Financial Fraud: 6 Simple Steps to Protect Yourself
by Dr. Scott Brown, Advisory Panelist
Thursday, March 5, 2009: Issue #949
Financial fraud doesn’t start out ugly…
It all began in 1994, when one of my brother’s college buddies began talking about the big checks his girlfriend was receiving as a member of a hot, new Multi-Level-Marketing “opportunity.” His friends joined and soon convinced others to enter. Business was booming.
Then the money stopped.
Like many of these stories, the company went under – its investors and many of its employees were out countless millions – many losing more than just money.
And now I had the opportunity to sit down with the founder of one of these debacles. One who had wantonly misspent revenues on such extravagances as chartered corporate jets to Paris and Friday lobster dinners.
Before I blew him off entirely, I realized that this was a rare opportunity to get into the mind of a fraudster. I said “yes” to Randy’s visit and was soon sitting in front of him.
He’d flown down to Puerto Rico to try to coax me into joining him in his next scheme. I welcomed the opportunity to understand the mental wiring of a financial criminal.
Unlike this meeting, where I could see the culprit face-to-face, most Americans never get to meet the person who is trying to scheme them.
Financial Fraud – Always Such Nice, ‘Honest’ People
He explained that he didn’t begin in financial fraud, but that he started as a salesman for a penny stock “pump and dump” scheme in New York. When it ended, he’d made a lot of money as a brilliant – yet dishonest – salesman for a dishonest business.
He was soon invited into a vitamin scheme preying on financially unsophisticated elderly people where the FBI temporarily locked him up. In the federal penitentiary he learned that it was easier to steal money from the public through Multi-Level Marketing since intentional fraud would be re-interpreted by bankruptcy courts as “miss-management.”
As an investor and consumer you’ll be bombarded by all sorts of “opportunities” that come your way – from any number of unexpected sources. It may be your barber or hairdresser who’s just learned of a “hot” opportunity.
It may be an old friend from college.
Each “opportunity” will have a reasonable story. The fraudsters will have all sorts of evidence to bolster their “sterling” reputation. But that’s just the start of the bait they’ll dangle in front of you.
Making things even harder, the friend or colleague that contacted you will have already been pulled into the con’s web of lies. As an unsuspecting promoter, they’ll express concern or even anger over your disbelief. But you’ll lose your you-know-what if you hand over your money – and your friendship or family relationships will end even worse.
Financial Fraud & Off-Shore Banking
There has been consistent number of financial fraud in “off-shore banking” scams. And I am approached for help at least two or three times a year by individuals who have lost money in an international con-job.
Bermuda has two major sources of foreign revenue for its population; tourism and offshore insurance/finance. And while there are many legitimate offshore investments, there are just as many schemes and con artists eager to steal your money. Just watch the show American Greed on CNBC and you’ll quickly see what I mean!
Local politicians protect fraudulent operators in order to avoid any negative press in the U.S. and European markets that drive their industries. They fiercely protect their market – even if it means you get hosed.
The sad irony is that these schemes gush such fat geysers of ill-gotten cash that conmen protect themselves with expensive legal defenses – paid for by the victims.
They use the world’s legal system to hose the innocent by taking advantage of laws that sometimes seemed designed to protect crooks, particularly the draconian British libel laws that exist in many offshore financial centers.
Since the fraudster suddenly controls millions – or billions – there’s always an unscrupulous attorney willing to file a defamation lawsuit against any and all whistle-blowers. It leads to a situation where many frauds aren’t discovered until it’s too late.
6 Simple Steps to Avoid Financial Fraud
When you’re presented with an “opportunity”, there are a number of ways to give it a “sniff test” and tell if it’s legitimate.
1. Sounds Familiar
Does it look like anything you’ve ever heard of or seen before? It’s amazing how many versions of pyramid schemes or Nigerian scams there are out there. If it sounds similar, chances are it is.
2. Trusted Sources
Does this investment come from a trusted source? This is the hardest hurdle for most to get by. Bernie Madoff seemed to have an impeccable resume and background, and it’s why his fraud went on for so long. Do your own reference checks.
3. The Pudding
The proof is “in the pudding” as they say. If you ask for performance results or documentation to back up claims, they should easily provide the information. Information should be available on a quarterly basis.
4. Information Demands
If someone were to walk up to you and ask for your credit card number, you’d say no. But you’d be surprised to find out the number of people who give up sensitive information – like bank account numbers and personal data – for an opportunity to collect untold millions. When someone requires something like this without a reasonable expectation, warning flags should go up.
5. Your Uncle
Imagine you had a skeptical uncle (some of us don’t have to imagine it). If you presented the opportunity to him, what would be his response? If your uncle doesn’t approve, then neither should you.
6. Embarrassment
Would you have any qualms about sharing this investment with your friends and family? What about if it went badly? If you would feel that any investment of yours isn’t something that you’d be embarrassed to share, then that should tell you something.
Finally, it never hurts to be overly cautious. Take your time and do your research. It won’t stop all the scams and fraudsters out there, but it can protect you from the thousands of other snakes in the grass.
It all starts with education,
Doc Brown
P.S. One of the best ways to ‘vet’ an organization or business is by checking their standings with the Better Business Bureau. You can visit their website here.
- Financial Fraud: 3 Easy Steps to Avoid “Bad” Investments
- Offshore Investing: Smart Ways to Keep Your Money Safe
- 9 Out of 11 Ain’t Bad
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18 Responses to “Financial Fraud: 6 Simple Steps to Protect Yourself”
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March 5th, 2009 at 11:21 am
As a securities regulator in Bermuda, I find Dr. Brown’s comment ” Bermuda has two major sources of foreign revenue for its population; tourism and offshore insurance/finance. And while there are many legitimate offshore investments, there are just as many schemes and con artists eager to steal your money.” Off the cuff, inaccurate, biased, and shameful.
Just as many con artists? Oh really? So this means that of the 15,000 off-shore financial institutions, fund managers, accounting offices, and insurance companies, vetted by the Ministry of Finance and the Bermuda Monetary Authority, there are just as many schemes and con men? Where does Dr. Blowhard Brown get his statistics? This would mean fully one third of Bermuda’ populations is a con artist or invoved in such a scheme.
I think I am reading invention when I read Dr. Scott Brown, the stock and trade of ..oh let’s see..oh I know: the con man.
Or he is just ill informed and peeing in the wind to write a second rate advice column? Because the biggest frauds in history have been perpetrated right on shore in America..Enron, Madoff, Milken, the cocaine banks of Florida in the 80’s..the list is endless …
Shame on you Investment U ..oh..and cancel my subscription.
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Alexander Wissel Reply:
March 5th, 2009 at 2:06 pm
I believe you are taking the two sentences out of context, combining their meaning. The argument is that there are numerous foreign investments that hide beneath foreign regulation – or lack of it. Words like “offshore” and “overseas” are window dressing, in Bermuda or elsewhere.
As a counterpoint to your “outrage,” we would ask why so many foreign investment houses choose to set up shop in a “easy to get to” place like Bermuda. Clearly they aren’t investing in sand. With much the same reasoning that most U.S. companies are incorporated in Delaware, they go because of the “favorable” regulatory situation. It’s not a personal attack on the great state of Delaware, or the Sovereign strength of Bermuda, just a logical result of the regulations present in both environments.
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Dr Chris Boyejo Reply:
March 6th, 2009 at 2:51 am
It is unfair to refer to what you termed”Nigerian scam”. It is instructive you know that there are good and bad people all over the world. America has her share of financial criminals too. Nigeria, like any other country is not insulated from global financial fraud. Has it ever occurred to you that some Nigerians are taught western collaborators?It is good to keep an open mind in any research work. Remember, you can not throw the baby away with the bath water.
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March 5th, 2009 at 11:36 am
Wait: More government regulation? We should let the Bernie Madoffs make as much as they want. It’s up to the consumer to be aware and avoid these scams.
Let the market be free!
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March 5th, 2009 at 12:00 pm
Found the article to be of interest.
Good content.
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March 5th, 2009 at 1:23 pm
Thanks for the helpful article on avoiding Financial Fraud.
Just for your elucidation, the observation in “3. The Pudding”
“The proof is “in the pudding” as they say”
makes more practical sense if the original saying is used:
“The proof of the pudding is in the eating”
All the best, John Wood.
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March 5th, 2009 at 6:30 pm
YOU ARE BIASED AGAINST BERMUDA AND NIGERIA . WHY NOT INCLUDE (WALL STREET)USA,LOAN SHARKS IN THE REAL ESTATE BUSINESS THAT HAVE IMPOVERISHED MANY AMERICANS, SWITZERLAND THAT ATTRACTS CORRUPTION MONEY FROM THE WHOLE WORLD.
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March 5th, 2009 at 8:34 pm
I saw an infomercial on television 2 weeks ago about a Mortgage Free Sucess program. The host and his guest talked about persons being able to pay off their mortgages in 5, 7 or 9 years. There was something called “reverse compounding”. What is this “reverse compounding”. There appears to be many infomercials on the radio also in which the advertisement calims that people can pay of their mortgages in in a very short time. One advertisement on WTOP radio boast that John Comuto(the last name may be spelled wrong) states that he can help you to pay off your mortgage in a short time. One of his supposed clients stated that he paid off his 30 year mortgage in 2 years! Of course you had to send for his free program tape. When you call the number advertised, they want you to send them $350.00 for the so-called free tape.
Is this and the infomercial that was on television related to the article avoiding financial fraud?
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Alexander Wissel Reply:
March 6th, 2009 at 9:21 am
From our understanding, “reverse compunding” is a fancy way of saying you pay more on your mortgage than you have to. IE, changing payment plans to weekly (adding one full payment a year).
The “trick” is that by paying off more than your principle each month, you limit the amount of interest accrued, “paying it off early” miraculous!… Forget the tape, save your money.
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Liz Gray Reply:
March 6th, 2009 at 4:20 pm
If you get paid every two weeks, deposit 1/2 of payment into separate account +10% (maintenance “sinking fund”) then make one payment per month. Search your mortgage book or closing papers to determine the ammount of principal. Make a “prepayment of principal” labeled such with a separate check noting the arcelnumber and address of the property. These few dollars (dinner out 1x/week) will knock a whole year of payments off the far end of the mortgage. This will be more effective than extra payment which is largely interest. Many lenders do not regognize “extra” payment, and will not count two payments in March and April as a reason to miss October and November. Better to save one or two payments in a separate emergency account.
Be very cautious of bank savings accounts. Wells Fargo changed the terms of my savings account. The interest went down to almost nothing, and they took fees from the principal. The final straw — one cent of interest for the quarter, and $6.00 in fees. Obvoiusly, I closed the account. When we opened it the BO (bank official)
promised my mother that her money would be absolute safe…every penny protected by the FDIC.
Apparently that does not apply to the thieves within the system. We never agreed to pay a monthly fee on our joint savings account.
Our cash would have been safer buried in a tobacco tin, than in Wells Fargo. Scared…Oh Yeah. What’s next?
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March 6th, 2009 at 12:58 am
March 6th, 2009 at 12:57 am
One of the totally obvious red lights in Bernie Madoff’s was the ABSENCE of any top accounting firm. Any of the investment advisors should have spotted that.
What is also galling is that Spitzer was going non-stop full time after honest but sharp dealers and never bothered the real crooks.
And something I learned the hard way – just because the company is listed on the NY Stock Exchange doesn’t mean it is safe and honest.
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March 6th, 2009 at 3:12 am
this article is speaking the truth. In the Philippines one prominent fraudster is breathing alive with fire as if a flame thrower burning everything in its path. Currently there is a congressional investigation going on regarding this matter. However the outcome of the inquisition is still hanging in the air and no positive resolution in sight yet. Thousands of investors had already lost millions of pesos. How long would they wait to regain their hard earned savings? The sad thing is the culprits is still at large and perhaps enjoying the summer sun on a beach somewhere.
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March 6th, 2009 at 2:16 pm
This article is absolutley the truth about what is going on in the financial world. There are so many scams out there and as the economy gets worse, as it may, more scams will follow.
One scam that has hit my twice in the last couple of months is one that they try to tell you that they have a check in a very large amount, say $500K to $2.5mil. and they have to get it to you right away. Oh, by the way, there is a delivery fee of anywhere between $499 and $525. The check will look real and legit, but you are out the delivery fee if you are taken in by this. Fortunately, I was on to this scam. It is being run out of India and if you ask who it is, they will tell you it is either Richard or Robert Shaw. So be on the lookout. They will have your name, phone number and address.
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March 8th, 2009 at 9:46 am
Why are you talinkg about Network Marketing like that? I wonder why Mr Buffet purchase a Network Marketing co. I have to say that we have bad appleas out there no doubt. The Direct Seller industry is powerfull. Who use Network Marketing? all brand names are using it because they are saving big money on advertisement.. Thas how they are getting paid.. sorry about my gramma. I dont need to have a perfect gramma to make six figures in Network Marketing (Direct Sellers)
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March 8th, 2009 at 4:43 pm
The original article and the replys are all good. First, the sovereignty and governments of Bermuda, Nigeria, India, the Bahamas etc., certainly do not endorse or foster financially fraudulent schemes as an official government endorsement. It is illogical, bad for business and eventually will hurt that country ( With all due respect to Mr McMartin, it is likely that Doc Brown’s research does not have the statistics to back up his statements, otherwise he should have published them with the article. Please reconsider your subscription, as one author and one opinion should not deter you from otherwise valid financial information. )
Secondly, I have been duped by several MLM scams. The lesson I have leaarned is to RUN AWAY AS FAST AS YOU CAN, and if you can’t just say no, hangup and move on. If it is a family member, friend or neighbor, tell them to talk to you again in a year. Usually they wake up and they are out of it long before this.
Thirdly, good point on WELLS FARGO Liz Gray. In my dealings with them (Six mortgages, three bank accounts – personal and business over eight years, they are dishonest, crooks to the consumer, bureaucratically corrupt and immensely inefficient. I recommend getting away from Wells Fargo as fast as anyone can. Please write for details.
The bottom line from Doc Brown is that there are CROOKS, THIEVES, and SCAMS everywhere (in every country on the planet – by the way). DO NOT GIVE OUT ANY INFORMATION over the internet, telephone, or even in person until you verify the person or business entity to which you are dealing.
Lastly, if you can add and subtract, and want to get out of debt, add up all your debts, pay off the least amount or highest interest debt first, then the next, then the next, etc. Stop spending money on things you don’t need. What you do need is shelter, utilities (electric, gas, water), taxes, vehicle, gasoline, insurance (auto, home, life), food, and basic necessities. Take a break from (impulse) shopping until your debts are gone. This advice is free. It is similar to what you would pay many dollars for on line or on TV. If you want a good advisor on debt reduction/elimination see Dave Ramsey. (www.daveramsey.com)
Be careful out there,
Paul.
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March 9th, 2009 at 12:28 am
Bermuda vs. Texas. Oilmen of Texas believe a good day is when they’ve swindled enough money from some family to damage their lives beyond repair. The state RR. Comm. is not the investor’s advocate. There is no ethics or regulatory agency to enforce fairness. Texas will circle the wagons around the native swindler by refusing any infor-
mation or investigation on the crooks.
In the last 18 months I have found ways of being swindled by 4 of the 5 oil companys I’ve invested in. Here’s one example: 1. Mullins & White (now Guardian)invited me to invest in many Oil & Gas wells. After due diligence I chose 3 sites. After 9 to 10 months the well’s producing. If the flows meet or exceed expectations the monthly gross has 2 to 3 times the standard deductions applied. So, your check is cal’d against 50%+/- of the actual Balance. If the well comes in short of expecta-
tions they won’t spend the last of the solicited monies to complete the well unless the investors put up more $. Or, after choking back the flows to make the well look like a loser stage an election of the investors to see if we want to continue pumping this no gain well, sell it, or for tax reasons quit claim it to the Operator. As a closed ballot the results are whatever they want. Low & behold the vote is to abanndon the well. The operator takes over sole possession of the well. The flows miraculusly increase past expectations for 10 to 15 years. That’s only one of the 4 ways I’ve been had. Anybody, want to hear more? Call me at 970-626-5355. Texas Sucks.
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JB Reply:
April 1st, 2009 at 10:06 am
I made the same mistake Mullins & White -(now two separate companies Guardian Oil & Gas and DW Energy Group when Rick Mullins and Martin White parted ways in 2008..Hmmm?) showed me that M&W’s Oil and Gas were 10 for 11 wells of people making a good profit when I first invested. (I still have that PDF they sent me 2004-2005..what a joke!)
My first two wells were dry – “first time it ever happen to Mullins & White”, I was told. Shame on me for investing again, but a relative went in when on a well I did not and they were getting really good checks…for 2 months, so I ventured in on 3 more over several months hoping to recoup the loss and get a modest income stream.
The rest is as you describe months of production before you see a dime, then the expenses on that or other wells eats up the profit on the producing wells. Then the production trickles down to “not worth keeping”.. But wait there’s another well than sounds even better…(As far as the election goes, shouldn’t it be open for all investing partners in the partnership?)
Both new companies (Guardian Oil & Gas and DW Energy Group ) and urged me to invest again – I’m done. I can’t tell the good wells from the bad one, and apparently neither could Mullins and White (M&W Financial)
I really thought M&W Financial (Mullins and White) was the real deal – not a get rich quick scheme, just a good income stream with tax benefits in oil and gas. At the current 6% payback on my investment, I’ll break even on my total investment in 17 years.
It could be bad luck, or a really bad geologist, but like you I feel I’ve been scammed.
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May 4th, 2009 at 10:34 am
It would have been much easier for everyone if you had included the Powerpont presentation Scott Brown’s session on options. It is almost impossible to visualize and understand his commentary without the slides.
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