SCAMS INFO

In this article we’re going to cover one of the most common types of fraud and unfortunately the easiest one to get away with.

How many times has this happened to you? You see an ad in the paper for something that’s on sale for a ridiculously low price. You rush down to the store to get this item before it’s gone and sure enough when you get there, no matter how early it is, the item is gone. And then after you find this out the salesperson says to you something like, “But we have one just as good over here.” Turns out the item is 4 times the cost and not as good. You’re angry enough to strangle someone. But ultimately you end up getting the other item because you don’t want the trip to be a total waste. This is known as the bait and switch and is one of the most common types of fraud.

The reason it is fraud is because the item in the paper never really existed. Oh, have a great time trying to prove that, because in most cases you can’t, but it’s fraud just the same. And it goes on everyday. The truth is, most of those too good to be true deals that you see in the paper are most likely going to turn out to be bait and switch items.

Probably the most common practitioners of this are car dealerships. Open up the paper and the ads are as large a whole page at times. And then you’ll see a car that normally sells for about $21,000 on sale for an insane price of $17,000. As your eyes are bugging out of your head you grab the paper so you can show the exact car you want to the sales person and rush out of the house like a bat out of hell. Then you get to the dealership, and most likely because of the ad the place is packed and you’re waiting an hour for someone to even wait on you, and then finally when you do get a hold of the sales person he regrets to inform you that the car has already been sold. Your jaw sinks to the floor but before you can turn to leave the sales person points to a model that is very similar to the car you wanted. He tells you about all the wonderful features and then you notice the price tag is about $20,000. While it’s less than what the model normally goes for it’s still nowhere close to what you were hoping to pay. But, because you don’t want the trip to be a total waste, you buy the car. The bait and switch worked like it does so many times.

There isn’t really a lot you can do about this. You can report it but most likely the dealership will have documents to prove that the original car in the ad was sold. Your best prevention of this type of fraud is just to be on the look out for it. If you see an ad in the newspaper that appears too good to be true then most likely it is.

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For thousands of years investment advisors have been asking investors to give them money so they could invest it for them. Even after Charles Ponzi in the 1920’s, investors have continued to give investment advisors money to invest. The mutual fund industry has been the largest vehicle, but is highly regulated and has produced few frauds. Unregulated investment schemes, such as PONZI schemes and its brother, pyramid schemes, have been the most prolific types of investment fund frauds. Hedge funds could be the next significant vehicle. Hedge funds have gained in popularity to a staggering investment amount of over $2 trillion, according to the SEC. Over 2,400 investment advisors have registered 11,500 hedge funds with the SEC this year.

So why would hedge funds produce the next really big fraud? According to the Association of Certified Fraud Examiners and Financial Accounting Standards Board, the environment for fraud includes three factors, “incentives/pressures, opportunities, and attitude/rationalization.” The hedge fund manager certainly has the pressure from his investors to produce results. He also has an unregulated environment to work in producing the opportunity. Additionally the high risk/high reward attitude of the manager makes him more likely to take the risk of defrauding his investors.

A quick review of the SEC litigation releases in the past year shows increased activity against hedge funds, including: altering audited financial statements, concealing losses, creating a fictitious auditor, insider trading, market timing (mutual funds), misappropriation, misrepresentation to investors, non-disclosure to the SEC, and stock manipulation. These frauds were not limited to small or offshore funds, but included funds with hundreds of millions of dollars operating throughout the US. Are these all of the frauds occurring? No, but these are simply the ones which the SEC has litigated against. No one knows in this unregulated environment how many frauds are occurring today.

Since hedge funds are still a popular investment vehicle, how can an investor protect against these frauds? Like any investment, the investor must do due diligence before investing in a fund. The investor should review the funds offering materials, investment objectives, audited financial statements, background of investment advisors and other documentation provided by the fund. He should verify the size of the portfolio with the fund’s custodian. He should check the background of the personnel of the investment advisor working on the fund. He should check for regulatory action against the investment advisor and its personnel. He should evaluate the ability of the outside auditor. He should determine who prepares the periodic financial statements provided investors and whether there is third-party oversight. He should determine if the fund has registered with the SEC. He should check with others in the industry that have knowledge about the fund.

After the investment is made the investor’s due diligence should not stop. Many of the documented hedge fund frauds have not started in the beginning of the fund, but after the investors became comfortable. The investment advisors continue to be pressured to produce results or lose their investors. The investor should continue to review the reports sent to him by the fund. He should verify the size of the portfolio with the custodian on a periodic basis. He should watch for changes in auditors and other third parties. He should be alert for any regulator action against the fund or its advisors. He should not let the early withdrawal penalties deter him from withdrawing at the first sign of trouble. In most of the documented cases, there is little left, after discovery of the fraud and the litigation to recover from the fraudsters and third parties.

The answer is that some hedge funds are defrauding their investors while they are not more closely regulated. With the increasing popularity and size of some of these unregulated funds, one of these may be the next really big fraud. Don’t be the investor caught in it!

Mr. Cuthill’s practice is limited to court-appointed positions in large fraud cases. His work has produced the return of millions of dollars of investors’ funds. For more information about him go to http://trusteeandexaminerCuthill.com/.

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Have you ever sat in a Coffee Shop or bookstore and listened the sales pitch of a Multi-Level Marketing (MLM) recruiter attempting to coax you into their down line? Crazy isn’t it? While you are sipping on your “Double pump - White Mocha Frappachino, with whip cream” yes, I am a Starbucks Groupie; you can over hear the conversation a couple of tables over from you about all the wonderful things this person will be able to enjoy later in life if they sign up for this special business.

Now mind you I have a friend in Florida who does MLM, she is happy with it and a very positive happy and nice person. Of course, we have to keep away from the issue of Amway when I visit, as she is so into it that it more resembles a religious cult. I am careful not to say anything about it, otherwise it will affect our friendship. Now then, I consider her an honest person, who means well and I am confident she does not over embellish the sales pitch.

But many MLM people do, embellish, misdirect and even misrepresent. Recently one of these meetings tool place and a reader emailed her story. It seems the MLM recruiter had fed her a line of BS and would not answer her questions, after she kept asking him point blank for some answers. You might find this odd, but this is often the elusive approach they use in their sales techniques. She was concerned about this and she went to look up on the Internet to find out more about all this. Her experience was a bit frustrating. When she emailed us she stated:

“Do you know what I found to be the most odd? I asked him in several different ways (psychology trick - ask the same question in different ways to see if the person in question comes up with the same basic answer each time, to test for consistency): what does this all entail? What EXACTLY are you doing when you’re working on your “private” franchise? Hell, I even offered up things, like: do you spend a lot of time on the Internet? Do you talk to real people? Do you yourself have to buy merchandise and re-sell it? How to you get potential buyers? Etc. You know something? He dodged every single question that had to do with the specifics, and instead he offered some success story on CD and 2 brochures, then wanted to set up another “meeting.” What do you think: do you think he’ll want to go to a coffee shop again? Haha…”

All I can say to this person is; Good for you! If more people did this, there would be a whole lot less bogus MLM sales pitches, misdirection and inadvertent misrepresentation. Personally speaking I cannot tell you how many times I have heard this routine. I feel as if I could be an actor in a movie playing the part of an MLM sales person, as I can practically recite their whole spiel, I would not even need the script. I tell you it fries me to over hear these conversations. Think on this in 2006.

Lance Winslow

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