A $36 billion opportunity for CFEs to make a difference.

November 13, 2018

When I started my career as a CFE, my background had been primarily in auditing and accounting, and most of my cases were corporate matters. Fraud victims were usually corporate entities looking to quantify a loss and mitigate the lapse in controls. I rarely encountered an individual who suffered a real loss because of a fraud scheme.

That all changed in early 2009. I was working on the liquidation of a real estate investment firm when an unexpected phone call permanently altered my outlook on fraud. Working out of the shuttered investment firm’s office, I answered the firm’s main phone line and was met by a soft, almost frail voice. “I’d like to get some information about my investment. I was supposed to be receiving monthly interest payments, but nothing has come in a while.” I spent the next 15 minutes listening to the caller, asking a few questions but mostly processing everything I heard as I took notes. The phone call was my first exposure to the emotional loss that victims of financial fraud can suffer. No longer was loss simply a mathematical calculation, a procedural assessment of lax internal controls or documenting conduct subject to a governmental inquiry. Now a victim’s full financial and emotional toll were front and center.

Crooked Investment Advisor

This fraud scheme began when an investment advisor persuaded a group of tightly knit elderly individuals to invest their retirement savings with him. He promised to invest in a portfolio of real estate properties that were showing great returns. This “can’t-miss” investment opportunity wasn’t registered with the SEC, so anyone investing would need to be an “accredited investor.” These retirees in particular didn’t qualify as accredited investors, but that didn’t stop the advisor — he helped prepare false paperwork to make it seem they did.

Soon after the retirees made their investments, they began receiving monthly distribution checks. In 2008, that same investment advisor went back to the group (along with others) seeking additional money to fund investments in yet more properties. There weren’t new properties, however. In classic Ponzi scheme fashion, the new funds were used primarily to make distribution payments to early investors. Those distribution checks soon stopped coming to the investors, and the real estate management firm ended up in bankruptcy.

The fraud victim I spoke with during that early 2009 phone call, like others I spoke to in the weeks afterwards, was truly dependent on the distribution checks and had burned through any other savings available to avoid falling behind on mortgage payments. I learned that all other savings had been exhausted and there was nothing left to pay the mortgage. The fraud significantly hurt the elderly victims’ financial well-being, but the emotional toll seemed worse. Almost ten years later I can still hear the pain in their voices. They’d saved during their entire careers to enjoy their golden years. But their once seemingly secure financial futures were gone thanks to an investment advisor who preyed on their trust.

In total, dozens of investors fell victim to this fraudulent investment scheme that raised more than $20 million dollars before its collapse. The investment advisor was subsequently barred by FINRA (Financial Industry Regulatory Authority) and his brokerage firm was later expelled from the securities industry.

Read the full article on Fraud-Magazine.com.