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But it is wrong not to examine that confidence, to realize that there is no sound basis for it, and to move beyond it to a thorough due diligence investigation.

I’ve spoken to thousands of people all over the country in the past 12 months, from compliance officers gathered in suburban Seattle, to human resources professionals meeting in Tulsa, to Certified Fraud Examiners gathered in Baltimore. At every speech my presentation includes a scrolling list of public and private pension funds that have lost money to investment fraud. It takes more than a minute for the entire list to scroll through, and the list is only partial. The audience, having walked in convinced that they are too smart, sensible, or sophisticated to fall prey to a fraud, instantly shifts course to If those institutional investors could fall for fraud, maybe steering clear of one is harder than I thought. This week I learned that I’ve got another pension fund to add to that list. Gus Burns of mLive.com writes: (more…)

Distressed Real Estate Fund Fraud

This case is the uppermost molecule of frozen water at the very top of a very big iceberg.

As I’ve talked to radio hosts over the past year in interviews about The Vigilant Investor, I’ve often been asked to identify the schemes that are hot currently; those that are ruining nest eggs right now.  Usually, I identify two: promissory note scams and distressed real estate scams. This week, the SEC filed an enforcement action in another case involving the latter. According to the SEC’s press release: (more…)

SEC Files Charges in Alleged 15-Year Real Estate Ponzi

Your task as a vigilant investor, therefore, is to be able to protect yourself not only from career crooks with bad intentions, but from well-meaning investment promoters and financial advisers with the best of intentions.

Where do most Ponzi schemes begin? Think about that question for a minute. Some of you may have said that they begin in the mind of a career investment crook, and some of them do begin there. But most of them begin with good intentions. (I seem to remember that the road to hell is paved with them). The SEC has filed an enforcement action involving an alleged scam that seems to have begun the way most of them do. According to the SEC’s press release: (more…)

Moonlit Beaches, Warm Breezes, and Shattered Nest Eggs

If a ten percent commission can make a broker forget his ethical duties, what about a 35 percent commission?

The rate at which real estate investments are being exposed as frauds is frightening. It was inevitable, I suppose; when the market tanked and made prices low, scam artists had a ready made opportunity. But real estate scams have always worked. The SEC has filed charges against two men that it claims ran a sophisticated real estate con even before the Great Recession. According to the SEC’s press release: (more…)

They Die Hard

When they walk out of prison, they crank right back up and keep going full throttle until another prosecutor/judge pairing insists on another time out.

Today, I’ve got two pieces of bad news and two pieces of good news. Let’s get the bad news out of the way first. Bad news point #1: Investment fraud is rampant. It’s at epidemic proportions already and will get worse over the next decade as baby boomers continue to retire. Bad news point #2: Investment fraudsters never quit, unless they go to prison. From failed investment to failed investment they just keep going until a prosecutor and judge tell them they can’t for awhile. When they walk out of prison, they crank right back up and keep going full throttle until another prosecutor/judge pairing insists on another time out. A recent case from the SEC illustrates the bad news. According to the SEC’s press release:

On May 10, 2012, the Securities and Exchange Commission charged a California-based real estate company and its owners with defrauding potential investors by boasting a false company track record to tout their purported real estate expertise while concealing the bankruptcy of their previous company.

The SEC alleges that Michael J. Stewart, John J. Packard, and Randall A. Smith created Apartments America, LLC to pool investor proceeds from an unregistered offering of securities and invest primarily in apartment buildings in Southern California and Arizona. They solicited potential investors through a website, Internet advertisements and postings, cold calls, solicitation letters, and advertising in a national newspaper. They boasted a track record of producing more than a 60 percent annual return on investment and creating more than $100 million in net equity.

According to the SEC’s complaint filed in federal court in Orange County, California, what potential investors did not know is that Apartments America was a new company with no assets and no track record. Stewart, Packard, and Smith were merely using the same investment strategy and selective statistics from their prior bankrupt company that had defaulted on $91.6 million in promissory notes held by 647 investors.

According to the SEC’s complaint, Stewart lives in San Clemente, California, and Packard and Smith each live in Long Beach, California. Together they formed Apartments America in September 2009, just three months after Pacific Property Assets (PPA) filed for bankruptcy. Stewart and Packard owned PPA and Smith worked for them. In the months prior to defaulting on its promissory notes, PPA was actively soliciting investor funds and promising an annual interest rate of 24 to 30 percent.

The SEC alleges that under Apartments America, whose securities have never been registered with the SEC, Stewart, Packard, and Smith similarly solicited investor funds with the same plan to purchase apartment buildings. But they engaged in a concerted scheme to distance themselves from PPA and its bankruptcy. In communications to potential investors, they selectively and misleadingly used some of PPA’s historic investments and touted them as Apartments America data. For instance, they arrived at their fabricated statistic of a 60 percent annual return on investment by cherry-picking PPA’s successful property investments while omitting the losses incurred on more than 50 properties in PPA’s portfolio at the time of its bankruptcy. Stewart, Packard, and Smith also misrepresented that they had created more than $100 million in net equity by calculating some of PPA’s property investments while omitting information about its bankruptcy and the losses on its bankrupt properties. They also falsely represented to potential investors that they were managing a property portfolio valued at more than $200 million when that in fact referred to PPA’s bankrupt property portfolio, which was actually being managed by the bankruptcy trustee.

Now the good news. Good news point #1: If you know where to look, you can turn bad news point #2 to your advantage. You can find earlier failed investments and thereby avoid the one that the well-disguised fraudster is asking you to buy now. Good news point #2: You can be the hero who saves hundreds of people. It only takes one vigilant investor willing to alert regulators to an ongoing scam to close the thing down. Once closed, it cannot destroy the retirements of the hundreds of other investors who would have fallen victim to it had the vigilant investor not taken action. How many times in your life do you get the chance to do something heroic? Here’s your chance. Everything you need to know is in The Vigilant Investor. You’ll see things you never would have noticed before. You’ll recognize scams that you never would have recognized before. You’ll be a hero to people you’ll never meet, but who will owe you a debt of gratitude.

If you’ve been a hero through things you learned in The Vigilant Investor, we want to give you credit here. Please share your story with us by emailing pat@investorswatchdog.com.

Overlooking the Obvious

We often look right past the people pitching us the investment and focus instead on their description of it.

Real estate.  They aren’t making any more of it, they say. And now is the time to buy. That has been the central pitch of numerous investment scams over the past four years. Illinois authorities have found another such scam. According to Northwest Herald: (more…)

Post-Madoff Ponzi Boom in Full Swing

Unfortunately, your innate people sense will do you no good.

Bernie Madoff turned himself in in December 2008. The same day, hundreds of Ponzi schemes collected their first dollar. Because we were all transfixed by the biggest Ponzi scheme in history, it was easy to think that Madoff’s demise marked the end of  a Ponzi age. Really, though, his story was but one chapter in a never ending story of investment fraud.  This week, the SEC took emergency enforcement action against what it believes is an ongoing Ponzi scheme that began more than a year after Madoff’s surrender. According to the SEC’s press release: (more…)

Beware the Escrow Account

The scamster bag of tricks is bottomless.

The number of investment frauds involving supposed escrow accounts appears to be on the rise. I’ve seen several over the past two years, including one involving a $38 million international hedge fund fraud. Investors were told that their money would sit safely in an escrow account and would not be moved from that account without their consent. Of course, once investor money hit the account the scamsters quickly transferred it out, with the investors none the wiser, until it was too late. Prosecutors in Virginia believe that they have found a scam using a similar ruse. According to WUSA9.com: (more…)

Accused Oregon Con Woman Charged

Learn the approaches, and you’ll learn the escape.

“Those of us in the investor protection business know that Madoff’s ’sophisticated’ victims were actually low-hanging fruit, easy prey, the $100 question on Who Wants to Be a Millionaire?” — The Vigilant Investor, p. 18

Some financial scams are big; think Bernie Madoff or Alan Stanford. They are headquartered in New York, Ft. Worth, or other cities that you’ve heard of. Others are small. They happen in small town America. But the victims of small scams wind up just as desperate as the victims of record-breaking frauds. Like those who invested with a scamster headquartered in a steel and glass office tower, those who lose their nest egg to a scamster operating out of a local real estate or insurance office may wind up living with their adult children or in a Medicaid nursing home, instead of independently. Part of our mission at Investor’s Watchblog is to bring you the stories of the scams that don’t make the Wall Street Journal.

Ashland, Oregon is a town of about 20,000 people. It sits along Interstate 5 near the California border. According to prosecutors, it was the scene of a crime that has deprived several investors of a combined $1.6 million. According to The Ashland Daily Times: (more…)

Top Credentials Will Lead You Astray

Federal prosecutors in Minnesota have accepted a guilty plea in an investment fraud case that cries out for a fresh discussion of credentials — what they mean and what they don’t.

Kirk S. Wright earned a master’s degree in public policy from the Kennedy School of Government at Harvard University in 1995.  Thirteen years later, on May 24, 2008, he hung himself in his cell at the Union City jail near Atlanta after being convicted of defrauding hundreds of people out of more than $185 million.  - The Vigilant Investor, p. 42.

Marc Dreier has impressive credentials. After earning an undergraduate degree from Yale and a law degree from Harvard, Dreier worked at some of New York’s most prestigious law firms before opening his own firm, Dreier, LLP in 1996. — The Vigilant Investor, p.116.

I begin this post with those two quotes from The Vigilant Investor because this post is about credentials. Federal prosecutors in Minnesota have accepted a guilty plea in an investment fraud case that cries out for a fresh discussion of credentials — what they mean and what they don’t. According to InvestmentNews: (more…)

SEC Closes Alleged Scam Mall

Be wary of an investment promoter who seems to have something for everyone.

In Chapter 3 of The Vigilant Investor, we describe a “scam mall,” a place where there seems to be something for everyone. This week the SEC shut down what it believes to be a scam mall operating in Nevada. According to the SEC’s press release: (more…)

SEC Shutters Alleged Mormon Affinity Fraud

With that kind of head start, even a 10-year-old con man (boy) could pull off a religious affinity fraud.

In The Vigilant Investor, the chapter on affinity fraud is called “Affinity Fraud and the Evil Twin,” because affinity fraud depends for its success on the very natural belief that someone who looks very much like you — same church, same upbringing, same heritage, same occupation, etc. — behaves as you would behave. But thousands of investors have learned, and continue to learn, that someone who looks very much like them often behaves very differently. The SEC believes that it has found a large affinity fraud in Utah, allegedly run by two men who attracted investors partly through their affiliation with the Church of Jesus Christ of Latter-Day Saints. According to the SEC’s press release: (more…)

Too Warm in Colorado

Very smart, very wealthy, very accomplished people will trust their initial read, and never perform the kind of due diligence investigation we prescribe in The Vigilant Investor. They’ll be left scratching their heads.

According to a story in The Gazette in Colorado Springs, Colorado, Brian Wellens lives in Newport Beach, California, where he has hopes of starting a golf apparel business with investors in Costa Mesa, California.  He is also exploring an eyewear distribution business in Lima, Peru.  Investors who talk to him about those opportunities will likely find him very credible, a can-do kind of guy.  No doubt, they’ll be impressed with the business plans he presents. Some of them will give Wellens their money, hoping to receive the attractive returns that he predicts.  Those who’ve read The Vigilant Investor, though, will keep their money. It turns out that Wellens is facing significant legal trouble in Colorado stemming from his most recent venture.  According to the The Gazette:   (more…)

Investing in a Town That Doesn’t Exist

Finding the people on that list who deal with other people’s money could reveal scams that might not otherwise come to light for years.

Real estate investment fraud is rampant. With few exceptions, real estate prices are in the cellar, which investors see as an opportunity to “buy low.” Scam artists take full advantage of that fact, telling their victims that they can buy real estate at rock bottom prices and sell it at a profit. With banks reluctant to lend, they say, such investments are the only opportunity to profit from the drop in prices.  Last week, prosecutors in New Jersey charged two people with engaging in a scam that made that claim. According to  Businessweek: (more…)

What if the Person Who Advises You Falls for a Scam?

Every healthy human brain comes equipped with certain cognitive biases that make us especially vulnerable to investment fraud.

Most of Bernie Madoff’s victims never heard his name until his decades-long charade blew up. They didn’t seek Madoff out. They never gave him their money, directly anyway. Instead, they entrusted their nest eggs to their local investment adviser, the person who had faithfully helped them make good investment decisions for years or decades. And, their local investment adviser turned it over to Madoff. This week, the SEC commenced an enforcement case that reminds us that even investors who have a perfectly honest investment adviser are vulnerable to investment scams. According to the SEC’s press release: (more…)

And They’ll Start Another One Tomorrow

They have the thing that our parents told us did not exist — a money tree.

In The Vigilant Investor, I describe five different types of financial scamster, from the career criminal all the way down to the inept “bungler.” In truth, there are infinite ways to slice and dice the characters who deprive investors-institutional investors included-of their assets. The descriptions I give in the book are only one way to identify them. Using those descriptions, though, the people whom the SEC named in an enforcement action out of Illinois last week would, if they are guilty, belong in the “career criminal” category. According to the SEC’s press release: (more…)

REIT Scamster Skips Out on Sentencing

That reaction tells us a lot about why we [yes, you included] are all so susceptible to investment fraud.

Back in 2003 and 2004, Michael R. Rouse told prospective investors that he was running a real estate investment trust (REIT) called the Golden Gate REIT and that they could earn a good return by investing in the REIT. In April 2011, a federal jury found that Rouse didn’t use investors’ money to invest in real estate at all, instead buying himself a $125,000 Mercedes and other luxuries.  Rouse’s sentencing on nine felony counts was set for last Friday. The judge was there. The prosecutor was there.  Several of Rouse’s victims were there. But Rouse was elsewhere. The search for him is on and, given the proficiency of the U.S. Marshal’s Service, the chances are good that he won’t be on the run for long. But his failure to show up for sentencing gives us the chance to answer one of the questions I get most frequently after speeches. (more…)

Bankrupt Nevada Developer Arrested on Ponzi Charges

Savvy scamsters promise returns close to what legitimate investments earn.

According to prosecutors in Nevada, Hans Seibt targeted senior citizens. He offered them returns of between 10 and 12 percent annually and accepted investment of as little as $10,000. He told his investors that the returns would come from real estate investments. Rather than use investors’ money as promised, though, prosecutors believe that Seibt used it for personal living expenses. (more…)

It’s Officially a Trend

“Let me think about that,” is not an unreasonable request.

In the past few months we’ve covered several cases that involved supposed investment in distressed real estate.  Sometimes the promoters claimed to be buying the real estate themselves.  Other times they were supposedly providing financing for others.  Just as often, it seems, they were spending investors’ money as if it were there own.  This week, prosecutors in California secured a conviction against a man who becomes the latest in what has become a very long line of investment crooks using the distressed real estate market as the centerpiece of a financial fraud.  According to the Laguna Niguel Patch:   (more…)

SEC Charges New York Fund Adviser with Fraud

An investment adviser who is recommending that you invest in a fund he manages cannot possibly be giving unbiased advice.

Does your registered investment adviser also advise a fund, whether a hedge fund, a real estate fund, or some other kind of pooled investment? Has he or she solicited you to invest in that fund? Probably so. A recent enforcement case from the SEC shows the danger in saying yes to such a solicitation. The SEC has charged Lloyd V. Barriger of Moticello, New York with fraud in connection with two real estate funds he managed– the Gaffken & Barriger Fund, LLC (the G&B Fund or the Fund), and Campus Capital Corp. (Campus). According to the SEC’s press release: (more…)

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