At one of our recent Worrells Conferences I observed that over the years Worrells have been involved in the deconstruction of a number of scams. We have investigated and recovered what we could from the scammers and have commiserated with their victims. We have seen up close the damage wrought by scams and noted that very rarely are scammers contrite.
Our experience with scams has allowed us to recognise a number of common elements, and we pass these on in the hope that they may help you and your clients keep your hard earned funds safe from the unscrupulous.
Although scams have been around for most of written history, and will undoubtedly continue to raise their ugly heads for evermore, we could not find what we thought was an adequate definition of a scam, so we came up with our own:
“An apparently plausible financial “opportunity” offered to (usually) cashed up investors anxious to capture an improbably large gain over a short period, in a venture that they know nothing about.”
Scams come in all shapes and disguises. Some are sophisticated and long term, using glossy promotions and polished presenters to gain credibility; some get their plausibility through their apparent simplicity and openness. All get their return from the gullibility of the investors.
Most folk try to be honest and expect the same from those they deal with. Most of us are programmed to believe much of what we are told, particularly if it is told in an apparently convincing and sincere way. Scammers on the other hand will lie without compunction or remorse. So lesson number one for those looking at a potential scam is to deliberately ratchet down their gullibility factor.
Worrells definition of a scam (see above) contains an element which is common in all scams. That is the scam will always promise “an improbably large gain over a short period”. We could almost say that if the deal does not contain this element it is probably not a scam…. except that some scammers promise a reasonable return but absolute security. Of course we should all know that there is no such thing. So a claim of absolute security should start warning bells ringing.
In virtually all scams there is no independent party, for example an investigating accountant, an investor’s representative or an auditor, looking out for the investors interests. Reports on the investment prepared by the investment managers are worth approximately…. nothing, and should never be relied upon.
Not surprisingly most scams work in an area where there is insufficient or ineffective regulation. Even if a scammer has a licence from the market regulator little reliance can be placed on that. The fact is that at best regulators only react to complaints, and at worst they often move very slowly when complaints are received.
Our experience is that those investors who first wake up to the problems in a venture and demand their money back stand a chance of getting paid. Often the scammer wants to keep the scam going for as long as possible so as to get the maximum return, and will pay off those who may derail their plan by vociferous complaining. Remember the squeaky wheel gets oiled first.
In summary scam lesson 101 is:
1. Ratchet down your gullibility factor.
2. Remember return is always related to risk. Very high return equals very high risk.
3. If you don’t understand what you are investing in…. don’t invest.
4. Don’t invest in any venture that lacks a truly independent party to look after investors interests.
5. Don’t place too much faith in the market regulator to limit scammers or to recover your funds.
6. If caught out complain to the roof tops. You have nothing to lose and might get paid.