May 19, 2020
How to Steer Clear of Unprincipled Advisors and Fraudsters
Written by Neil Behrmann
Be very careful if you recently retired or came into money and you’re looking for a safe investment. You could be a very attractive target for a crook. Once your money is gone, it can be impossible to get it back.
Mass Market Fraud
Mass Market Fraud is a type of fraud which aims to make victims part with their money by promising cash, prizes, services and high returns on investment. Examples include foreign lotteries, 'boiler room' frauds and correspondence scams where fraudsters purport to act on behalf of bona fide charities and institutions and ask you to provide money and personal information. The majority of these frauds are committed from overseas by way of email, telephone or letter to victims. Classic scams include: “Congratulations! You've won the X Lottery!”; a 'cold caller' phone call offering high returns on new stock listings and other stocks; off-plan real estate investment via brochure; an email claiming that a friend abroad has lost her money, cards etc.; a request for charity from Africa or a lottery requiring personal bank details.
• Be wary of any firm or individual offering to sell you commodity futures or options on commodities, including: precious metals, such as silver or gold; foreign currency, such as Euros, Yen or Deutschmarks; or crude oil, heating oil, unleaded gas, or agricultural products such as corn, soybeans, or cattle. Be wary of any firm or individual offering to trade your money for you in commodity futures or options, or to pool your money with other customers.
• Predictions or guarantees of large profits. Always get as much information as you can about a firm or individual’s track record and verify that information—even if you know the people involved or they are recommended by friends or relatives. If you can’t get solid information about your investment and the company, don’t invest. Before you invest, always check it out with someone whose financial advice you can trust.
• Be suspicious if the firm or individual says there is little risk. Be suspicious if someone tells you that a written risk disclosure statement is only a routine formality. Written risk disclosure statements are important to read thoroughly and understand.
• If a firm claims that they will trade foreign currency for you in the interbank market, or that you should trade in the interbank market, be cautious. The term “interbank market” refers to a loose network of currency transactions negotiated between financial institutions, usually banks and investment banks, and other large companies.
Ultimately, the real truth is that if it sounds too good to be true, then it most certainly is.
Some Hedge Fund investor questions suggested by UK Serious Fraud Office
- Are you satisfied that the fund has a truly independent board in place?
- Do members of the board also hold posts on a large number of other boards?
- Is the fund exempt from regulatory oversight?
- Has the fund disclosed an external, independent well known auditor?
- Is the fund manager controlling valuations and providing portfolio prices and is it difficult to verify the value of the assets?
- Is the fund valued independently?
- Have the prime brokerage, auditor, directors or administrators changed?
- Do many employees leave the organization and do key members of staff have any criminal records or are involved in civil disputes?
- Have there been any regulatory actions against the hedge fund manager? Have the fund managers consistently displayed perfect market timing (the Madoff scam)?
- Have there been unusual transfers or activity near a quarter or year end?
- Is there an apparent restriction on access to the fund to elite investors?
- Has the fund taken large positions in companies? This may indicate an intention to sell a proportion of the holdings to influence the value of the remainder.
- Have there been any market rumors and/or complaints from investors about the fund and its management? Is there inadequate disclosures and transparency on trading positions?
- Have there been any misrepresentations in investor communications? This may be in relation to returns or the background of the fund managers.
- Have the returns displayed month on month been inconsistent with the indices and the performance of peers?
- Are key functions of the business controlled by a tiny group?
- Is the administrator knowledgeable about the fund strategy and independent?
- Are you satisfied that there is an independent custodian?
- Have redemptions been actively discouraged? Have there been many redemption requests? Have there been any failures to honor redemption requests?
- Have the financial reports been timely, are the reports easy to understand and is the manager responsive to questions?
(Source UK Serious Fraud Office and Commodity Futures Trading Commission)
About the Author: Journalist Neil Behrmann is author of Trader Jack: The Story of Jack Miner, about a teenager caught up in a Russian Mafia and hedge fund fraud (www.thestoryofjackminer.com).