The San Jose Mercury News recently reported that Michael Brendan Ferguson of Foster City was arrested for fleecing more than 100 investors out of millions via a Ponzi scheme involving ATM machines. One victim told the newspaper that she had lost her entire life savings, more than $750,000.
I’ve written on this topic before. While Ponzi schemes are nothing new (remember Bernie Madoff?), you might be surprised to discover just how frequently they crop up. The latest report from the FBI’s financial fraud unit indicates 1,846 financial fraud cases actively under investigation.
The FBI report cites two examples:
• Joseph Blimline, currently awaiting sentencing for orchestrating one of North Texas’ largest oil and gas investment Ponzi schemes, defrauded 7,700 investors of more than $485 million.
• A&O Entities sold fractionalized, “no-risk” interests in life insurance policies to elderly investors with promised rates of return from 9 to 15 percent. The owners, Chris Allmendinger and Adley Abdulwahab, received 45- and 60-year prison terms, respectively.
Virtually every victim of every financial scammer says the same thing about the perpetrator – he or she was charming, persuasive and trustworthy. Obviously, believing that someone is trustworthy is not sufficient to protect yourself from getting taken. There are, however, some simple rules you can follow to avoid getting fleeced by con artists.
• Make sure that you understand how the investment works, including risks and tax consequences. If you don’t, you’re setting yourself up for failure. This is true whether you’re evaluating common investments such as mutual funds or residential real estate or exotic ones such as accounts-receivable factoring or life settlements. If the promoter is not explaining things to your satisfaction, go somewhere else.
• Always remember the adage: “If it’s too good to be true, it probably isn’t.” Most scammers promise consistent, safe returns well above the average for the type of investment promoted. Do you know what the average is? If not, apply the above rule. Then ask the promoter to explain what his/her company is doing to be able to generate those higher returns without taking on more risk. (Hint: It’s usually not possible or everyone would be doing it.)
• Stick to publicly traded securities listed on major exchanges. Numerous government and private agencies scrutinize these types of investment companies and have to report financial information on a regular basis, making it much harder for fraud to remain undetected. And with more than 10,000 different mutual and exchange-traded funds currently available (according to the Investment Company Institute), it’s hard to justify the need for most investors to invest in nonpublic alternatives.
• Don’t put all your eggs in one basket. This is the single most important rule. Even if your most trusted friend suggests an investment, never, ever commit all your money to that one bet. Don’t let greed override common sense.