Protecting Sophisticated Investors From Sophisticated Con Artists

Posted in: Consumer Law

Investors receive a great deal of suspiciously dishonest advice. However, they may hesitate to complain to the police or the regulators. If the investors belong to affinity groups, such as a church or social club, or if they are employees who work together, they are warned against “affinity scams.” They are told: “Do not make an investment you do not understand. Do not make an investment solely on the basis of a recommendation of members of an affinity group. If others received a return once or even a number of times, it does not mean that you will be as fortunate.” If something seems to be—as the saying goes—“too good to be true,” it is!

This advice includes an admonition that all investments involve risks, especially if they are accompanied by a promise of a very high return. Investors are told to be suspicious of investments that are open to a select few, or that require confidentiality. Investors are told to ask for documentation because those who make fraudulent offers do not like to “leave a paper trail.” Investors should ask for explanations about the investment as well. And they should resist the usual pressures of making a decision especially when the investments are presented as a once-in-a-lifetime opportunity.

Yet, even sophisticated victims, who discover that they were defrauded, are not likely to rush to the police or disclose their knowledge about the scheme, if they can help it. Many would rather forget it. They may be embarrassed because they have been “taken for a ride.” Large corporations wish to avoid admitting that they were conned for fear of losing the respect and commitment of their customers. If the con artist becomes bankrupt, any investors who profited from the fraud keep quiet for fear they may be required to repay their gains to the trustee in bankruptcy, for distribution to the con artist’s creditors.

Victims may be reluctant to get involved if they have insufficient information on the precise way in which the scheme was carried out. It may be difficult to prove a fraudulent Ponzi scheme, as opposed to a failed business that refinanced its needs for cash. Victims may avoid reporting because they have developed a personal affection for the con artists. Others may have identified with the con artists’ success. Thus, in the words of Professor Peter Tufano of Harvard Business School, a view of the victims suggests that they may remain silent for many reasons, including risk, guilt, and shame.

How do the con artists function? They watch carefully for signals of weaknesses and vulnerability of potential victims. Then they zero in on these points of exposure. For example, fraudulent telemarketers “had absolutely no sympathy for their victims, many of whom were elderly.” For example, one telemarketer considered the victims to be idiots: “I had it so perfected that I could get these customers to buy again. . . . I made sure they were happy so I could sell them again,” he told the researchers. “I wanted to sell these people 10 times.” He did not target old people; he merely sought vulnerable victims. Because older people happened to be more vulnerable, they were more likely to become victims. But any other type of vulnerable person would have been just as attractive.

Con artists use personal sensitive inclinations of the potential victims. A victim of a con artist described how he took advantage of her faith: “Luca [the con artist] skillfully manipulated my faith in God to his advantage, looking me in the eye while praying to God to bless the investment.” She testified that Luca would pray with her “just before he showed her fraudulent layouts for his purported developments.” The district court noted that many of Luca’s victims were impressionable because of age and membership in the church in which Luca held a leadership position.

Let us examine the following advertisement:

The message opens with the words:

Fellow investor:

In fact, the message is not from an investor but from an adviser. But fellowship is important. It says: We are in the same boat together.

Then comes a description of a terrible and risky situation:

This is the most severe market warning I have ever issued.

That is, the house is on fire.

What you do in the next few days could determine your financial destiny for the rest of your life.

In other words, time is short and the impact is devastating in terms of time: All your life.

Because I’m here to alert you that the same forces that have triggered every financial boom and bust during our lifetimes are combining in a way that is far deadlier than anything we’ve ever seen. This convergence is forming a powerful supercycle. And it’s lethal enough to rip through the world economy in the months ahead . . . changing our lives forever. I’m going as far as saying everything about how you earn, spend, save, and invest your money will be permanently altered. This convergence is forming a powerful supercycle. And it’s lethal enough to rip through the world economy in the months ahead . . . changing our lives forever. I’m going as far as saying everything about how you earn, spend, save, and invest your money will be permanently altered.

This statement is followed by a description of the dreadful results of what can happen. There are no facts to support these results, but there is their vivid picture. Again, it emphasizes the identity of the writer with the reader:

Now, I fully understand just how shocking this forecast is . . . and I realize that you might dismiss it as being “too extreme.”

This is another identification with the shock that the message creates.

This statement is followed by a heartfelt request-–almost a begging—to read why this terrible environment is soon to happen:

However, I’m begging you to take a few minutes to learn exactly why we’re in for a 60-month long rollercoaster ride through hell. I’ll detail exactly why this supercycle will trigger one of the most terrifying new markets here in my urgent video.

The two important elements of this request highlight the terrible and terrifying results and urgency.

Then comes a “trust me”:

Please don’t disregard this warning. I’m not making it lightly. We warned investors that the stock market was going to collapse in 1987. . . we forecasted the tech stock bubble in 1999 . . . and we predicted the housing crash of 2007. If you were one of the millions of Americans who didn’t heed our warnings then, I implore you to watch my video and listen this time. This convergence is forming a powerful supercycle. And it’s lethal. There’s not a moment to lose. See for yourself why I’m sounding the alarm bell with good reason. This convergence is forming a powerful supercycle. See for yourself why I’m sounding the alarm bell with good reason. Would you like to edit your e-mail notification preferences or unsubscribe from our mailing list?

Sincerely, Sean Brodrick,
Senior Analyst, Wealth Supercycle
4400 Northcorp Parkway, Palm Beach Gardens, FL 33410

Another example focuses on time:

Last day for your $350 Gift of Free Bitcoin Also ending today. Massive $3500 Savings! This is the Last day. Subscribers! Provided you respond today, you can STILL claim your gift of $350 free crypto. You can STILL reap a massive savings of $3,500. And most important, you can STILL get my strategy that could have turned $25,000 into more than $1 million in just over two years. But it all ends today, Thursday, July 18th. I would love to keep our enrollment open for you and other investors beyond today. But unfortunately, I cannot accept more than a very limited number of investors, and today our Charter enrollment for this strategy is closing. To claim your $350 in free crypto and reap the massive $3,500 savings, go here. Just remember: Today is your last day to do so. Best wishes,

Whether this writer would follow or relax his or her future deadlines is unknown and irrelevant. What is important is to view the possibility, probability, or actual success of the impact of such a pressure on the readers. Some readers will throw this notice to the wastepaper basket. They do not buy when pressed. Others might think about it and decide not to risk it, especially if the writer had to exert this type of pressure. Others might rush to buy the bitcoins and feel the excitement of the chance of becoming rich, whether it materialized or not.

Not surprisingly, here is another publication entitled: When to Fire Your Adviser.

The reasons why the client would terminate the relationship with the adviser are: (i) No chemistry between the adviser and client; (ii) The adviser is cagy about compensation; (iii) Communication among you and the adviser is “spotty;” (iv) The client’s situation changes, and (v) the client spots “red flags.”

However, missing from the list one might add the legal and important test: adviser is not an expert and has conflicts of interest.

Finally, there may be reasons why an adviser might terminate the relationship with a client: (i) When the client’s spending is “out of control;” (ii) When the client does not follow the adviser’s advice, and (iii) when the client is rude or abusive. In these situations one can identify erosion of trust not only by the client but also by the adviser. Relationships of trust cannot be maintained under these circumstances.

These summaries are incomplete. People, relationships, and the circumstances of relationships are far more unstable and complicated. But some features of both human behavior and circumstances are recurrent. They apply to all actors and in most circumstances. Therefore, they should be highlighted.

There is a Hebrew saying: honor and suspect him. How can one do both? How can one trust and mistrust the same person? Perhaps you can, but then the full relief of trust is not available. There is always a need to check and ask: why was this advice given? Does it fit my needs? Does this advice promise too much profit and pose too much risk? Do I need this return, and can I afford to take this risk? Do I enjoy taking risks and hope for huge returns? What are my tendencies in trusting others? Knowing ourselves may be our greatest protection and source of profits and success.

Finally here is my disclaimer: I have no credentials for making these statements and comments, except by drawing on reading for many years, about various financial situations and their evaluations, and other people’s opinions. This note is a very short summary. It may not be entirely accurate; it involves my own tendencies and unverified conclusions. So please, dear reader, take it with a grain of salt. Hopefully, however, this paper will raise ideas, as well as disagreements, which should be justified. This is the main purpose of this short paper.

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