The e-mail from the Nigerian Prince offers you millions of dollars in gold bullion makes you smile. All you have to do is send a mere $10,000 “good faith” payment to cover administrative fees. You righteously reach for the Delete key, but wonder: “What if?” Another e-mail beckons you with the words: “Great investment opportunity! Act Fast!” You delete it as well. An hour later, you’re listening with great interest as your best friend tells you about a real estate deal he learned about at a seminar and is thinking of buying. “There are only three left,” he says. Not wanting to miss out, and impressed by your friend’s confidence, you decide to join him.
Despite widespread publicity about Bernie Madoff’s scheme and countless of lesser-but-similar scams, individual investors continue to get ripped off by fraudulent operators. Agencies and organizations such as the Federal Trade Commission, the Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Retirement Industry Trust Association, not to mention State and local agencies, are busy warning investors to watch out for Red Flags. Frustrated by the stock market and facing an uncertain future, more and more individuals are seeking to trade caution for return. Certainly all these regulators have put an end to fraudulent schemes, you think.
Some warning signs are almost too obvious, but should be repeated for emphasis: Promises of “Guaranteed” returns; limited offerings (going fast — only a few remain!); and “No Money Down!” are almost certain signs of trouble. As one advisor put it: “Ask yourself why — if it is such a special deal — are they offering it to you?” Warning signs include sloppy documents (missing pages, typos, misspelled words), evidence of evidence of hurried “cut and paste” operations lacking professional oversight.
Get a professional opinion first. A client recently asked me to review an investment opportunity. The documents contained misspelled words and different fonts. Checking further, I discovered it had been prepared by a company formed by a disbarred attorney. The reviews told me all I needed to know.
In another case, a client was being pressured to purchase a REO multifamily project . When I suggested that my client get a property inspection, he objected; it would cost money and his investment partners wanted to close the deal. They had been looking for a deal like this for a while, and they only had a week to sign. Unable to locate an inspector, my client finally arranged to visit the property. He not only discovered exposed asbestos in the units, but learned a former tenant had sued the previous owner and another tenant was in the hospital with serious respiratory problems. Despite this evidence, the client told me his real estate agent was working frantically to get an extension of time to sign the papers.
Unfortunately, the worst risks are not strangers claiming to be related to Royalty or Nigerian bankers, but good folks you know from Church, or your buddy at the gym. Bernie Madoff’s “success” was that he suckered friends and associates from select groups, targeting some to serve as testimonials for the others, in what is known as “affinity fraud.” Playing on the human tendency to trust those whom others trust, he played the “affinity” card well. Barnum and Bailey knew there was a “sucker born every minute.”
For many deceived investors, the red flags are quite visible — in their rear view mirror. There isn’t a single person who has lost ten, twenty, or a hundred thousand dollars who hasn’t looked back and said “I should’ve known.” Many have told me “I only wish I had talked to you sooner.” The cost of a couple of hours of a professional review may seem expensive at the front end, but it often proves to be a bargain in hindsight!