Fraud Is Alive and Well In 2014

When authorities entered Bernie Madoff’s private offices after his fraud was revealed, they found a silver sculpture in the shape of a screw on his window sill.  The name of his yacht was “The Bull Ship.”  Madoff was laughing in the faces of the thousands of investors he bilked.

Today, approximately six years after Madoff was exposed, fraud is alive and well.  Fraudsters are as creative as ever;  there are a number of areas of which you and your clients need to be aware.  According to a report issued by the North American Securities Administrators Association, the top four areas involving the greatest risk are, in order: (1) Rule 506/Reg. D exempt transactions, (2) Oil and Gas, (3) Ponzi schemes, and (4) real estate.

So, how do we protect people from being scammed?  There are a few key things to remember.  Any unregistered transaction must be viewed with caution.  Regulations have been loosened; and advertising, including through the use of social media, will make these “private placement” products more readily available and attractive to more people.

Unregistered sales or servicers of investment products should also be viewed with caution.  These people usually appear highly successful.  They belong to prestigious clubs and are friendly with influential people who vouch for them.  (Of course they do. They have made lots of money based on the recommendations of the fraudster which he typically pays with incoming new investor money).  These schemes are often referred to as “affinity” schemes because they pray on a group of similar  people – old, sick, rich.  Remember the old adage, “If it seems too good to be true, it usually is.”  If you are offered returns far out of line with the markets, be wary.

In “hot” areas, look for fraudsters.  Oil and gas seems to be an area rife with fraud.  While of course there are many legitimate oil and gas investments, be wary of those sold by unlicensed sales people and under a state or Federal exemption from registration.  Real estate remains an area of fraud.  Even though the market has mostly recovered, short sales, foreclosures and “flipping” with promises of huge returns (and minimal effort) still abound.  (“Just sign the note and mortgage. We’ll have you out before the first payment is due. We have a buyer standing by.”)

In short, use your head.  There is probably no legitimate investment providing returns far out of line with the market and with “no risk.”  Remember the economic postulate that as risk goes up, the potential returns go up; but don’t forget the corollary: don’t expect above normal returns without above normal risk of losing your shirt.


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