Avoid Temptation – Avoid Fraud

by | Sep 27, 2011 | Archives

Here are some tips that can help you avoid fraud.


Would you buy a used car from this man?  Bernie Madoff was Wall Street’s hero for years.  Who has replaced his scam?  This is a question you do not want answered in the wrong way.

During major economic corrections… like we are living in now, it is tempting to ignore rule eleven of the Multi Currency Investing Baker’s dozen.

Rule #11: of the Multi Currency Investing Baker’s Dozen: Do not count on extraordinary returns. Be realistic.

Times of turmoil create opportunity but also make many susceptible to fraud… because one feels a need to recover from perceived losses.  This feeling of loss leads to looking for unrealistic returns… that come from investments that are safe.

There is no such thing as a safe investment that does not have risk.  When promised such a deal.. take extra care.  The future reveals whether an investment had risk or not… but as a general rule… the higher the potential return… the greater the risk.

The mindset of the West world is  indoctrinated on these 3 Ps…position, possession and popularity.  These concepts form the foundation of many lives and they are the precursors for stress, tension and poor health as well as financial doom.   These structural flaws in our social economic morality create a template for self slavery and a potential failure.  We voluntarily become chained to our desk or jobs and are willing to even cheat (ranging from small fibs on loan applications to doctoring books) to gain the 3Ps.   The weakness in this framework of thought also leaves us open to fraud.

Delegates really enjoy one another at our seminars.

A lot of information gets exchanged but I have noticed an increase in people talking about deals that seem too good to be true. Beware!  Here are some tips to help you understand what might be true and not.

The first tip is to recognize that if something seems too good to be true, it usually is.

My experience is that once a person is hooked by a fraudulent idea… he/she loses common sense.

I first discovered this fact with my first scam encounter over 30 years ago while working and living in Hong Kong. A commodity trader in town allegedly had a way to scam the Japanese commodity trading firm he worked for. Purportedly the quotes arrived in Hong Kong minutes before Tokyo and the time gap could be taken advantage of. The guy approached one of my clients and promised to make 15% to 20% per month if he would be an accomplice.

The client sought my advice. I investigated and discovered that the deal was a fraud. The commodity dealer had tricked investors all over town. If the client opened the account, the trader would lose the entire deposit via churning and fees. What could the client do, go to the police and tell them he was ripped off while trying to defraud a commodities firm?

I called the client and told him the whole story and explained exactly how the con artist worked. Thought that was enough.

Later I learned that the client invested $10,000 anyway and lost it in exactly the way I had warned he would. To add insult to injury the client then put up another $10,000 (the con artist told him they could recover the first $10,000). He lost that too!

This has happened again and again. Clients contact me, ask me about a fraud. I unveil it, tell them what to watch out for and then learn later that they made the investment (and lost their money) anyhow.

Even worse, the duped sometimes shoot the messenger.

Often when someone uncovers a fraud, the investor gets mad at the person who unveils the fraud and not the guy who is stealing from them!

In the Hong Kong example above, finally the Hong Kong Fraud Squad investigated and the con artist fled town. My client was angry at me and the police. “If everyone had left the guy alone, he would have worked it all out”, was his refrain.

Another fraud prevention tip is reading the book “Cleaning Up: One Man’s Redemptive Journey Through the Seductive World of Corporate Crime” by Barry Minkow. This book is about fraud.  “Cleaning Up” explains why people get mad when scams are unveiled, why they ignore warnings about fraud and much more.

Minko really knows fraud.  When he was 16 and in high school he started a carpet cleaning business in his parents’ garage.

He got a bad start because he used usurious loans with interest rates higher than the business could afford.  This led to check kiting, stealing and even selling his grandmother’s jewelry, staging break-ins at his offices, and running up fraudulent credit card charges.

Minkow kept expanding and became the largest carpet-cleaning company in Southern California but the business was always running hand to mouth and getting poorer because he had created a Ponzi scheme offering huge profits on non existent projects.  Paying the investors drained all the income received.

Because he was such a young (apparent) success he gained a lot of good press attention.  His business went public by merging with a shell company, listed on NASDAQ.  At the time, he was, at 21 years of age, the youngest person to take a company public in American financial history.

Using many fraudulent tactics, Minko ran his company’s stock up to a value of$280 million.

However, the business still had a terrible cash shortage from paying investors for the nonexistent projects.

Finally the wave overwhelmed Minko and the company.  Investors lost $50 million.

Minkow spent just under seven and a half years in prison, became a born-again Christian, earned a degree in Church Ministries and is now a pastor.

Minkow also holds an executive position at the Fraud Discovery Institute in San Diego, which he helped found. The institute launches investigations into companies suspected of fraud. He has since helped law enforcement uncover so many frauds, that the judge presiding on his case released him from his terms of probation.

The book shares how to use the 3 Ts (Transparency, Truth plus Time) to create the Ultimate Fourth T, Trust.

This lesson alone makes Cleaning Up worth reading, but there is much more you will gain about cleaning up in business and all of life in this fun, easy to read story of a smart man who bares his inner self to light the road he followed from being cunning to becoming wise. The minute we realize that “but for the grace of God there go I” this book becomes a great primer for avoiding fraud, large and small.

Minkow gives several warnings and tips that can help you spot a con.

Fraud Avoidance Tip#1: Just checking out history and size is not enough!

Minkow proved the fact in his first chapter. His Fraud Discovery Institute was asked to check out the Financial Advisory Consultant Mutual Fund. This fund had been around for 20 years, had over $800 million under management and had averaged 38.8% per annum growth over the two decades.

He did his due diligence and discovered the longest running Ponzi scheme in American history. Due to a report filed by Minkow, the State of California and the Federal government, both began investigating this fund. Eventually the fraud was shut down. Investors lost $400 million.

When he first looked at that fund it had history, size, a long list of satisfied investors one could refer to and some very slick brochures.

Minkow saw three red flags that worried him; Control by one person,  no audited financial statements to support the very high returns earned in a low return environment and  all the new investors relied upon current investors to decide to enter the fund.

Bernie Madoff came after Minkow wrote his book.  Even larger proof!

Fraud Avoidance Tip#2: Look for independent proof of profitability. In Minkow’s discovery, there were no proper nouns, no names in the brochures. The language was ambiguous like “In May of 2002 we bought a large laundry company and sold it for 2.9% profit for the month.” Never in any of these purported sales did the brochure name a company that was bought or sold so that these profits could be independently verified.

Fraud Avoidance Tip#3: Look to see if the owner of the fund has the licenses one would expect.  In Minkow’s case the owner needed Series 7, Series 66, registration with NASD and California Department of Corporations.  He had none. The company it turned out was only filed as a DBA. This 20 year old, $800 million mutual fund was not even incorporated!

Fraud Avoidance Tip#4: Check records.  The fund Minkow investigated claimed to make its money in three ways- buying and reselling businesses, insurance premium financing and equipment leasing. Minkow called experts in these fields. In the insurance premium area he discovered that such high returns just were not possible plus any such lender would have to have a license to make such loans, called PFCs. He checked this as well and found again no record of any such license.

Fraud Avoidance Tip#5: See for yourself.  Minkow visited the offices and discovered that it housed a staff of five people. This seemed quite small for a fund with three divisions managing $800 million.

When you look at any investment or business deal give it the following 11 step test.

Fraud Test #1:  Look for independent proof of profitability. Find out how the business claims to have been making profits and investigate the actual transactions that have been said to have taken place. Do not accept excuses for not letting the profits be seen. A scam artist will say the deals are confidential or something of this nature. Just say “No proof – no deal”.

Fraud Test #2: Do not let the fact that someone else has received big profits, even for years, suck you in.

Fraud Test #3: Ignore the media or star studded cast that may be involved. Often the media and professional athletes, celebrities, politicians and church deacons, etc. are innocent victims as well.

Fraud Test #4: Look for signs of hidden debt. Regular payments to a person or company who is not performing a service is a clue.

Fraud Test #5: Especially beware of special offers to get you act quickly. This can be a sign that the scam artist is in special need of quick cash.

Fraud Test #6: Do not let outward appearances be your guide. The first rule of lying is, “never take your eyes off their face. Do not break eye contact”. The best con artists are the nicest people on the surface. Expensive cars, big houses, yachts and even private planes are not a guarantee of success. Do not let the appearance of normalcy fool you. Realize that almost no white collar criminal who goes to jail ever plans on being there. Most start with good intentions, make an error and cheat to cover up. Almost all believe that there is a cure so if they can just hang on everything will be okay. Most frauds are not committed by criminals but by people just like you and me who get caught in an unexpected circumstance and are just trying to cover up and hang on.

Fraud Test #7: Check out the use of funds carefully. The dishonest person will always have a reason why he needs the extra cash, but an in-depth review will show that the need does not make sense.

Fraud Test #8: Do not trust even audited accounts. Minkow for example had an employee who created fake invoices from suppliers who did not exist, reconciled phony bank accounts and formed a false company to confirm to auditors that information was correct. Minkow now trains CPAs to spot fraud and warns them that during confirmations they should not just accept a letter from a company that confirms a certain sales figure, or balance, etc. but to go the extra mile and make sure that the company that confirms the letter actually exists. Few auditors do this.

Fraud Test #9: Beware of wealth claims based on the value of stock. The value of shares in a phony company can be very unreal.

Fraud Test #10: Know that the Better Business Bureau does not audit accounts that are sent to them. They accept the data that a business sends them at face value. BBB, Dunn & Bradstreet nor bank references should be accepted as proof of anything.

Fraud Test #11: Check with experts in the field that the profits claimed seem reasonable based on industry standards.

Take these steps when you invest.  You’ll reduce your chances of losing and increase your potential for profit.

There are no guarantees in life, business or investing, but prudence diligence AND DIVERSIFICATION helps assure that your losses will be honest and you chances of profits  greatly increased.

Even with Minko, take care.

For example a report in early 2008, showed that the CFO of Herbalife misrepresented his educational background on his resume, leading to the CFO’s resignation from the company.

Minkow’s book is great… a must read.  Yet you should also note that according to Wikapedia:  “After releasing the report, Minkow sold Herbalife shares short and stood to benefit financially when Herbalife’s stock fell as a result of his investigation. During an appearance with Neil Cavuto on the Fox Business Network, Minkow claimed that he notified the FBI and SEC of his plans, but many observers believe that the fact that he may have personally benefited from the Herbalife investigation calls into question his true motivations.”

Barry Minkow almost always holds a position (usually short selling) in securities that he reports on.[2] There is a disclaimer on his website “It must be understood and clearly disclosed that just because FDI says a company, especially a public company, is an apparent financial fraud in progress, unless law enforcement corroborates such findings it is a meaningless conclusion as the finder of fact is always law enforcement and the courts.”[2]

Minko wrote about himself when he was creating his huge fraud:I had fallen into the supreme falsehood of fraud perpetration: fraud is a means to an end and never an end in itself. I told myself that lies to the banks, investors, and auditors were not really wrong as long as I had a plan that would ultimately pay everyone back. As long as no one got hurt there was no crime.”

Minkow believes that most fraud perpetrators believe that they have a cure which will eventually recover the losses.

He writes: “The first irony of course is the irony of the cure and the lies that we (fraud perpetrators) tell ourselves. The second irony of fraud is that the very greed that we perpetrators count on our marks (potential investors) possessing to drive them to invest and blind their objectivity is the same greed that blinds we perpetrators and makes us feel invulnerable to detection. Greed is the one-size-fits all blindfold that both perpetrators and investors wear in tandem. Though neither will admit it.”

Times change.  Economics rise and fall… but human nature… motivated by fear and greed does not change.  Neither does our susceptibility to fraud.

Fraud is nothing new… but the tactics change and times like these make many of us more people susceptible to fraud…. so beware and use these fraud prevention tips.


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