The
following post appears courtesy of Barbara L. McQuade, the U.S. Attorney for
the Eastern District of Michigan.
Investor fraud schemes are among the
most pervasive types of cases handled by the White Collar Crime Unit of the
U.S. Attorney’s Office for the Eastern District of Michigan.
In the past year, our prosecutors have
charged a number of investment advisors and stock brokers with defrauding their
investors. In one case, a defendant encouraged elderly investors to liquidate
legitimate investments to invest with him. In fact, he kept their funds for his
own use, depleting many of the victims of their life savings, totaling $4
million. In another case, a defendant offered investments over the Internet,
promising high returns and taking in $72 million in investor dollars. Instead,
the investments either generated losses or were never made at all.
Victims of fraud include individual
investors with modest portfolios as well as institutional investors with large
investments, such as pension funds.
President Obama’s Financial Fraud
Enforcement Task Force was designed to attack fraud, waste and abuse by
increasing coordination among agencies and fully leveraging the government’s
law enforcement and regulatory system. As part of that effort, the U.S.
Attorney’s Office for the Eastern District of Michigan is aggressively
prosecuting financial fraud cases. In the largest investment scheme in the
history of the district, a defendant was recently convicted of defrauding more
than 1,200 individuals by convincing them to invest more than $350 million in
fictitious limited liability corporations. He was sentenced to 16 years in
prison.
In addition to prosecuting perpetrators,
we are also combating fraud by raising public awareness to help investors
protect themselves. Knowledge of common fraud schemes can help prevent
individuals from becoming victims of these crimes.
One of the most common investor fraud
schemes is the classic “Ponzi” scheme, named for Charles Ponzi, who devised the
concept in the 1920s. In a Ponzi scheme, the investment promoter promises
investors a high rate of return for their investment and then uses the funds of
new investors to pay the promised return to the earlier investors. These early
investors then unwittingly help advance the scheme by bragging about the high
rate of return on their investment. Eventually, of course, the scheme collapses
when the swindler needs to pay out more than he can take in. A recent example
of this type of fraud was the massive scheme Bernard Madoff operated that cost
investors billions of dollars.
Another common scheme is known as
affinity fraud. In these schemes, perpetrators prey on members of an
identifiable group, such as a church community, a school parent-teacher
organization, a country club or a professional group. The investment advisor
will join the group, or pretend to be part of it. As a result, he enjoys an
inflated credibility that encourages members of the group to trust him and be
less cautious than they might otherwise be when making an investment.
Another frequently used tactic used by
perpetrators of investment fraud is to ingratiate themselves with their
victims. In one recent case, a defendant regularly visited his clients at home,
shared details of his personal life with them, attended family functions, such
as birthday parties and weddings, provided gifts to family members, made donations
to the clients’ preferred charities, and assisted clients in life decisions.
After obtaining their trust, he took their money for his own use.
Investors can protect themselves from
fraud by researching potential investments and investment advisors. Information
and tips are available at stopfraud.gov,
www.sec.gov and www.investor.gov.
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