How to Avoid Becoming a Fraud Victim

Since Bernie Madoff's massive Ponzi scheme hit the news two years ago, there have been countless other Ponzi or pyramid schemes that have quietly failed under the radar. For example, have you heard of Sir Allen Stanford's Ponzi scheme? If you read this blog, you probably have but others I talk to haven't heard of Stanford's $7 billion Ponzi scheme. This is a new phenomenon brought about by the shear size of Madoff's scheme. Anything else seems insignificant. Prior to Madoff, a $10 million Ponzi scheme that came to light in a community would be big news and a $50 million scheme would make national news. Nowdays, a $200 million local Ponzi scheme gets mentioned by a small blurb in conjunction with the weather forecast: "Rain in the forecast tomorrow and investors lost $200 million in local Ponzi scheme. More on the forecast at 10pm." That's it--not even a complete sentence about the scheme!

So many Ponzi schemes have come to light in the past two years or so that I hope people are becoming wiser to the con artists who were thriving before the great recession. I'm also hopeful that the silver lining in the great recession is that these economic parasites will be cleansed from our colon and the economy can be more productive as a result. Unfortunately, unless we learn some basic lessons, my hopes may be unfounded. Here are my top five tips to keep the scammers away from your bank account.

Davis, California's CG

If you ever go to Davis, California, beware of "The Crying Girl" (aka The CG) who will tearfully plead for $37 or so for a train ticket to escape an abusive boyfriend. According to this NY Times article, she's been running this racket long enough in Davis that many of the citizens have caught on and are not happy about it! Apparently, she is very convincing as all good "con men" or con girls are. Hey, if you can turn on the tears at will, why not make a few bucks while you're at it?! If I were her agent, I'd suggest she go to a new market. Maybe Chico? Watch for her show to be played at a town near you...

The career path of a convicted fraudster: Jack Abramoff

The NY Times reported this week that former lobbyist, con man, and convicted fraudster, Jack Abramoff, completed 3.5 years of prison and is now working in a pizza shop in Baltimore, making less than $10 per hour. The article suggests that management subscribes to the marketing philosophy that "There’s no such thing as bad publicity." Maybe so but I would hesitate to give him access to the cash register...

What's the difference between a con-man and a politician?

It appears that the answer is "not much," at least in the case of the former NY State Senator, Efrain Gonzalez, Jr. They both attempt to build confidence in themselves and it appears that many people vote on how well someone can speak persuasively but that's another story for another blog...

Click here to read more about Efrain Gonzalez, Jr....

It sounds like the Lebanese Madoff studied under Bernie or Charles Ponzi himself when he designed his strategy to scam $1 billion from his fellow countrymen.

Consider a few quotes from a recent NY Times article and you can see the common conditions of successful Ponzi schemes:

First: "He was known as a deeply religious and charitable man, with a gift for winning people’s friendship."

Pyramid schemes often involve "con men" who build confidence by "winning people's friendship" and appearing to be religious. Bernie Madoff also built confidence and many fraudsters appear to be deeply religious.

Next: "But the dollar figures have drawn less attention here than Mr. Ezzedine’s close links with Hezbollah, the militant Shiite movement. Many of the investors — mostly Shiites living in Beirut and southern villages like this one — say those party links were the reason they chose to risk their hard-earned savings with a man who offered 40 and 50 percent profits but never showed any paperwork."

In this quote we see a few more common ingredients including affinity with a group and outrageous returns. Affinity is used since it gives the perpetrator a group of people who trust one another's opinion. Once one person in the group gets excited, the rest follow and seem to turn off any due diligence based on the fact that others in their group are doing it. Bernie's scheme started in among his fellow Jewish friends.

As for the outrageous returns, when will the world learn that "if it seems too good to be true, it is probably a scam!"

Insights on Madoff's interactions with the SEC

The SEC released the 22 page summary of the 450 page report detailing its interactions with Bernie Madoff. The NY Times article on this summary described how Bernie was able to persuade investigators when they were getting close to catching him. We know that all successful fraud perpetrators are great at building confidence and are often referred to as a "con man" as a result. The report noted Bernie's abilities in this area and also showed that he could be very domineering when he needed to be. Here are a few excerpts from the NY Times:

One investigator described Mr. Madoff as “a wonderful storyteller” and “a captivating speaker” after the 2005 encounter in which Mr. Madoff, a former Nasdaq chairman, boasted of his ties to people high up in the S.E.C. and said he was on the short list to be the next agency chairman — the post that went to Mr. Cox.

But Mr. Madoff turned angry — “veins were popping out of his neck,” an investigator said — when asked to produce certain documents, and he tried to dictate what paperwork he would yield. When the investigators reported back to their superior in the S.E.C.’s Northeast regional office, “they received no support and were actively discouraged from forcing the issue.”

A Colorado con man is revealed

This week's NY Times reports:

The thick-muscled man with close-cropped hair who called himself Rick Duncan seemed right out of central casting as a prop for a Democratic candidate running against Bush administration policies last fall.

Richard G. Strandlof, in his guise as Rick Duncan, an Iraq war veteran, appeared in campaign commercials for Hal Bidlack.

A former Marine Corps captain who suffered brain trauma from a roadside bomb in Iraq and was at the Pentagon during the Sept. 11 attacks. An advocate for veterans rights who opposed the war. An Annapolis graduate who was proudly gay. With his gold-plated credentials, he commanded the respect and attention of not just politicians, but also police chiefs, reporters and veterans advocates for the better part of two years.

Yet, except for his first name, virtually none of his story was true. In reality, he was Richard G. Strandlof, a charismatic drifter with a history of mental illness and petty crimes who had moved from Montana to Nevada to Colorado, assuming different names and identities along the way.

It's fascinating to me how some individuals seem to gain the confidence of everyone they meet. Ocassionally, individuals who have this charisma seem to thrive on telling tales that are bigger than life. When this happens in a hedge fund we see investors losing millions and even billions. In this case, it happened with an individual who claimed he was trying to do good. Others are not so sure now and wonder if he just liked the attention and power he was getting. Regardless of the reality in this case, it's a sad fact that we need to be skeptical of any individual who gains the confidence of all those around him or her. Watch out for the 'con' man who seems to effortlessly gain nearly everyone's confidence. They seem to be attracted to politics and business.