Personal Fraud Defence in the 21st Century Comments15 Comments


The following is a guest post. If interested in submitting a guest post, please read my guest posting policy and then contact me.

Let’s suppose you receive an unexpected phone call one day from a man claiming to be a financial advisor. You are of course immediately skeptical of this cold caller and are about to hang up the phone when the man assures you that he isn’t trying to sell you anything.

He also tells you that you are right to be skeptical of people you don’t know and that you shouldn’t invest money with someone that you don’t trust. However, just so you know that he is good at what he does, look for Apple stock to go up this week.

Week 1

When you check at the end of the week, sure enough Apple stock has increased in value. A few days later you again receive a phone call from the same financial advisor. Before he even gets a word out you let him know that you aren’t impressed. Anyone could guess right about a stock increasing in value at any given time.

To your surprise, he agrees with you. He assures you again that he doesn’t want to sell you anything and that he doesn’t want your money. However, just so you know that he is good at his job, look for Nike stock to increase in value.

Week 2 & 3

Despite it being a down week for the market as a whole, sure enough Nike stock went up in value. You know that anyone can guess right two times in a row but to your surprise he is right again the third week. You ask if he has inside information about these companies. He chuckles and says that he doesn’t.

He then goes on to explain his investment strategy which actually sounds pretty convincing. He has good answers for all your questions, he is confident, and he has been right three times in a row now. Furthermore, he reminds you again that you shouldn’t invest with someone that you don’t know and trust, but just so you know…

Week 4

When he is right the fourth time you aren’t surprised. You do some quick math and realize that you could make some serious money with this guy. You make up your mind to invest with this guy when he calls again. However, he doesn’t call when you expect him to. He doesn’t call the day after either. You are now very upset and kicking yourself for passing up the opportunity of a lifetime when the phone rings.

Before he can get in a word, you let him know that you are ready to invest with him. To your astonishment he refuses. He reminds you again that you have only known him for a month and that you shouldn’t trust people with your money that you don’t know. However, just so you know…

Week 5

You don’t even have to look the fifth week to know that he was right. Ok, you do look, just to make sure, and of course he was right. He again doesn’t call when expected. You begin to worry again that you scared him away and have now definitely missed the investment opportunity of a lifetime. 3-4 days later, he finally calls.

You again tell him you want to invest with him but to your shock and horror he again declines because you have only…But you don’t care. You interrupt him and let him know that you aren’t asking to invest with him. You are absolutely going to invest all of your savings with him. He protests, but after a few minutes, agrees to invest 1/2 of your savings, which you finally negotiate up to 3/4 of your money. You ask him to invest all of it but he refuses because he hasn’t had time to prove himself. Once you know him a little better and he has made you some money, then he will invest the rest. Unfortunately, you never hear from him again. You never see your money again either. You have been scammed.

A Fraudulent Job (Sort Of)

When I was in college I held a lot of undesirable jobs in order to pay my tuition, support myself, and not have to take out student loans. I worked as a dish washer at a cafeteria, as a late night custodian, and a few other jobs. I’m sure none of you are jealous.

However, during my senior year and masters program, I was fortunate to land a job as a research assistant for a college professor who specialized in fraud. For several years, I was paid to research and write about how individuals swindle other individuals.

Unlike cleaning toilets and washing dishes, I was fascinated by this topic and loved every minute of my work. It made me realize that many of us are quite naive and that if we aren’t careful, just about any of us can be taken advantage of.

Now whenever our finances are tight or we wish that we had some extra money, I sometimes joke with my wife that I know of a few ways that we could raise some extra cash. That usually earns me a punch on the arm and a severe scolding, but I get a good laugh out of it.

Signs of Fraud

Criminals are more cunning than ever these days. You may think that a poorly written Nigerian 419 scam (named after section 419 of the Nigerian Penal Code which covers the criminality of fraud and theft) email from a mysterious West African politician or Nigerian dictator is as sophisticate as scams get but that is simply not the case.
Fortunately for us, most scams have some or all the same telltale signs of fraud, such as:

  • High guaranteed returns that are risk free
  • Pressure to invest
  • Difficulty understanding an investment
  • Appears too good to be true
  • Secrecy or confidentiality
  • Plays on people’s greed

However, many scammers today know that people will recognize these giveaway signs and so they are much more subtle, clever, and convincing.

Red Flags

In the scam described above, the con artist:

  • Appeared to be very open
  • Provided a very plausible sounding explanation for how he invested
  • Denied doing anything illegal (no insider trading)
  • Did not apply pressure to invest with him
  • Made no outlandish promise that he would triple your money in 30 days at no risk to you.

He knew that doing these things would immediately make you suspicious. So what were the red flags?

  • Although he made no promises, the con artist was indirectly showing that he could guarantee high returns
  • If you had this skill, you wouldn’t have to cold call strangers. They would be knocking down your door
  • It all seemed too good to be true
  • What he was doing was theoretically impossible to consistently do in a legal manner over time. If you understand how the stock market works, you know that no law abiding investor can consistently predict how certain stocks will perform in the short term. There are a lot of really smart people in this world, yet not even they can do this. This simple understanding has greatly impacted the way I invest.

Even if you didn’t understand how he was able to make those correct predictions and even if he was very convincing, there were definitely some red flags.
Seek Out Another Opinion

On a more serious note, I have been approached by a number of people during my career who wanted my opinion about an “amazing opportunity.” Many of these opportunities didn’t pass the smell test and some stunk so bad I didn’t even have to smell.

If you ever come across something that you aren’t sure about, ask a trusted friend or advisor who isn’t as emotionally involved for his or her opinion. Such a person can oftentimes be the guiding voice of reason that many people need.

How He Did It

If you’re wondering how the financial advisor guessed right about all of those stocks 5 weeks in a row, let me assure you that there was no lucky guessing involved. There was no amazing investment strategy either. He must have been insider trading then, right? Nope.

Together with some buddies, the scam artist called 1,000 people that first week. They told 500 people that Apple stock would go up in value and the other 500 people that Apple stock would go down in value. Since Apple stock went up, they never called back the 500 people whom they had told the stock would decrease in value.
The second week they called back the 500 people that they had correctly advised and again told half of them that Nike stock would go up in value and the other half that it would go down in value. This process continued for several more weeks.

After doing this for 5 weeks, they had whittled their list of 1,000 down to about 30 unlucky disciples who all thought that this “financial advisor” had a guaranteed money making investment strategy. They couldn’t give him their money fast enough.

Author Bio: This is a guest post from LD, a practicing CPA/CFP who blogs about personal finance at Personal Finance Insider. You can find out more about LD and sign up for his free personal finance e-course (covering all of the major topics in a good personal financial plan) here.

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This entry was posted in Financial Advice, and tagged , Comments15 Comments
By : Adam | 26 Mar 2013
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15 thoughts on “Personal Fraud Defence in the 21st Century

  1. Jose

    I don’t think that I would be a victim because i don’t, and will probably never use a personal financial adviser, especially one that makes their money on commissions. If I absolutely had to have one they would have to come with personal recommendations and charge a flat fee.

  2. The Norwegian Girl

    It`s frightening to think about all the criminals who trick people like this. There are unfortunately a lot of people who would believe that they were doing the right thing. I, on the other hand, would never let anyone else trick me into something similar. I don`t want anyone else to handle my money than me and my trusted bank.

  3. Anne @ Unique Gifter

    That sounds like it was a sweet student gig! I also find this type of stuff fascinating. It does disturb me how frequently people are scammed though. My grandma is one of those prime target seniors they talk about on the TV all the time! My Dad and his siblings thankfully have all of her finances under control/observation, to prevent her from doing things like the time she wanted to give her portfolio back to a financial manager who had been charged and disbarred!!

  4. Grayson @ Debt RoundUp

    This was a great post. I enjoyed reading it, yet it saddens me that people fall for this. I don’t take calls like this. If I was going to invest in something, I would probably do it myself after a long research period. I am a DIY at heart and will try anything once. If I couldn’t figure it out, then I would seek out an advisor.

    1. LD @ Personal Finance Insider

      Thanks Grayson. I agree with your approach – do what you can yourself and only pay an advisor to help with important things you aren’t capable of doing yourself.

  5. Financial Black Sheep

    I worked in the IT department for quite some time and would always get people forwarding their emails, asking if they were a fraud. A BIG FAT YES! lol, all were trying to get money or personal information. If the email asks for personal information of any kind, it will be a fraud. Real companies don’t need all of your information through email.

    I have never heard of someone cold calling you to invest in stocks, but if I don’t recognize the number I let it roll to voice mail. I guess that is my line of defense when it comes to pressure selling over the phone. That, or I just cannot answer the phone most of the time, because I am in school lol.

  6. Jim Weston

    It is scary how common fraud can be in today’s world. I’ve seen it happen to good people several times. It really is an unfortunate thing that I see no end to.

  7. funancials

    I have to admit….that strategy is pretty genius. Calling 500 each, telling them it will go up or down. Definitely a different approach from the common red flags.

  8. Darnell Jackson

    What if the entity committing the fraud is a large institution like a bank?

    Have you heard about the huge settlements that Bank of America paid after they got caught defrauding people?

    They’re not alone either.

  9. Edward Antrobus

    My buddy who did time was bunk-mates with a con-artist. I don’t remember the exact details, but he was basically stealing people’s identities by offering them fake jobs.

  10. Shafi

    I don’t have much to invest. I am on fixed income. But whatever I have invested is in mutual funds and track it myself.

    The problem with Madoff and other such folks is that no matter how careful you are, if they are crooks and have bad financial intentions, there is no way you can detect them.

    We are all humans and many times we are blinded by our own greed not to mention get-rich-quick schemes.

  11. William @ Bite the Bullet

    Fascinating! Where this gets very effective is when you meet a Fred, well known friend over dinner and he tells you how he and Joe (another friend) been making serious money. When you ask how, he says they are part of a select few who “got in on” something with Bernie. No pitch, but you see the new Mercedes Joe bought. Next week you found out Sally also was in on this. How come they didn’t tell you? That’s how Bernie Madoff did it. Trusted friends of trusted friends. In the story above, one “mark” gets told, after handing over the money, how much he “earned.” And then the “friends of friends thing” starts…

    Secret to success? Modest Money expectations — no plug to the host intended :)


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