Fraud Prevention Month - Bernie Madoff vs. Earl Jones. Would you have been duped? Would I have been duped? Let’s explore.

Bernie Madoff is one of the best know fraudsters for masterminding what is considered to be the largest financial fraud in U.S. history.  He defrauded investors of an estimated $65 billion.

Earl Jones, the Canadian scammer deceived 158 people, mostly seniors, of more than $50 million.

Would I have been duped by Madoff?

Many people have asked me whether I would have been diligent enough to spot Madoff for the crook he was.  I wish I could say “yes”.  

Madoff was an evil genius at building an exclusive club filled with celebrities, millionaires and professional investors like hedge fund managers.  He made you feel left out of the club if you weren’t investing every dollar with him.  If you would have attended a social event of his, you would look around the room at the pros in the financial industry that choose to invest with Madoff and likely would have let your guard down.  I’d like to think if I had the opportunity to invest with Madoff I would have done my due diligence, but sadly, I have to admit that I likely wouldn’t have.   

Here’s why I think I would have fallen for his Ponzi scheme:

• Many of my friends who were smart investors were involved, so I would have expected them to have done their due diligence.
  

• I would have heard about my friends’ past success with their investment and felt I was missing out – after all, he’s been around for decades.

• Madoff was a professional and former chair of the NASDAQ, what did I need to research?

• Exclusivity.  How could I say “no” when I was offered an opportunity to invest?  He built on that exclusivity and burning desire to be “in the club.”

• In this case, the investment returns weren’t a major red flag (in hindsight they were).  He was paying investors a 10% return, which is not unattainable, but to deliver this consistently should have been a major red flag (as his critics pointed out over the years).  However, it still wasn’t the high level red flag return that many other Ponzi schemes offer (for example, 18%).

Would I have been duped by Earl Jones?

The Earl Jones story enraged many Canadians and many wondered: “Why didn’t the RCMP or some authority stop him sooner?”  Afterall, his scheme was going on for over 20 years.

Would I have been duped by him?  I’m almost 100% positive that I wouldn’t have because he wasn’t licensed to sell anything.  He acted as a financial advisor for over 20 years but never had a license.  Being licensed with a regulatory body is the very least a “financial advisor” can and should do for the saftety of their clients.  Unfortunately, anyone can say they’re a financial advisor, so it’s up to the investor to find out if that’s true.

How would I have found him out?  I would have asked him what he was licensed to sell.  He would  probably have lied about a license, but I wouldn’t have stopped there.  I would have done some research with various regulators in Canada to find out if he was infact licensed or not.

Of course, there have been licensed adviors in the financial industry that have committeed fraud.  However, they’re more likely to be caught and the public can find out about their fraud by inquiring with the regulatory body that oversees their license.  That’s why so many people were defrauded by Bernie Madoff, because he was licensed and his company seemed legitimate.  Jones was not licensed and none of his business was legitimate.

Will it happen again?

Authorities wish that Bernie Madoff’s and Earl Jones’ deceptions of the world were isolated Ponzi schemes and would be unlikely to happen again.  Unfortunately, that couldn’t be further from the truth as new schemes are being thought up every day by  full-time criminals.  And, they’re always working to improve their sales pitch to separate you from your hard earned money.

Gordon Gecko (in the movie Wall Street), famously declared: “Greed is always good.”  However, more often than not, greed eventually destroys everything in its path.  The scoundrels I researched for my last book on fraud seemed to have conceived and executed the perfect crime, but in almost every case, not only were they caught in the end, many lived their days out in poverty or prison, and even committed suicide.

My next post with address the red flags to watch out for when deciding whether an investment or an advisor is legitimate.

The above was a partial excerpt from my book, Protecting You and Your Money; A Guide to Avoiding Identity Theft and Fraud published by the Chartered Professional Accountants of Canada.  To order your guide, click here.