Old Financial Cons May Get a New Wrinkle

Old Financial Cons May Get a New Wrinkle
By Joe Mont

Despite a flurry of media attention about finance-related ripoffs, new victims are continually ensnared.

TheStreet recently poke to Ken Springer, president of Corporate Resolutions, and its managing director, Donald Klaskin, about the continued resurrection of pyramid schemes and what may be the next move for con artists.

Corporate Resolutions is a worldwide business investigations and consulting firm based in New York City with offices in Boston, London, Miami and Hong Kong. The firm, founded by Springer, a former FBI agent, provides investigations for private equity firms, alternative asset funds, law firms, corporations, financial institutions and government agencies.

It is surprising to see that the same old scams and Ponzi schemes, no matter how much publicity they get, continue to rope in victims.

Springer: There are some things we always say: If it is too good to be true, it probably is; what is wrong with this picture; and past history is often indicative of future performance. Those are three things that ring true all the time.

We are putting together a spreadsheet of these scandals and so many of them have a lot of common denominators. Look at Sam Israel III with Bayou Hedge Fund Group, or look at Allen Stanford or look at Bernie Madoff and you will see the similarities.

Given consistent patterns, are there red flags investors should be on the lookout for?

Springer: We looked at Madoff post-mortem, and the first thing we saw was that he had a one- or two-man accounting firm 40 miles northwest of New York City. How could that happen? He was in a strip mall and six months earlier the company had been at his house. That doesn’t necessarily mean he was going to commit a fraud, but someone should be asking some questions.

Klaskin: Why wouldn’t he have a bigger firm? There are some issues with bigger firms too, but for the size of the business that he did there would have been at least a big regional accounting firm.

Springer: A lot of times, even when people do conduct background checks and there are flags that are raised, they are so enamored with the return on their investment, the interest they are going to get and what is going to happen, that they ignore things. You know what? You can’t help people who want to jump off a cliff.

Klaskin: There are reputable firms out there, and reputable mutual funds, that have been in business for years. Why the unsophisticated investor wouldn’t go to them, as opposed to going to someone who is an independent investment adviser, is shocking.

If you don’t know how to, or can’t afford to, do a background check, then you either shouldn’t investor you are much better off going with a known commodity and someone out there that has a history and track record of providing various returns. A
re you surprised that the same, carbon-copy scams continue to succeed?
Klaskin: I’m not amazed by it. In the 1970s, in New York, they appointed a special prosecutor on a five-year, temporary assignment to clean up Medicaid fraud. I worked there five years and have friends of mine there who are retiring after 30 some-odd years on the job. You see these multimillion-dollar frauds and it just hasn’t made a dent. People just continue to do the same thing.
Springer: You can’t fall in love with a deal too soon. You can’t have blinders on. You have to know what you are getting into.
Even though scammers seem to keep going back to the same bag of tricks, are there new frauds we may see? Are the ripoff artists inventing a better mousetrap?
Springer: My guess would be that you are going to see something related to real estate again. History repeats itself, and real estate is a common denominator. We are going to have more commercial loan defaults and you have all that debt restructuring coming out next year, so that would be my guess.
Klaskin: With the Dodd-Frank Act, financial reform and new regulations, there has been a tightening. I think as you see more and more financial reforms, you are going to find that people will gravitate to things outside the United States. They are going to look to China, Brazil and India — economies that are just booming — and there is going to be something using them. What kind of due diligence can you do in those countries? They are going to promise returns of 20% and people are going to do the same thing they always do: “Oh my God, 20%! I know there is a bit of a risk, but it is a great return.” They are going to play on that. People are going to say I can get a 2% or 3% return here and there I can get 15% or 20%. They are just looking at the return and, once again, the same thing is going to happen. I go back to when Cain killed Abel over greed. That was the start, and it has continued. It is greed that gets people to make those mistakes.