Home » Opinion » Book review
Smelling a rat: 5 simple signs of financial fiddling
By Wan Lixin |
October 24, 2009, Saturday
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Print Edition
Print Edition
THERE has always been, and will be, plenty of fraudsters eager to separate you from your money.
On an average day my e-mail box contains several messages telling me that someone wants to share a fortune with me, or that I have won an award.
From time to time I also receive text messages on my mobile instructing me to send my money to a certain account.
Simple as these tricks appear to be -- they're obvious rip-offs -- media reports suggest these con men (and maybe women) are plying a hugely profitable business.
As a matter of fact, a considerable number of middle-aged or elderly Shanghainese are known to have transferred huge sums of money to "safe" accounts, acting on instructions from phony banking personnel.
Similarly, "wealth management" can also be a kind of fraud, only it is more sophisticated, and thus more difficult to unmask, entrapping even people who are otherwise quite smart.
"How to Smell a Rat: The Five Signs of Financial Fraud" by Ken Fisher with Lara Hoffmans can help safeguard against these swindlers.
As illustrated in the preceding paragraphs, the world is full of cheaters waiting to fleece the gullible.
Of them, the more glamorous ones include money wizard Bernie Madoff, who stole some US$65 billion from his investment clients with a giant pyramid scheme.
The 150-year prison term handed out to the septuagenarian will probably do little in deterring future imitators.
More recent fraudsters include Nicholas Cosmo, who promised 80 percent returns on fake loans and stole US$370 million; attorney Arthur Nadel's US$350 million hedge fund scam; Daren Palmer's US$100 million Ponzi scheme, and Robert Brown, who scammed investors for US$20 million.
The world is full of crooks and charlatans like these people, though most succeed less spectacularly.
"Thieves can be creative, but structurally ... scams are similar. That's good news because avoiding a would-be con artist is easy, no matter how convincing he is," the authors observe.
The book offers tips on how to identify six types of investors, and how to identify fraudsters by looking for one or more of five suspicious signs of financial frauds.
First, never hire a financial adviser who assumes physical custody of your funds.
One of the reasons for Madoff's success was that he could have custody of investors' funds.
No matter who advises you on your money, deposit your funds elsewhere, ideally, with a "big-name third-party custodian."
The second sign is consistently high returns. Be wary of a financial adviser who never had a bad run.
Fraudsters claim to have secret formulas that enable them to beat the market all the time.
To convince their victims, they send them falsified growth and earnings statements, thus dissuading investors from withdrawing their money. Even if some people do take out their funds, con men wolves always manage to find new sheep to maintain the pyramid.
The third sign is an investment strategy that is not understandable.
If your financial adviser cannot give you a clear account of what he or she is doing, you should avoid them.
"Madoff ... knew his strategy was murky ... he claimed it was 'complicated' and 'proprietary' and he couldn't go into it further. Nonsense!" the authors say.
The fourth sign is advisers who tout exclusivity, because rejecting new customers is unreasonable for those who live from clients' fees.
As Madoff had adopted this practice, potential victims had to woo him to become his clientele.
If some financial adviser claims to take only a few select clients, make sure you are not one of them.
Do not be taken in by a financial adviser's fancy office or plush decor, or pictures showing him hobnobbing with celebrities.
Remember Madoff was the former chairman of the NASDAQ stock exchange.
"Don't be too impressed by reputation. It's changeable, isn't measurable and is easily influenced by factors that have nothing to do with ability," the authors suggest.
The fifth sign is that a "trusted intermediary" has done the due diligence for you.
You must do the investigation yourself before deciding whether to hire an adviser.
"Due diligence is your job. No one else's," the book cautions.
These signs are all very important to watch out for any investor today.
On an average day my e-mail box contains several messages telling me that someone wants to share a fortune with me, or that I have won an award.
From time to time I also receive text messages on my mobile instructing me to send my money to a certain account.
Simple as these tricks appear to be -- they're obvious rip-offs -- media reports suggest these con men (and maybe women) are plying a hugely profitable business.
As a matter of fact, a considerable number of middle-aged or elderly Shanghainese are known to have transferred huge sums of money to "safe" accounts, acting on instructions from phony banking personnel.
Similarly, "wealth management" can also be a kind of fraud, only it is more sophisticated, and thus more difficult to unmask, entrapping even people who are otherwise quite smart.
"How to Smell a Rat: The Five Signs of Financial Fraud" by Ken Fisher with Lara Hoffmans can help safeguard against these swindlers.
As illustrated in the preceding paragraphs, the world is full of cheaters waiting to fleece the gullible.
Of them, the more glamorous ones include money wizard Bernie Madoff, who stole some US$65 billion from his investment clients with a giant pyramid scheme.
The 150-year prison term handed out to the septuagenarian will probably do little in deterring future imitators.
More recent fraudsters include Nicholas Cosmo, who promised 80 percent returns on fake loans and stole US$370 million; attorney Arthur Nadel's US$350 million hedge fund scam; Daren Palmer's US$100 million Ponzi scheme, and Robert Brown, who scammed investors for US$20 million.
The world is full of crooks and charlatans like these people, though most succeed less spectacularly.
"Thieves can be creative, but structurally ... scams are similar. That's good news because avoiding a would-be con artist is easy, no matter how convincing he is," the authors observe.
The book offers tips on how to identify six types of investors, and how to identify fraudsters by looking for one or more of five suspicious signs of financial frauds.
First, never hire a financial adviser who assumes physical custody of your funds.
One of the reasons for Madoff's success was that he could have custody of investors' funds.
No matter who advises you on your money, deposit your funds elsewhere, ideally, with a "big-name third-party custodian."
The second sign is consistently high returns. Be wary of a financial adviser who never had a bad run.
Fraudsters claim to have secret formulas that enable them to beat the market all the time.
To convince their victims, they send them falsified growth and earnings statements, thus dissuading investors from withdrawing their money. Even if some people do take out their funds, con men wolves always manage to find new sheep to maintain the pyramid.
The third sign is an investment strategy that is not understandable.
If your financial adviser cannot give you a clear account of what he or she is doing, you should avoid them.
"Madoff ... knew his strategy was murky ... he claimed it was 'complicated' and 'proprietary' and he couldn't go into it further. Nonsense!" the authors say.
The fourth sign is advisers who tout exclusivity, because rejecting new customers is unreasonable for those who live from clients' fees.
As Madoff had adopted this practice, potential victims had to woo him to become his clientele.
If some financial adviser claims to take only a few select clients, make sure you are not one of them.
Do not be taken in by a financial adviser's fancy office or plush decor, or pictures showing him hobnobbing with celebrities.
Remember Madoff was the former chairman of the NASDAQ stock exchange.
"Don't be too impressed by reputation. It's changeable, isn't measurable and is easily influenced by factors that have nothing to do with ability," the authors suggest.
The fifth sign is that a "trusted intermediary" has done the due diligence for you.
You must do the investigation yourself before deciding whether to hire an adviser.
"Due diligence is your job. No one else's," the book cautions.
These signs are all very important to watch out for any investor today.
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