The telephone rings and on the other end of the line a mesmerizing voice says, "This is Brad, I've got a stock that's going to triple in price within two weeks. How many shares do you want me to reserve -- before it's too late?!"
We have all heard some version of the pitch. The problem is some people actually buy into it.
There are lots of high-profile examples of scam artists and Ponzi schemes. The latest is Martin Frankel, who allegedly bilked millions from the intelligentsia of some insurance companies.
Here are a couple you haven't heard about from my early days as a financial planner in California. In the early 1970s there was a small group of about five guys putting together small real estate limited partnerships and an equity-oriented real estate investment trust in San Rafael, just north of San Francisco. Turned out they would buy a small apartment building with one entity, then mark the price way up and sell it to the other entity. In the process they pocketed a few million dollars.
One of the leaders of this group was a graduate of the
Air Force Academy
and the model of an all-American boy. Everybody felt they could trust him until somebody blew the whistle and found out he was a crook. He seemed to have everything going for him, but he ended up in jail for fraud.
Once a manager of a famous rock group hired me to investigate an oil and gas deal. This was in the late 1970s, when tax shelters were rampant. This group of con artists was from Salt Lake City. It only took a 1 1/2-hour meeting and three phone calls to uncover their scam.
One scam that really shocked me, was a
-esque guy in Tiburon, Calif., named John. He always had a captivating, down-home sort of way about him. He had a great sense of humor and could tell the kind of stories that would warm your heart. Around 1973, John was president of the North Bay chapter of the
International Association of Financial Planners
, as it was called in those days. He was also the president of the local Rotary Club. He taught several financial planning courses at the
College of Marin
. He gave more than 200 financial seminars in the county. He was one of the oldest members of the "Marvelous Marin" breakfast club, a prestigious group of local business leaders.
The headlines of the
Marin Independent Journal
on July 10, 1992, read, "Marin Financial Adviser Accused of Fraud." There was John's picture, bigger than life, next to the headline. He allegedly defrauded up to 50 people out of $2 million to $3 million by convincing them to invest through an offshore trust. He skipped the country and later died broke in Costa Rica.
When it comes to your money, you must build safeguards around it. Here are 10 things you should do before parting with your money:
- Find out if the person soliciting your money is licensed. If he holds an insurance license, check with the state insurance commission. It he has a securities license, call the
National Association of Securities Dealers at 800-289-9999 or visit the NASD regulation Web site at
www.nasdr.com. John in Tiburon had his securities license revoked in 1989, but nobody checked.
Check with your state securities division. You can find your division's location by calling the
North American Securities Administrators Association at 888-846-2722.
If the person is a certified financial planner, check with the
CFP Board of Standards at 888-237-6275.
If a person is charging a fee for investment advice, he must be an agent of a registered investment advisory firm. Be sure to get a Form ADV Part II disclosure document from your state securities department or the
Securities and Exchange Commission. This standard regulatory filing is required of all advisers and may provide important background information.
Know how your adviser makes money, whether it's fees or commissions. Be sure to check into conflicts of interest.
Ask any person who wants to manage your money if he carries errors and omission insurance, a form of liability insurance that should be carried by any financial adviser or his securities company. Get the particulars on the policy.
Most investments involve setting up a custodial account. Be sure it is with a solid institution that carries lots of insurance in case it fails. Verify the account, be very cautious of anything offshore. Look for confirmations on transactions within four or five business days.
The SEC sees Internet fraud as a big problem. Verify everything. It's like the wild West -- the medicine men have dropped their high-tech tailgates and they're hawking you.
Always get referrals and background information. Verify information given in a biography.
Use good old common sense. If it sounds too good to be true -- it probably is.
Daily headlines tell us that we constantly have to be on our guard. Most money is made the old-fashioned way -- you earn it and invest it based on a long-term investment strategy. Beware of shortcuts.
email me with any fraud stories you have. Have a healthy and profitable week.
Vern Hayden is a certified financial planner in Westport, Conn. He is a financial consultant and advisory associate of Financial Network Investment Corp. He also is an owner of Hayden Financial Group. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While he cannot provide investment advice or recommendations, Hayden welcomes your feedback at