22 Jan

Investigating Investment Frauds and Schemes

Despite the proliferation of information available about phony investment schemes and the dire warnings given regularly by news reporters, consumers continue to become victims of these scams on a regular basis. The perpetrators of investment schemes dream up stories explaining their unusually high rates of return on money, and people with money to invest with them.

These high investment returns typically amount to guarantees in excess of 10% per year. Often they are to the point of ridiculous, offering a 30% or 40% annual return. As a fraud investigator, it is clear to me that these offerings are bogus, because any investment that legitimately generated such returns would not be much of a secret to the rest of the world. But consumers, who are often eager to protect and grow their nest eggs, are all-too-willing to believe that such an investment is the answer to their money problems.

These investment schemes (sometimes Ponzi schemes) are not usually terribly elaborate, but the stories about them are. In typical investment schemes, there is absolutely nothing legitimate about what they are offering. There is often a story about a wonderful investment vehicle, often with ground-breaking technology, a secret recipe, access to a niche market, or some other unusual-sounding detail. This cryptic detail allows the investment vehicle to create such high returns for investors, or so the story goes.

The unique characteristic that will supposedly earn the investors so much money is either nonexistent or does not have the significance that those selling the investment want you to believe. The people making the offering simply want to steal the investors’ money  and hope that they will buy into the scheme before they discover the hook is all a lie.

An affinity fraud is an investment scam in which the perpetrator gets involved with a close-knit group of people, often with a similar ethnic or religious affiliation. These groups of people often have a great deal of trust in one another. If the perpetrator can convince the group that she or he is one of them, or if the perpetrator can get a few key people to buy into the scheme, many members of the group are likely to invest their money.

Investment schemes can be identified by considering the following questions:

  • Does the business of the company make sense in light of market conditions and your general business knowledge?
  • Does the company exist because of some secret, revolutionary new process or product? If so, what proof is there that the technology or process is legitimate?
  • Does the company rely on some rare gem, piece of real estate, antique, or other hard-to-find item? If so, is the investment scheme really scalable to the extent that the promoters suggest?
  • Does the company’s performance make sense when compared to other companies in the industry?
  • What do objective third parties have to say about the company and its business? Are those things in line with what you are being told? Or are third parties suspiciously quiet about the company and its offerings?
  • Is the business of the company so complicated that an ordinary person cannot really understand what it is selling or how it is operating?
  • Are unusually high rates of return on the investments being marketed? Are such returns possible or probable? If such high rates of return are so easily obtainable, couldn’t other companies do the same?
  • Is the company guaranteeing rates of return on investments with them? Can their promises be verified in any way?
  • Is the company’s success dependent on exploiting a tax loophole or other government regulation? If it was possible and legitimate, couldn’t more companies do so?
  • Are certain parts of the business unusually secret? Is there a general reluctance to disclose key facts?
  • Who really works in this operation? Does it appear to be just the owner and a few other people? Does that level of staffing make sense in light of the operations or results touted by the company?
  • What is the background and experience of the principals? Do they have industry expertise?
  • Have any of the principals been involved in scandals or bankruptcies? Do they have criminal records? Have they been accused of running any scams?
  • Does the company have a board of directors, auditors, lawyers, and other advisors typical of a company of its size?
  • Is the apparent success of the company related to a recent announcement, rather than historical financial results? Can the facts of the announcement be verified?

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