public information available to investors about fraudulent schemes does a decent job of telling investors what not to do: Don’t invest in something that is too good to be true; don’t invest based on blind trust; don’t invest if the business model doesn’t make sense.
While that is very good general advice, it is too easily ignored or dismissed. Why? Because investors are blinded by their trust. They are looking for a good deal, and they assume that the people running the investment program are trustworthy. Investors’ trust, desire to turn a profit, and ignorance of the business lead investors to charge ahead, without doing any type of a proactive analysis.
Teach Investors What They Need To Do
Educating investors needs a major shift in focus. Instead of teaching investors what not to do, how about teaching them what they need to do - specifically, unequivocally, and with the confidence to demand answers to their questions?
Investors need lists of questions to ask, websites to search, and investigations to conduct. They also need to see in black and white what went wrong for victims who invested without conducting sufficient due diligence. They need to understand the psychology of the perpetrator, as well as to analyze their own reasons for investing.
Admittedly, I am biased on this subject. I recently published a comprehensive such guidebook for investors, Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams. Ponzi-Proof Your Investments accomplishes all of that and goes far beyond the over-generalized “too good to be true” advice that many government and private websites provide.
The following websites offer good advice, but they are not sufficient to either identify a fraud or to compel investors to take action. The quotes below highlight this shortcoming.
Limitations Of SEC Advice
The SEC website’s section on what you can do to avoid investment fraud says to “ask questions” but offers only the following advice:
We encourage you to thoroughly evaluate the background of any investment adviser or broker with whom you intend to do business – before you hand over your hard-earned cash. It doesn’t matter if you are a beginner or have been investing for many years, it’s never too early or too late to start asking questions. It’s almost impossible to ask a dumb question about how you are investing your money. Don’t feel intimidated. It’s your money at stake.”
Additional advice on the SEC website says things such as:
“>>If it sounds too good to be true, it is.
>> ‘Guaranteed returns’ aren’t.
>> Watch out for pitches that stress how “everyone is investing in this, so you should, too.” Scam artists often tell their victims that this is a once-in-a-lifetime offer and it will be gone tomorrow. But resist the pressure to invest quickly and take the time you need to investigate before sending money.”
Limitations of FINRA Advice
The FINRA website’s Education Guide “Scams And Swindles – An Education Guide To Avoiding Investment Fraud” states that the swindler wants to be your friend, will use high pressure sales tactics, will demand an immediate decision and will offer you something that is too good to be true. The advice offered is:
“>> Don’t be pushed into a quick decision
>> Always request written information
>> Never make any investment or purchase that you don’t fully understand.
>> Check out the company carefully (by contacting the regulatory agency)
>> Ask what recourse you would have should you make a purchase and are not satisfied.
>> Beware of testimonials you have no way of checking
>> Beware of fake websites.”
Limitations of NASAA Advice
The Investor Education section on the North American Securities Administrators Association website (www.nasaa.org) offers a little more specific advice on how to avoid becoming a victim. It states:
“>> Contact your state or provincial securities regulator to see if the investment vehicle and the person selling it are registered.
>> Contact your local Better Business Bureau to see if any complaints have been filed against the venture’s promoters or principals.
>> Deal only with financial advisers, broker-dealers or financial institutions having a proven track record.
>> Ask for written information on the investment product and the business.
>> Don’t take everything you hear or read at face value. Ask questions if you don’t understand, and do some sleuthing for yourself. If you need help in evaluating the investment, go to someone independent whom you can trust such as an attorney or an accountant.
>> Steer clear of investments touted with no downside or risk”
Other Advice
Private organizations provide similarly general and reactive advice, although they vary in their specificity on what research and investigation to do. For example, the tips on the Louisiana Office of Financial Institution offers a more specific questionnaire of the questions an investor can ask. (www.ofi.la.gov/SecuritiesInvestorEd.htm)
A More Proactive Approach Is Needed
A more proactive approach will more likely lead an investor to discover suspicious or fraudulent activity. Fraud is more readily detected if investments are considered with eyes wide open, with an understanding of the deceitful tactics that will be employed, and with a multi-faceted investigative approach that non-lawyers and unsophisticated investors can conduct themselves.
Ponzi-Proof Your Investments hands control back to the investor and arms the investor with an understanding of how Ponzi schemes thrive and very specific questions to ask, along with an explanation of why those questions are important. While it is no guarantee that fraud can be avoided, conducting this level of investigation is the best front-line defense to avoid a fraudulent scam. The chapters include warnings about the promises that will be made and the secrecy and marketing tactics that will be used. They also include a breakdown of due diligence to be conducted on specific subjects such as the financial data, the business model, background checks, money management and the sales people. An entire chapter is dedicated to the important discussion – one usually avoided by investors – revolving around the investors’ good faith and intentions and knowledge when investing and when redeeming investments. Two of the appendices contain various website resources, including a state-by-state listing of websites recommended to conduct due diligence.
It is time for investors to stand up and take control. Fraudsters are certainly responsible for their frauds and will, we hope, ultimately be held liable for the losses that they cause. But investors are responsible for safeguarding their money and doing proper due diligence. With all of the legal hurdles that make it tough for victims to recoup their losses, the best defense is to avoid investing in a fraudulent scheme in the first place.
