Join NexChange - the professional
network for the financial services
industry - and receive a free one-
year subscription to Forbes
Top Ten Investment Scams Ever
Every year, over 31 million purchasers are victimized by investment fraud. The medium loss per investor is roughly $15,000. Individual losses run into hundreds of thousands of dollars. Most remarkable is that financial swindle targets ranked above financial non-victims with percentages of 58% and 41% respectively.
Why do many get scammed The #1 rule in fraud is "Don't breed any mistrust." High returns can go overlooked for decades. But, like Bernie Madoff shows, it will all show up at the end of the day. In 2013, the SEC listed over 700 enforcement efforts for investment scams.
A look at fraud would have to go back centuries to 300 BC. That’s about the timie a Greek merchant named Hegestratos took out an insurance policy. The merchant would borrow money and pay it back with interest on a ship’s cargo arrived. If the loan isn’t paid back, the lender had the rights to acquire the boat and its freight.
Hegestratos conspired with a few friends to empty his boat, sink it, keep the loan and sell the corn. His plan didn’t really work out. The ship’s crew and passengers caught him in the act and he drowned trying to escape.
Investment Scams: The First Insider Trading Scheme
Just a few years after American became a nation, it produced it first fraud. In the late 18th century, American bonds were like junk-bonds are today. Every wind of news about the colonies’ fortunes cause the value of the bonds to fluctuate. The trick for the investor was to be able to anticipate which direction a bond’s value was headed.
Alexander Hamilton, Treasury Secretary, worked to restructure American finance by replacing a variety of bonds issued by the colonies with bonds from the new country’s central bank.
William Duer, assistant secretary of the Treasury, was in the perfect spot to get in some profitable insider trading. Duer was among the first to know news which would drive up bond prices. He would tip his friends, trade in his portfolio and then leak that information to the public. Then all Duer had to do was set back and sell off bonds and make an easy profit.
Top Ten Investment Scams
Charles Ponzi – $20 million lost by investors
Everyone has heard of "Ponzi scheme. It is titled after Charles Ponzi's famous scheme where he promised profits of 50% in 45 days. Tenured investors were paid off with money from fresh investors.
Lesson: Get an independent 3rd party to write the statements
Barry Minkow – Loss calculated at $100 million
When he was 19, Minkow saw his rug washing company go public and eventually reach $200 million in capitalization. Using false records and sales slips, it appears Minkow had built a huge and profitable business. Clients who were suspicious about overcharges on their invoices headed to an inquiry which uncovered Minkow's revenue figures. Minkow was sentenced regarding almost 60 felonies.
Lesson: Again — Get a reliable 3rd party accountant is reviewing the statements.
Jordan Belfort – Loss $200 million
Jordan Belfort was the subject of the TK movie "Wolf of Wall Street." Belfort reached the silver screen by running a pump-and-dump scam in the 90s where agents would force up the cost of usually, junk stock and then ca