Ottawa Investment Advisor John Bruce

How to Avoid Being a Victim of Financial Fraud

September 9, 2009 · Print This Article

You seen the names in the news, Bernie Madoff in New York, Earl Jones in Montreal and now Milowe Brost in Alberta. You have heard the allegations and you have seen the millions that their investors have seen evaporate when their Ponzi Schemes are discovered. Until recently you could ask the average individual what a Ponzi Scheme was and most would not know. This year we have seen the monster of Ponzis come and go devouring investors in it’s wake. To know what a Ponzi scheme is I went to Wikipedia, the free online encyclopedia for the definition.

Ponzi Scheme

From Wikipedia, the free encyclopedia

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually offers returns that other investments cannot guarantee in order to entice new investors, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going.

The system is destined to collapse because the earnings, if any, are less than the payments. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases. While the system eventually will collapse under its own weight, the recent example of Bernie Madoff powerfully illustrates the ability of a Ponzi scheme to delude both individual and institutional investors as well as securities authorities for long periods: Madoff’s variant of the Ponzi Scheme stands as the largest financial investor fraud in history committed by a single person. Prosecutors estimate losses at Madoff’s hand totaling $64.8 billion.

The scheme is named after Charles Ponzi,[1] who became notorious for using the technique in early 1920. He had emigrated from Italy to the United States in 1903. Ponzi did not invent the scheme (Charles Dickens’ 1857 novel Little Dorrit described such a scheme decades before Ponzi was born, for example), but his operation took in so much money that it was the first to become known throughout the United States. His original scheme was in theory based on arbitraging international reply coupons for postage stamps, but soon diverted investors’ money to support payments to earlier investors and Ponzi’s personal wealth.

Here are some tips to avoid getting caught up in a fraudsters game:

1 ) Ask if the Investment firm and advisor are members of the Investment Industry Regulatory Organization of Canada (IIROC). There is a service provided by IIROC to help investors access the public information available on their Member firms and their registered employees.

2 ) The Ontario Securities Commission (OSC) provides a registrant List that will let you check the individual’s registration status. Other regulators such as provincial securities commissions conduct their own investigations and may have taken regulatory action against individuals or firms. I would suggest that you conduct a similar search through other regulators to determine if the person or firm you are looking into may have been the subject of a regulatory action by another organization.

3 ) Find out if your investment will be insured under the Canadian Investor Protection Fund (CIPF).

4 ) Are you being guaranteed high returns with no risk? There are no such thing! In investing, the higher the potential return, the higher the risk. This type of sales pitch is often aimed at people who live on a fixed income or those nearing retirement who are worried about not having enough money.

5 ) Are they mentioning Insider tips and the need to get in now? Scam artists use this tactic to pressure you into making a quick decision. They make the offer more attractive by suggesting they have secret information about a company that the general public doesn’t have. They pressure you to act now to “get in on the ground floor”. This kind of sales pitch appeals to our fear of missing out on an opportunity.

6 ) Offshore investment – tax free. You can defer paying taxes, but you cannot avoid paying them. This type of deal is often pitched as a secret, but not for reasons you might expect. By asking you to keep the deal to yourself, scam artists know you won’t have to answer hard questions and comments from family, friends or financial advisers who might see through the scam. Often with scams like this, your money will be transferred overseas, making it harder for the authorities to investigate and even harder to recover.

7 ) Profit like the experts! These scams are pitched as opportunities known only to a select few who are said to be making a lot of money. The scam artist convinces you that they have access to this inside information. An example is the “prime bank” scam. Investors are told about a secret market that only the world’s largest banks know about and are then given an exclusive opportunity to participate in this secret market. The catch is that secret prime bank markets don’t exist.

8 ) Great investment opportunity – your friends can’t be wrong! This scam relies on the trust people place in their friends and the fear of not keeping up with them financially. Scam artists often target religious, ethnic and other groups by working their way into the organization and befriending members in order to rip them off. Don’t be a victim! Check out anyone who approaches you with the investment opportunity-no matter how trustworthy they may seem.

In general, if it seems to good to be true it probably isn’t! Follow the above advice and it will help you to avoid the pitfalls of fraudulent investments.

John S. Bruce
Investment Advisor
Mackie Research Capital
Direct Line- 613-425-3732
Toll Free- 866-860-4190

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation (“MRCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des épargnants.

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