Financial Fraud Can Happen to Anyone

Financial Fraud Can Happen to Anyone

In 2008 it was discovered that Bernard Madoff, famed financial investor, had scammed clients out of approximately $65 billion over 20 years. His victims included people from all walks of life–from politics, to Hollywood luminaries.

The list even includes Holocaust survivor Elie Wiesel and his Foundation for Humanity. Madoff stole from many in his Jewish community, not all of them wealthy.

He fooled investors, big and small, with claims of exclusivity and consistently positive returns. A year later in 2009, a seemingly endless string of similar scams began to surface.

Although the most sensationalized scandals were large-scale, many scams also occurred in small communities across America. They may not have made the papers, but these small scale con artists still cheated their victims out of every last penny.

No matter what regulators may devise, there will always be con artists on both big and small scales. They have existed long before Charles Ponzi’s famous swindle in 1920, and will no doubt continue to fool investors in the future.

The amount of financial scams uncovered in 2008 and 2009 were hardly unusual. While bear markets and recessions reveal scams, they do not cause scams.

Madoff was lying to his investors for decades–the recession of 2008 simply exposed his practices, because he could not continue any longer. If fraudsters manage to avoid detection long enough to get enough money from their victims, market volatility will eventually unmask their fraud.

Normal market volatility is just that–normal. Although many may feel they have been cheated in periods of big volatility because the market put a dent in their portfolios, there is a big difference between normal market volatility and thievery.

Financial fraud can happen to anyone. It is critical for investors to follow five rules to avoid financial fraud:

  • Avoid giving full asset control to a financial adviser.
  • Watch out for returns that are too good to be true.
  • Do not be blinded by fancy tactics or flashy investment strategies.
  • Do not be distracted by exclusivity, benefits, and other things that do not impact results.
  • Always exercise due diligence and research firms before handing over any sum of money.
  • Use them as a checklist to avoid financial fraud of all kinds, and at all levels.

The first and most important sign of financial fraud is a money manager or financial adviser who also takes custody of their client’s assets. In other words, the financial adviser also acts as the bank or broker–supposedly safekeeping the assets that they manage.

Most cases of embezzlement have this sign of financial fraud in common. In these instances, clients did not deposit their money with a third party.

Instead, they decided to deposit their money directly with the decision making party, giving their adviser full responsibility not only to decide which stocks to buy, but also to keep and account for the client’s assets. In taking full control of client’s funds, the money manager has the ability to spend the client’s money in any way they see fit, and can literally take it out the back door with them any time they want.