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