Stephen Smith was arrested in 1999 in Florida for running a slick “ponzi” investment scam: While purportedly recruiting new investors for an oil-well project, he was actually taking the money for himself (there was no oil-well project) and using some of the money obtained from the new investors to pay dividends to older investors.
Mr. Smith had only been running the scam for a few months, when he had already managed to convince several individuals in the Houston area of Texas to invest several hundred thousand dollars in his oil-well scheme. One investor noted that Mr. Smith was highly convincing, and invited him to visit the wells himself. The investor did, and Mr. Smith took him on a helicopter ride of the wells and showed him immaculate records of their production and profits. The investor, who said he personally liked Mr. Smith very much after meeting him, was stunned to find out he did not own any of the wells and did not invest any money into any projects at all–oil-wells or otherwise. Of course, all of the records he was shown were forgeries.
Investors into Mr. Smith’s recent scam also could have saved themselves a lot of money by doing some very basic research before the fact rather than waiting until after the damage had been done to check out Mr. Smith.
The after-the-fact investigation revealed that Mr. Smith had been arrested then years earlier, in 1989, for running a similar ponzi scheme in his native Florida. He was sentenced to 15 years in prison after being found guilty of 19 charges of grand theft for using fraudulent financial information to obtain loans and lines of credit, one count of racketeering, two counts of organized fraud, 122 counts of the sale of unregistered securities, and 122 counts of communications fraud. In that scam, Mr. Smith defrauded approximately 700 investors out of $125 million. One of the individuals he convinced to invest in his scam was his own grandmother. He was released after serving only four years, but was strictly prohibited from engaging in any financial consulting activities. Despite all of this, he couldn’t resist doing it all over again, and he is now back in the slammer.
As a footnote to the story, when he was arrested in 1989, Mr. Smith had several properties in four states valued at around $1.6 million. He also had $39 million in insurance policies, seven bank accounts totaling well over $2 million, jewelry, two Mercedes automobiles, four boats, six other vehicles (including three Aston Martins) and a Rockwell International Sabreline jet plane. Additionally, he refused to cooperate with the receiver assigned to the case, despite the fact that more than $15 million from this scam was never accounted for. Although he admitted to having offshore bank accounts in Bermuda and the Middle East, these leads were apparently never thoroughly researched, and the $15 million remains out there someplace, accessible only to Mr. Smith.
The leader of Greater Ministry International, Al Cunningham, was arrested in September 1999 for running an illegal investment ponzi scheme, and for using the money to create an armed enclave in the Caribbean. Mr. Cunningham’s church offered followers a “unique opportunity” to invest in the “Caribbean market” and receive “higher than average returns.”
Mr. Cunningham played on his purported religious affiliation to bring in investors. According to one person who lost several thousand dollars of his retirement money, he was hesitant to ask for references because Mr. Cunningham was “a man of the cloth.” Additionally, he provided bank statements and glossy brochures to investors, and frequently turned down potential investors the first time they approached him about investments. By doing this he cleverly served to increase the desirability of his investment scheme.
According to investigators on the case, they still do not yet know how much money Mr. Cunningham actually stole. However, he was planning to purchase two Caribbean islands–each valued at several million dollars–and large amounts of grenade launchers, land mines, machine guns, shotguns, sniper rifles, handguns, flak vests, surveillance balloons, radar systems, and plastic explosives.
Not surprisingly, Mr. Cunningham has no legitimate religious affiliation. He made large personal purchases during the time he ran the scheme, and he has a long arrest record. A record, that is filed in public courthouses, and is available to anyone who wanted to check. Unfortunately, no one did until it was too late for many of the investors.
Financial fraud is rampant and the kinds of cases are only limited by the imaginations of the tricksters. Charlatans often operate internationally, to make it more difficult for US authorities to catch them, and to make the investment itself seem sexier.
In one recent case, an individual was coaxed into investing with an Argentinean broker who claimed to be affiliated with a well-known US bank and brokerage firm. A friend of the individual had been the recipient of several years of excellent returns (a paper increase in his portfolio from an investment of $4 million to almost $13 million) from the broker, and this success spurred the new investor to jump at the opportunity.
But before giving the Argentinean broker any money, the investor decided to check him out. He visited the broker in Argentina, dined with him, visited his home and office, met his wife and kids and dog, and even met the broker’s partner inside the bank where the partner claimed he worked. (Unfortunately, the bank meeting consisted of a handshake in the lobby and then off to a local restaurant for lunch. The investor never saw the banker’s office, and indeed he had no affiliation whatsoever with the bank. He had merely adopted an alias identical to the name of a real official of the bank.)
Convinced that the operation was legitimate, the investor returned to the US and began wiring money to the broker. Over the next two years he sent a total of $5.5 million to the broker and received bi-weekly statements on the letterhead of the legitimate bank, and was in continual contact with the broker.
The broker and the investor became close friends and the investor recommended him to a number of his friends and family, including his mother.
Two years later, when the original $5.5 million investment had purportedly reached over $11 million, the investor received an anonymous letter tipping him off that the broker was a scam artist and advising him to pull whatever money he could out of the fund immediately. The investor immediately hired an investigator who quickly discovered that the broker and his partner had no connection to the legitimate brokerage firm or the bank, neither were licensed to trade anything, and all of the statements the investor had received were forgeries. The broker never invested any of the money; instead, he had stolen it all and sent it to his own offshore bank accounts. And, during the entire six years he ran the scam, his lifestyle in Buenos Aires remained low-key and modest.
If he doesn’t go to jail for his offenses (and he probably won’t, given the cost of prosecuting crimes such as these in Argentina) the scam artist will have ample time to spend the money he has stashed away–almost $10 million from these two investors alone. And no, none of the money was returned when the investor requested it; the only thing the investor received was three months of promises and excuses, then silence.
In yet another similar case, a Brazilian entrepreneur promised extremely high returns for a “select group of investors” on a secret project. The potential investor checked the broker’s references and received enough information on the project to convince him it was a “once in a lifetime chance” and that it would succeed. Before proceeding, however, this smart investor contracted for a professional due diligence on the entrepreneur and his group. He sincerely believed the due diligence would be rote and would not show any problems (and really hoped this would be the case), but wasn’t going to take any chances.
He was surprised and disappointed to learn the entrepreneur was not licensed to trade in securities, his firm was not registered, and he had previously been arrested for similar instances of investment fraud.
The list of examples is endless. It’s really amazing how so many people will bicker and bargain and comparison shop for small personal items like cameras, furniture, clothing and the like, but when it comes to spending millions of dollars on get-rich-quick investments they can be so willing to take a tip and send their life savings to unscrupulous tricksters.
Protect Yourself from Fraud
Financial fraud is definitely on the rise. For every individual who is arrested, there are many others who have never been caught or who have only recently started operating their schemes. The scams are lucrative and easier to contrive today given the ease at which fraudulent documents can be created on a personal computer, enticing more and more criminals to enter the realm of financial fraud.
There is no way to identify a fraud from simply meeting with the principals. They are often extremely intelligent, charming, and personable. As one investor who lost several million dollars stated, “This was no used car salesman. I really liked the guy.” They have the ability to manufacture extensive references and stellar credentials. Moreover, they can show reams of documentation to attest to the value of their project or strategy, and will show potential investors whatever they require to convince them to invest their money in the scam.
The best way to protect yourself from fraudulent financial scams is to conduct a professional due diligence on the individuals and companies involved before sending in any money. Unless you are sure you are dealing directly with an established, reputable firm, failure to investigate up front could mean the loss of your entire investment.
n addition to the financial cost of fraud, there often is also a reputational cost to the person or company that is victimized. A damaged reputation is often at least as devastating as financial loss, and it can sometimes be more difficult to recover than mere dollars. The following are but a few examples of how reputations have been hurt by fraud.
A high-tech company hired a vice president who came highly recommended and appeared to have strong credentials. Approximately six months after he was hired, the vice president announced that he had negotiated a large sale of computer equipment to a Japanese company and an exclusive partnership arrangement with a highly reputable European company. To produce the number of items required by the Japanese, the vice president rushed production and ordered workers to skip steps, resulting in a sub-standard product with several built-in glitches. The Japanese returned the defective products and issued scathing statements about the company.
At the same time, the European company announced it had no knowledge of a partnership and distanced itself from the high-tech company. Because of the poor quality of the sale to the Japanese, the company lost many of its existing contracts and had to file for bankruptcy protection. The company’s reputation was further damaged by a federal investigation into stock manipulation due to the European partnership press announcement which had stimulated the company’s stock to rise dramatically.
Although the other executives in the company were found innocent of all charges, the top three company leaders suffered so much damage to their reputations that they have not been able to find employment elsewhere in the industry or to obtain funding to start another company. Their association with shoddy workmanship and stock manipulation as a result of the vice president’s actions will never be erased.
In another case, a cleaning company won the contract to clean the offices of a computer company that had several government contracts. When the computer company received a telephone call from the FBI saying someone had attempted to access a secure government site from the computer company offices, the company promised to investigate the matter. The subsequent investigation revealed that a member of the cleaning crew had “hacked” into a relatively insecure company site, which contained a list of passwords for access to government sites. The hacker then attempted to use the passwords to reach into classified sites.
Although the hacker apparently never actually gained access to any classified data, and it was unclear whether he was doing it for fun–just to see if he could do it–or actually targeting classified documents, the breach of security resulted in the computer company losing its government contract, and being told “off the record” that it will not be considered for any future government contracts. In the view of the US government, the responsibility for maintaining proper security from its end of the operation rested squarely with the computer company.
Another example occurred when a medical company hired a new president. He claimed to have 25 years experience in the medical field and touted himself as a specialist in medical implants. After five relatively uneventful years with the company, one of the company’s implants caused severe damage to a patient. The American Medical Association launched a large-scale investigation into the company and found that the president had attended only one year of medical school, and had actually falsified all of his credentials and experience.
The resultant medical malpractice suits brought the company to its financial knees, but the real damage was due to the resultant loss of all credibility in the medical field. Even products not associated with the new president were taken off the market because of their association with the disaster.