Protecting Loved Ones from Financial Fraud

If you are in the habit of reading personal finance blogs, you might feel you could never fall victim to fraud. As I sat in the audience of a recent conference, I thought about my little sister, my parents, grandparents and late great grandparents. Whenever folks are desperate, they are more easily victimized. So I wanted to share this info with you all because it was SO good. Maybe you can be the one to notice the red flags and make the right call to protect the people you care about. Sometimes even a Facebook share, tweet or emailing a link can help call attention to an issue and raise awareness before people are scammed.

AJ7H04 Credit bank card fraud

Earlier this month, I went to a great seminar hosted by the Montana Commissioner of Securities and Insurance. Jesse Laslovich the Chief Counsel presented this info and was kind enough to let me use his notes to share this great info with you! (This is NOT a sponsored post. I received no compensation, just inspiration!)

9 Types of Financial Fraud


1. Pyramid Schemes

These happen when a company is built on earning money from recruiting additional people. Your pay isn’t base on the sale of an actual products, that real people want to buy. Now this is different from Multi Level Marketing (MLM) companies that produce income from the sale of products. Avon, Rodan and Fields, Jamberry, Mark Kay: these are companies that have real products that customers buy. In a pyramid scheme there is only an exchange of money with no real, viable products. Pyramid schemes are illegal, and should be reported so they can be shut down before more people are victimized.

The town I grew up in actually had 2 pyramid schemes come through over the years. It was sad to see folks lose their money. Perhaps even worst to see the ones who made money, and then when the “companies” were shut down, felt so much embarrassment and shame. Then had been conned into becoming con men themselves, causing friends and family lose money.

If there is a company you aren’t sure is a legit MLM, you can call the Commissioner of Securities and Insurance in your state or the Direct Selling Association. Legitimate companies should be registered.

2. Ponzi Scheme

Bernie Madoff is the most infamous example of a Ponzi scheme in current times. The Madoff investment scandal came into the news in  December 2008, when former NASDAQ Chairman admitted the wealth management arm of his business was an elaborate Ponzi scheme.  Prosecutors estimated the size of the fraud to be $64.8 billion.

In a Ponzi scheme, money brought in by new investors is used to pay old investors. At some point, the scheme collapses when they can’t find enough new investors to fund the payouts to previous investors. Whenever the guaranteed returns are unusually high, people need to exercise caution. It can be easy to fall for an inciting promise, but make sure the return is teetered to reality.

3. Unsuitable investments

This happens when an investment adviser sells products to their clients that aren’t appropriate for them. Perhaps the adviser puts all his clients, irregardless of age or risk tolerance into funds that are 90% gold. Even outside of the fiduciary standard, an adviser has to find products that are suitable. If the products offered seem to be a really poor fit, make sure to call the CSI and get more information about that broker.

4. Churning and Unauthorized Trading

Example of this from Butte Montana: the Piper Jaffray case.  This Stockbroker executed more than 6000 trades in 35 clients’ account without authorization. In total he made more than $600,000 in commissions, while his clients collectively lost approximately $1.5 million from the same trading.  If your broker is making more money on your investments than you, this is a HUGE warning sign. 3 of his victims were in their 90’s; one had died and the broker was unaware so kept trading in the client’s account.  In the last year of his life, the deceased investor reported a mere $9,000 on his tax return that year and his broker earned more than $15,000 in commissions that same year from the man.

Always check your statements. If you have access to others investments statements as their CPA, tax attorney, or executor of their estate, check the statements. All trades should be pre-approved. Trades should be minimal. When there are excessive trades or ones done without consent, call your state CSI. They are able to investigate. It rarely happens on just one account. The elderly can be especially vulnerable. If they see volatility on the news, they can be convinced that moving in and out of products (with a 6% commission) each month is prudent. It is always helpful to have an extra set of eyes to protect our loved ones. If our parents or grandparents have an accountant or CPA, a copy of their statements can be mailed to them as well to protect against churning.

5. Exotic investments

Exotic investments aren’t necessarily illegal. But because the average investor knows so little about the opportunity, it is much easier to invest in things that carry too much risk. The lack of knowledge also makes it easier to create a scam. I think it is wise for people to stick with investments they can easily understand. Stocks, index funds, bonds, mutual funds, CD’s. Trying to chase unrealistic returns with leave you open to fraud or unreasonable risk.

6. Promissory Notes

While promissory notes can be legitimate investments, those that are marketed broadly to individual investors often turn out to be scams. Legitimate corporate and other types of promissory notes are not usually sold to the general public. Instead, are sold privately to sophisticated buyers who do their own “due diligence” or research on the company. If someone comes offering 100% risk free returns with a promissory note, call your state’s CSI to see if they are registered. I think as people are in the early years of retirement, these seem more appealing. If a salesman is going door to door selling promissory notes, it is most likely a scam.

7. Natural Resources

This is an issue in states rich with natural resources like Montana. Scammers claim they have found the next big vien of gold, rare metals or oil. They might promise huge returns. When they raise $500,000, they claim the payout will be 20x your investment. They might have slick brochures, a fancy website or fake geological reports. But that is it. After they take your money, they will vanish.

8. Private Placement: Reg D

This is another one, that isn’t necessarily illegal. They can be appropriate for high net worth investors. The trouble often happens that people claim to have a million dollar net worth, when in fact their liquid net worth is only 100k. If your net worth is 5 million, losing 100k is the risk of the game. But it is devastating to lose your only 100k. If family members or friends are fudging the numbers to get in on these opportunities, try to dissuade them.

9. Annuity Fraud

Annuity fraud happens when the product is 1. Oversold 2. Over charged or 3. Not appropriate. Annuities often carry very high fees. An unethical salesman might try to sell too many to one person.  When grandma tells you she bought 8 annuities from a very nice young man, it’s time to call the your states agency to look into that agent.


What should we do if we suspect fraud?

Make sure to see their license and registration. Read the information and check the information. Call the Commissioner of Securities and Insurance in your state.  With a financial representative, a broker-dealer firm, even with the actual investment, the Commissioner of Securities and Insurance is one of the way to guarantee that the information you have been given is legitimate.

Even as a CPA, estate lawyer, or executive of an estate, if you see something that doesn’t seem right, call the Commissioner of Securities and Insurance in your state and find out more information about the company, investment or sales person. Most cases of fraud only get investigated because someone took the time to call.

I wanted to share this with you, because nothing will make my blood boil faster than fraud against the folks who have worked hard their entire lives to build a bit of financial freedom. Because I can’t personally take a can of bear spray to each of these scammers, sharing this info with you is the best I can offer. (Only sightly joking about the bear spray, because that is illegal. If you don’t know what bear spray is: think pepper spray that will stop a bear. Very effective in many unsavory situations!)

Hopefully you are more knowledgeable to recognize the fraud, AND know what steps you can take to help prevent it. No bear spray needed.

To find the office in your state: here is a complete list.

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Discussion questions:

  1. Is there someone in your life that seems more vulnerable?
  2. Have you seen any of these forms of fraud up close?
  3. In the most hypothetical sense, would you spray someone with a can of bear spray if they churned your grandparents investment account?

Please note: I reserve the right to delete comments that are offensive or off-topic.

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33 thoughts on “Protecting Loved Ones from Financial Fraud

  1. Fantastic post, Ms. Montana! I could write an entire post in your comments section on this one, as I feel as strongly as you on this topic (and I do have two cans of bear spray on hand!).

    As I was reading, I couldn’t help but be reminded of the recent Wells Fargo fiasco – proof that financial fraud is rampant. Check your statements! Check your family members statements if they are vulnerable. Keep track of your money and question anything and everything you see on those statements that you do not understand.

    I have an elderly grandmother who does not completely understand her finances and, since my grandfather passed away last year, she is very vulnerable. She recently had a “nice” couple stop by and chat with her about selling her condo. Grab the bear spray! We haven’t heard any more about that couple, but she obviously let them in and spoke with them. We keep good tabs on her and her finances, but it is worrisome.

    My in-laws have reported being victims of a pyramid scheme 20-some years ago. They bought in and convinced friends and family to invest as well. By the time they figured it out, they had put lost several thousand dollars. They also ended up paying the friends and family back the money they invested since they felt responsibility.

    • That is so sad about your in-laws! It’s very kind that they helped pay back their friends, but of course it cost them even more money. They talked about how fast these things can move now with the internet. Hundreds of thousands of dollars can be taken in just weeks.

  2. Unfortunately, these sort of bad actors are just rampant, and there’s only so much we can do. I’m actually in the consumer protection field and we see this happen all the time. Recently read about a financial adviser in my city that was arrested for bilking an elderly client out of $200k or so. Family members just have to do their best to watch over their parents, siblings, etc.

    • I was so impressed with our state office. They really had a “call us about anything attitude.” Even for people considering an adviser: call us! They said they know WAY too much information on everyone, and are happy to share. I really had no idea that there was a state organization that actively investigated and prosecuted these things. Before I attended the conference, I would have had no idea who to call if there was something odd on my statement.

  3. I’d like to add a type of fraud to the list “Computer Fraud.” My grandma who is 85 likes to surf the web and even though we have safeguards in place for her so she doesn’t infect her computer she still ended up mistyping a websites name and ended up on a site that was supposedly Microsoft. Not knowing any better she called them because a big blinking popup told her that her computer was infected and she needed immediate tech support.

    Luckily she quickly realized that the guy on the phone was just interested in her credit card details so he could “fix” her computer. She hung up and called me instead and asked if that was a normal thing to do. Thankfully no money or useful details were given.

    I’ve never been more irate at a “tech” scammer until it become a personal attack on my grandma’s financial matters.

    • That scam is so pervasive! We have had it twice on our computer. Or they tell you to go buy gift cards or visa gift cards, to make it harder to trace. If Jesse jumps in the comments, maybe he has some good suggestions on that. Or any other readers know what we can do against those kinds of fraud?

      • Great information. My uncle fell for a scam on his computer where he let them someone take control of the screen. They also got a credit card# out of him but my cousin was able to nip it in the bud. Then there’s the oldie but goodie phone call, where the elderly person answers the phone and the caller says “Grandma?” The scammer never says his name, gets granny to say something like “Is that you, Billy” and gives a sob story about being stranded or in trouble and needing money wired. He says “Don’t tell mom” because he’s “embarrassed”. I know of one person who fell for this, and later was with her daughter when the real grandchild called from across town.

        • I think the state office just handles investment/security fraud, but now I am really curious who is suppose to handle other forms of financial or internet fraud. I find it twice as detestable when people target the elderly. I would take 2 cans of bear spray to them. It’s so good that your cousin was able to step in in time! Family needs to look out for each other.

          • I think bear spray is being too nice. Unfortunately these scumbags know they are very unlikely to get caught and just carry on with their business without a second thought about it.

  4. I’d like to add IRS fraud/scams. My grandma got a call from the “police” saying that she had not submitted her taxes correctly and had to pay a penalty and interest. She was told the police would meet her at the bank to in order to satisfy the debt. Luckily she called me up as I was the one to file her taxes and quickly google’d because the state police normally do not get involved in state taxes. I was able to read about a warning from the real state police about this scam and told my grandma to ignore the calls. She was still a little scared but obviously the police never stopped by 🙂

    • That is crazy. I wonder if they would have showed up dressed as police? Thank goodness she called you! Did you happen to call the police? I wonder if they would have gotten involved?

          • These scams usually originate in India call centers, so nothing they can do really except tell you not to fall for it. If you check out OwnagePranks on YouTube, he likes to mess with the tax scammers, it’s somewhat entertaining….

          • I might be a good idea to put together a list of types of scams to help people stay informed. There is a really scary kidnapping one, where they pretend they have your child and want you to wire them money. In that terrifying moment, you don’t want to need to google possible scams. It’s better to know in advance.

  5. Hi Ms. Montana! This comment is off topic so I apologize! I just wanted to say hi, my family just moved to Montana so I thought it was kinda cool to find another blogger in this state! I thought maybe I would be the only one lol 🙂 I look forward to reading more!

  6. Like MustardSeedMoney, we got one of those calls although they said it was from the IRS. The IRS does not call, they like registered mail, and they especially don’t call from TracFones. (reverse lookup baby!)

    Also there are a lot of collections schemes with zombie debt…it just won’t go away. Because my little brother lacks anything approaching financial responsibility, my parents have had a lot of problem with that. Unfortunately for the collectors, my dad’s a lawyer and delights in tormenting them.

    Thanks for all the good info.

  7. As an accountant I love this post! When I was doing my auditing class we regularly discussed many of these schemes. When I now began blogging, somebody actually tried to scam me. I got a letter in the mail (no idea how they got my address!) saying that I needed to pay $75 within 15 days or they were going to shut down my domain and bring me to court. At first it was scary but then I stopped to think about it and realized there is no way this is real. Looked up the name of the company online and saw that it was a regular scam many new bloggers fall for. Sometimes checking the internet can give you all the answers, other times you need to be skeptical of everything.

    • Accountants can be a huge help against these kinds of fraud. In Montana a lot of the tips that come in about investment fraud come from accountants who notice something odd with their clients accounts. I wish people had more protection against cyber crime!

  8. Great post =) It’s sad so many older people fall for schemes and get taken advantage of. I’m watching out for my parents for this reason.

    • I think it’s a great idea to let our parents or grandparents know they can call us first before giving anyone money. Providing then with some examples of fraud, and just have them say, “I need to run this by my “adviser” first and then I will get back to you.” That alone is so empowering!

  9. Great points! I always tell people to invest in what they know/use. Well known companies/blue chips can offer the safest long-term investment, that produces an actual return above inflation. Many people hear “tips” and throw a lot of money on investments that they have no knowledge about. A friend of mine lost thousands of dollars investing in a penny-stock that he found out about from a man at a bar. The man said it was fool proof way to make serious money, yet my friend is out a substantial amount of money. Things like this happen all the time. It’s scary.

    • I think there is always a temptation to stray away from the vanilla investments (maybe more so for men), but it’s basically gambling. If people can’t afford to lose the money, it’s not worth trying to play.

  10. We’ve had a few people here in the cities fall victim to the bank account/IRS fraud this last month. They are tending to prey mostly on the elderly, telling them that they owe the IRS and they have to pay up “now, or else”. The poor people are literally scared into giving their bank account info out. Terrible!

    • That is so horrible. It would be great if there were a peer-to-peer support group in communities. Like volunteers you could call if you get a threatening or confusing call before you pay someone.

  11. I was once at a coffee shop on a business trip, and a large group of people assembled in the corner. The patriarch of the group started speaking about “how would you like to make some money and live the American dream?”, and right away I could tell it was a lure for a pyramid scheme. What’s funny is they came over to me to see if I wanted to join, and I was like “no thanks, I’ve already got enough money” .