If you're going to invest in a Ponzi scheme, look for the biggest and most exclusive ones. Find scams in which really wealthy people and large, prominent financial institutions are involved. A swindle in the Hamptons or Palm Beach is a much better choice than a scam in Moline, Ill. or Tulsa, Okla. Why? Look at what's happening in the Bernie Madoff case.
Irving Picard, the trustee in bankruptcy for the case, has collected about $1.5 billion so far. The time for him to file claims to recover money for injured investors is expiring, and he has recently brought a flurry of additional cases. Big banks, like J.P. Morgan Chase, UBS and HSBC, have been sued. Other financial firms and people that may have fed investors into the scheme have been targeted. Overall, Picard has filed claims for over $50 billion recently. Since he reportedly estimates actual cash losses from the scheme in the range of $20 million, he's trying to collect more than the actual losses (evidently on the theory that some actors, like those soliciting or providing investors, may have liability for damages). His chances of recovering 100 cents on the dollar of actual losses is likely to be low, and the chances to obtain damages probably lower. Nevertheless, many of the recently named defendants are important players in the financial services industry with reputations to protect. If their cases go to trial, unflattering information about them might be revealed in court. They could have strong incentives to settle. Many of them, like the large financial institutions, can't claim inability to pay. That means they will have to pay something.
We're still a long way from the end of the Madoff case. But his victims, who two years ago may have thought they had lost everything, may receive non-pathetic recoveries. For many, recovering 20 or 25 cents on the dollar could bring a little champagne and a new leased Mercedes into their lives. The Bentley may not reappear. But dog food (other than for the pet) could be dropped from the grocery budget.
In the grand scheme of things, being duped in a big and brazen scam of the wealthy is better than being ripped off by a guy selling investments in the parking lot of a big box store. When the wealthy are victimized, other wealthy people and large institutions can possibly be made defendants. Such defendants will often be inclined to settle. Con artists who practice their chicanery in middle class settings are likely to spend the money as fast as it comes in, and there's nothing to collect when the house of cards collapses. Even when victimized by con artists, it would seem, the rich end up richer than everyone else.
Showing posts with label scams. Show all posts
Showing posts with label scams. Show all posts
Friday, December 10, 2010
Sunday, December 5, 2010
Looking for Bernie Madoff
If you could get the candid assessment of the financial markets from a lot of investors today, it would probably be something like returns are low and risks are high. That explains why so much money, especially that held by individual investors, remains in bank accounts, money market funds, ultra short bond funds and other relatively low risk places. The financial markets have given us so many unpleasant surprises in the last 3 years, people are afraid the future holds more.
At the same time, with incomes stagnant and inflation increasing (regardless of government statistics and what high ranking government officials claim), many are under pressure to seek higher returns from their savings. There's nothing wrong with looking for a better return. Just remember that, even though we now live in the era of the endless bailout, there still isn't a free lunch. Unless you're a major bank, a sovereign nation, or a very large business corporation. Stocks and lower rated bonds might offer greater potential for profit, but they also offer greater potential for loss. Risk and reward walk hand-in-hand down Wall Street.
Some investment products include guarantees against loss. These often are touted by insurance companies and should be scrutinized closely. The promise against loss is going to cost you. It could be in the form of tight limits on upside returns (i.e., if the product generates a return, the insurance company is going to keep a good portion of it), stiff penalties for early termination or withdrawal, and in other forms. Remember that if the markets perform poorly and your return is zero, even though your losses are also zero, you would have been better off in passbook savings. (That's not a theoretical point; anyone who put money in passbook savings ten years ago instead of stocks is ahead of the market.) While no one knows what the future will bring, investing in a no-lose product doesn't mean you'll win.
Even though many insurance companies might want to sell you a lousy deal, in general they aren't fraudsters. The worst thing you could encounter in your quest for higher returns is the markets magician who claims to consistently produce good, albeit not spectacular yields, day in and day out, year after year. No one can do that, period. If you meet anyone who says he or she can, put your hand on your wallet and run away. Fast. No matter how tempted you are, and no matter how good the sales pitch sounds, don't invest.
The biggest frauds are perpetrated, not because the bad guy lies, but because investors lie to themselves. They convince themselves that lead can indeed be turned into gold. They brush aside contrary evidence and the rationality of naysayers. They want to hear, however improbably, that good returns can be secured with no risk. They seek out the con artists who promise the sun, the stars and the moon.
Bernie Madoff didn't have to find many of his victims. They found him, and they were ready to believe every word of his web of lies. He'll be in prison for the rest of his life. But there are plenty of latter day Bernie's around. Often, the gullible and greedy will find them. As a matter of law, the con artist is liable and should be punished sternly. As a matter of reality, if you go looking for a latter day Bernie Madoff, you'll probably find him. And you'll regret it.
At the same time, with incomes stagnant and inflation increasing (regardless of government statistics and what high ranking government officials claim), many are under pressure to seek higher returns from their savings. There's nothing wrong with looking for a better return. Just remember that, even though we now live in the era of the endless bailout, there still isn't a free lunch. Unless you're a major bank, a sovereign nation, or a very large business corporation. Stocks and lower rated bonds might offer greater potential for profit, but they also offer greater potential for loss. Risk and reward walk hand-in-hand down Wall Street.
Some investment products include guarantees against loss. These often are touted by insurance companies and should be scrutinized closely. The promise against loss is going to cost you. It could be in the form of tight limits on upside returns (i.e., if the product generates a return, the insurance company is going to keep a good portion of it), stiff penalties for early termination or withdrawal, and in other forms. Remember that if the markets perform poorly and your return is zero, even though your losses are also zero, you would have been better off in passbook savings. (That's not a theoretical point; anyone who put money in passbook savings ten years ago instead of stocks is ahead of the market.) While no one knows what the future will bring, investing in a no-lose product doesn't mean you'll win.
Even though many insurance companies might want to sell you a lousy deal, in general they aren't fraudsters. The worst thing you could encounter in your quest for higher returns is the markets magician who claims to consistently produce good, albeit not spectacular yields, day in and day out, year after year. No one can do that, period. If you meet anyone who says he or she can, put your hand on your wallet and run away. Fast. No matter how tempted you are, and no matter how good the sales pitch sounds, don't invest.
The biggest frauds are perpetrated, not because the bad guy lies, but because investors lie to themselves. They convince themselves that lead can indeed be turned into gold. They brush aside contrary evidence and the rationality of naysayers. They want to hear, however improbably, that good returns can be secured with no risk. They seek out the con artists who promise the sun, the stars and the moon.
Bernie Madoff didn't have to find many of his victims. They found him, and they were ready to believe every word of his web of lies. He'll be in prison for the rest of his life. But there are plenty of latter day Bernie's around. Often, the gullible and greedy will find them. As a matter of law, the con artist is liable and should be punished sternly. As a matter of reality, if you go looking for a latter day Bernie Madoff, you'll probably find him. And you'll regret it.
Monday, May 21, 2007
Scam Alert
It's past midnight and you've been in the bar for a while. Maybe you've had two or three drinks, or maybe a bit more. You're still alone and some of the people around you are starting to look better than they did a half an hour ago. One of them walks up and says, "I just won the lottery. Would you like to see the $20,000 shower curtain in my apartment?" Are you going to fall for this?
You're living paycheck to paycheck, and any time you have to buy both bread and potatoes at the grocery store, you wreck your budget for the week. Someone who is nicely dressed, sports an expensive watch, and drives a luxury car approaches you and says, "Would you like to get in on an investment that pays 10% a month? You can double your money in less than a year. Look at what it's gotten me!" Will you fall for this?
Life has taught you, in at least some settings, that desperation isn't an excuse to do something dumb. There's no exception to this rule when it comes to money and finances. There's always someone with a good story who wants to take your money. How many people are waiting around to give you money? The next time you hear a smooth sounding story about easy money and no risk, put your hand on your wallet and excuse yourself to take a walk around the block from which you don't return.
Here are some common scams that you may encounter.
1. Internet fraud: be wary of unsolicited e-mails or instant messages promoting investments, or which direct you to websites that promote investments. Always research the investments--see if any independent source of information will verify the claims made. When in doubt, don't invest.
2. Foreign exchange trading scams: foreign exchange, or "forex," trading basically involves betting that one currency (let's say the Japanese yen) will increase or decrease in value against another currency (let's say the Swiss franc). This is a zero-sum game--if one currency gets stronger, the other one by definition gets weaker, and if you don't win, you'll lose. Legitimate forex trading involves millions and even tens of millions of dollars per transaction, and is for the big dogs on Wall Street. There are, however, lots of opportunities for ordinary investors to be ripped off in foreign exchange scams. Avoid this stuff.
3. Oil and gas scams: with the prices of oil and gas scaling Mount Everest, energy and alternative energy scams are now a dime a dozen (and not even worth that much). Research energy investments carefully, and always look for independent verification. Independent verification means you, on your own, should find legitimate sources of information that support the claims made. Don't rely on sources of verification provided by the promoter of the investment--those sources could be in cahoots with the promoter. When in doubt, don't invest.
4. Affinity fraud: some of the lowest forms of life in the financial markets take advantage of social or religious ties to defraud investors. This is called "affinity fraud." For example, a crook might join a congregation, win over one or two prominent members, and use their respected status to convince other members of the congregation to invest in a scam. Or else, a member of a minority group might try to sell phony investments to other members of the same minority group. In these cases, the crooksters exploit the natural human tendency to trust those who have something in common with you. Stay vigilant whenever anyone wants to take your money. Invest in an asset, not in a person.
5. Prime Bank investments: an endemic problem in the financial markets is the prime bank fraud. Scumbag promoters offer you a chance to get into investments offered by "prime banks," which are supposed to be prominent foreign banks that ordinarily serve only the ultra-rich. These investments are touted as high return, low risk and tax free. None of that is true. You're more likely to encounter a swimming pool in the Sahara than a real prime bank.
The North American Securities Administrators Association, which is composed of the state securities regulators in the U.S., has put together a longer list of scams du jour. Go to http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/6669.cfm.
The elderly are among the most likely to be victimized by fraudsters. If you have elderly parents or grandparents, try (gently) to keep an eye on their financial well-being.
Crime News: Is this your parakeet? http://www.nbc4.com/news/13352686/detail.html. If so, the police may have your camera.
You're living paycheck to paycheck, and any time you have to buy both bread and potatoes at the grocery store, you wreck your budget for the week. Someone who is nicely dressed, sports an expensive watch, and drives a luxury car approaches you and says, "Would you like to get in on an investment that pays 10% a month? You can double your money in less than a year. Look at what it's gotten me!" Will you fall for this?
Life has taught you, in at least some settings, that desperation isn't an excuse to do something dumb. There's no exception to this rule when it comes to money and finances. There's always someone with a good story who wants to take your money. How many people are waiting around to give you money? The next time you hear a smooth sounding story about easy money and no risk, put your hand on your wallet and excuse yourself to take a walk around the block from which you don't return.
Here are some common scams that you may encounter.
1. Internet fraud: be wary of unsolicited e-mails or instant messages promoting investments, or which direct you to websites that promote investments. Always research the investments--see if any independent source of information will verify the claims made. When in doubt, don't invest.
2. Foreign exchange trading scams: foreign exchange, or "forex," trading basically involves betting that one currency (let's say the Japanese yen) will increase or decrease in value against another currency (let's say the Swiss franc). This is a zero-sum game--if one currency gets stronger, the other one by definition gets weaker, and if you don't win, you'll lose. Legitimate forex trading involves millions and even tens of millions of dollars per transaction, and is for the big dogs on Wall Street. There are, however, lots of opportunities for ordinary investors to be ripped off in foreign exchange scams. Avoid this stuff.
3. Oil and gas scams: with the prices of oil and gas scaling Mount Everest, energy and alternative energy scams are now a dime a dozen (and not even worth that much). Research energy investments carefully, and always look for independent verification. Independent verification means you, on your own, should find legitimate sources of information that support the claims made. Don't rely on sources of verification provided by the promoter of the investment--those sources could be in cahoots with the promoter. When in doubt, don't invest.
4. Affinity fraud: some of the lowest forms of life in the financial markets take advantage of social or religious ties to defraud investors. This is called "affinity fraud." For example, a crook might join a congregation, win over one or two prominent members, and use their respected status to convince other members of the congregation to invest in a scam. Or else, a member of a minority group might try to sell phony investments to other members of the same minority group. In these cases, the crooksters exploit the natural human tendency to trust those who have something in common with you. Stay vigilant whenever anyone wants to take your money. Invest in an asset, not in a person.
5. Prime Bank investments: an endemic problem in the financial markets is the prime bank fraud. Scumbag promoters offer you a chance to get into investments offered by "prime banks," which are supposed to be prominent foreign banks that ordinarily serve only the ultra-rich. These investments are touted as high return, low risk and tax free. None of that is true. You're more likely to encounter a swimming pool in the Sahara than a real prime bank.
The North American Securities Administrators Association, which is composed of the state securities regulators in the U.S., has put together a longer list of scams du jour. Go to http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/6669.cfm.
The elderly are among the most likely to be victimized by fraudsters. If you have elderly parents or grandparents, try (gently) to keep an eye on their financial well-being.
Crime News: Is this your parakeet? http://www.nbc4.com/news/13352686/detail.html. If so, the police may have your camera.
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