Published May 24, 2013
I love my job. There’s a certain thrill that comes with investing, making a good call and enjoying the big profits. But I also take it seriously. Very seriously. Being a financial advisor carries a great deal of responsibility. After all, investors are counting on me to make smart decisions with their money, which they may need to live on, for retirement, a college education, or maybe a dream vacation.
So when I see a frothy market, I have a mixed reaction. On the one hand, it’s a great time to be an investor and grow your wealth. On the other hand, when a market goes up the way this one has, the seedy side of the business tends to rear its ugly head all too frequently. People don’t want to miss out on the gains they’re hearing about, and there’s a certain group of “professionals” that are more than happy to “help.” Unfortunately, these professionals are ignorant at best and oftentimes downright fraudulent, and they take unsuspecting investors for practically everything they’ve got.
I remember a story about a retired policeman who was tricked into taking out a $100,000 mortgage on a house that he’d already paid off in hopes of banking a double-digit return. But the “investment banker” was a fraud, and the policeman, who had put his life on the line to protect and serve, never saw a penny. Stories like this infuriate me (and not just because I’m married to a cop).
I will never tolerate dishonesty. The idea that someone’s greed can cost another person their life’s savings is unfathomable. If scam artists prey on unsuspecting individuals, they need to be held accountable. If management of a company lies to investors, they also need to be held accountable. Perhaps that’s why I became a Certified Fraud Examiner (CFE). Rather than sit around and watch investors get taken advantage of, I decided to be proactive.
A CFE is a specialist in the prevention and deterrence of fraud. It is my job to discover employees or executives who make illegal use of company assets and defraud investors or misrepresent a company’s actual financial status in the course of commercial transactions.
Take the investigative whistleblower Harry Markopolos, for example. You may not have heard of him, but I’m sure the name Bernie Madoff will ring a bell. Well, Markopolos was the financial fraud investigator that blew the cover off Madoff’s Ponzi scheme. After Markopolos got ahold of Madoff’s performance numbers, he quickly realized that the investor returns didn’t add up. Madoff was netting solid returns in the most volatile markets, but it was impossible to make that kind of positive month-over-month stable returns legally.
After years of digging, Markopolos blew the case wide open and revealed Madoff for what he truly was: a fraud. Through the largest Ponzi scheme in history (a fraudulent operation that pays investors from their own money or money paid by new clients), Madoff defrauded his clients of almost $65 billion. Unfortunately, the SEC didn’t heed his warnings. It took a financial market meltdown in which investors globally were seeking liquidity to finally expose the Madoff fraud.
I have personally worked on cases involving numerous types of investment fraud. It always takes the same shape. Investors are easy prey when it comes to promising big returns.
Specifically, I have investigated cases where executives misappropriated corporate cash for their own benefit and where corporate governance has broken down. I have also seen investment fraud where specific strategies as well as investment returns were completely fabricated.
I’ve also seen a great deal of Ponzi schemes that involve equity, real estate, and very complex investment products and strategies. One Ponzi scam artist I exposed (although I can’t disclose the case I was involved in) is now sitting in jail right where he belongs.
Ponzi schemes are the most notorious, but there are a few other investment scams you need to watch out for.
So how can you avoid falling for any of these scams? You pay attention to the red flags. If even just one pops up on your radar, it’s better for you to walk away than risk losing the money you’ve worked so hard to make.
Here are a few red flags that you should always look out for:
Investing in the stock market is not risk-free. It isn’t possible to give a 100% guarantee that you’ll make a profit on your investment. There are a lot of people out there that will try to take advantage of those who just want to make a little more money. And during a market like the one we’re seeing today, hitting record highs on almost a daily basis, I have no doubt that fraudulent professionals are coming out of hiding, sniffing around for the next innocent victim to trick. My concern is that when the market enters a phase of normal, cyclical retracement (i.e. downside), frauds will quickly become evident.
What’s truly ironic is that these brilliant heisters could actually have done better by simply working hard, being honest, and validly investing. There’s no need to go to such extremes to make money.
We haven’t seen a scandal as big as Bernie Madoff’s Ponzi scheme in a while now, and I hope that we never see one like it (or any) again. But to keep yourself out of harm’s way, and to stay profitable, watch out for those red flags, and find an adviser you can trust with a good track record. You’ll set yourself up to do better financially, and you’ll be able to sleep better at night.
Hilary Kramer is the editor in chief of the subscription newsletters: Game Changers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return Portfolio and Inner Circle. Formerly, Hilary was the CIO of a $5 billion global private equity fund. She has an MBA from the Wharton School at the University of Pennsylvania and began her Wall Street career as an analyst at Morgan Stanley. Hilary is the author of The Little Book of Big Profits from Small Stocks (Wiley) and Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends (Free Press). To learn more about Hilary Kramer visit: http://GameChangerStocks.com.