Correct! You noticed the red flags and spotted the fraud. Did you notice any red flags in the other stories? All three stories are in fact, stories of fraud. Investors become victims of fraud through so many different kinds of situations. No matter who the investment advisor or what kind of opportunity, it is important to PROTECT your investment – always CHECK before you INVEST.
These stories are based on real events – the names have been changed.
Mary met her financial consultant Ronald at an investment seminar, where she enjoyed a free lunch and heard from the companies that were selling shares through Ronald. She enjoyed the seminar and liked Ronald – his seminars and advertisements made him well-known in her seniors community. Ronald served as Mary’s consultant for many years, so when Ronald proposed that Mary purchase some new securities, she did not hesitate to trust his recommendation. Ronald assured Mary that her hard-earned money was being invested in good companies and were good investments.
One day, Mary received a letter concerning a company that Ronald had invested approximately $90,000 of her retirement savings into. The letter stated that her investment was now worth $0. Mary found out that the securities Ronald had purchased for her were exempt market securities and that he was not even registered to sell investments and securities, or offer investment advice. A quick call to the ASC would have informed Mary of this important information and would have identified red flags in the sales pitch, including promising better returns than the bank. Mary would have found out that the investment suggested was not suitable for her life stage, as it is always considered risky and there is no way to guarantee returns. It is especially risky for seniors who have less time to recover from loss.
This case is an example of fraud. This case involved financial consultant Ronald illegally selling $11 million worth of exempt market securities to at least 180 investors, most of whom were seniors. As an unregistered adviser, Ronald recommended investments that offered him large commissions without ensuring they were a suitable investment for his clients, many of whom lost all their money
Taking the club’s advice, Kevin borrowed about $100,000 against his home to invest. After his initial investment, Kevin stayed actively involved with the club. It was an exciting time. Membership was growing and new investment opportunities were being exclusively offered for a limited time. Since his initial investments were doing well, Kevin did not hesitate to invest around $200,000 from his retirement savings into a new promising opportunity.
Eventually, things started to unravel. The company was going through a rough patch, Kevin was not able to access his money and some members were even being contacted by securities regulators. Kevin soon realized that the whole investment club and the investments were a fraud – part of a large Ponzi scheme.
This is an example of fraud. Not doing their homework led investors to jump right into a Ponzi scheme. In a Ponzi scheme, early investors always make a good return on their money as they are paid “profits” allowing them to believe that the investment is sound and to encourage additional investment. What they don’t know is that the returns are being made with their own money or money from newer investors. There is no legitimate profit-making investment so the scheme collapses when new money stops flowing into the company or fund.
Red flags in the sales pitch include the “exclusivity” of the investment and the ‘limited time offer’. If this happens, walk away. Don’t invest without fully understanding how the investment works, how it generates money and how those involved get paid. Kevin was able to recover less than $20,000 of his initial investment and he believes he will have to work right though his retirement years.
Since Kate was 18, she has maximized her RSP contributions every year. She has used several different financial advisers, but felt that none of them were making investments that suited her financial goals. Even with her limited investment knowledge, Kate knew that she was young enough to take risks to maximize her retirement savings. Before she met with Daniel, she reviewed his company website and brochures, and was very impressed with what she found − Daniel came across as an experienced and trusting adviser. When Kate met with Daniel, he said he could make her investments grow to reach her retirement goal. Kate invested approximately $800,000 with Daniel.
Kate’s investments initially did well, but eventually some life events caused her to need to cash in a portion of her investments. When she tried to do this, she could not get in touch with Daniel or anyone else from his company. At this point, she sensed that something was wrong. Later on, Kate found out that she had been a victim of fraud.
This case is a classic example of affinity fraud, which exploits the trust that exists in groups of people who have something in common. Daniel used his public persona – gained through promotional radio advertisements – to build trust in people and establish his bogus investment credentials.
Background checks (beyond the company’s own materials) before investing would have found that Daniel and his salespeople were promoting and selling securities in companies in which Daniel had an ownership or management connection. Potential clients would also have found out that Daniel was not registered to offer investment advice.
Years later, Kate has still not received any of her money and has been told to expect less than a quarter of her investment back – if she is lucky. She now works two jobs and lives with a roommate.