DELIVERING SOLUTIONS TO REDUCE
INVESTMENT FRAUD RISK
The Risk of Investment Fraud is Real
In December 2008, the Bernie Madoff Ponzi scheme exposed losses of $64.8 billion — $17.5 billion of actual investor cash principal and some $47.3 billion in phantom profits which never existed. This massive fraud shocked the global economy and disrupted the lives of some 16,519 direct and indirect clients and their families. Experienced and novice investors alike were awakened to the risks and consequences of entrusting hard-earned assets with financial advisors without first performing proper due diligence.
The lessons learned from the Madoff scandal, however, have been short-lived as tens of thousands of investors continue to lose billions of dollars annually to investment fraudsters. Newswires report instances of investment fraud uncovered by regulatory authorities and law enforcement on an almost daily basis. The North American Securities Administrators Association (NASAA) whose membership is comprised of state securities regulators in the United States, Canada, and Mexico reported that Ponzi schemes—fraudulent investment operations in which returns to early investors are paid out of funds from subsequent investors rather than legitimate profits—continue to be a dominant category of fraud. In 2016, the NASAA’s U.S members reported Ponzi schemes as their number one type of investment fraud investigation.
Lack of Transparency
Investment transparency is the extent to which investors have access to information about investments, its managers, and the management company compliance framework to both identify and deter fraudulent activity. Of all the types of risk which can negatively affect investment performance, operational risk can be the most devastating. Approximately 50% of fraudulent activity and investment failure can be attributed to operational risk alone. Operational risk results from breakdowns in internal procedures, people, and systems, and these risks are associated with accounting, business structure, compliance, audit, valuation, reporting, and personnel oversight. A recent survey by Northern Trust of 300 institutional investors found that 55% indicated they would like more or substantially more transparency from investment firms, fund managers, and financial products before investing client assets.
The potential exists for a financial advisor or money manager to prey on an investor’s natural tendency to chase the appearance of stable returns without first determining the strengths and weaknesses of how a particular investment works and verify the checks and balances in place to protect investors. Operational risk, if not identified and understood, has the potential to enable fraudulent investment activity resulting in partial or total loss of investor assets.
 NASAA 2016 Enforcement Report
 Northern Trust Hedge Fund Services. The Next Frontier: Overcoming the Challenge of Transparency, 2015.
BIG SIX INSTIGATORS
OF INVESTMENT FRAUD AND LOSS
Legal and Regulatory Violations
Investment Fraud Risk Examinations
A comprehensive and robust due diligence process forms a central component of investor protection. Many investors lack the expertise to understand the risk factors leading to fraudulent activity. Due diligence provides valuable, otherwise inaccessible information to investors, thus helping avoid investing with potentially fraudulent firms, advisors, and financial products.
Proper due diligence provides investors a snapshot, at a given point in time, of the potential operational, financial, investment and liquidity risks involved in investing with a specific firm, advisor, and financial product. It helps investors understand the interconnection between different types of risk because individual issues, by themselves, which may be perceived as insignificant, may have a material adverse impact on financial statements. We investigate for dozens of independent warning signals and test for distinct patterns that are reliable predictors of fraudulent activity and help us recognize possible misconduct before funding an investment.
Our Fraud Prevention Process
Correctly done, the due diligence process consists of a thorough examination of legal and regulatory requirements, investment strategies, business structure, operations, potential conflicts of interest, valuation policies (unusually complex and illiquid assets), risk management, compliance and civil, criminal and regulatory actions.
Our process begins by conducting an intensive interrogation of the firm's principals, key employee, and investment advisor’s background objectivity and actions
We evaluate the soundness of strategy and overall investment quality.
We dissect the complexity of the firm’s corporate architecture and governance structure—evaluating its ability to support and maintain strict risk controls necessary to both detect and deter wrongdoing, leading to the “Big Six” instigators of investment fraud and loss.
The validity and credibility of an investment firm's third-party service providers are reviewed for proper oversight and any conflicts of interest.
The deliverable is an intelligent due diligence report with a professional opinion that pinpoints the source, nature, and degree of danger. Danger you may not even see coming. This critical data allows you to react quickly and potentially remain a step ahead of fraudulent activity or scheme.
Advisor Background Checks
We perform extensive background checks to ensure investment professionals are who they claim to be by validating resumes, credentials, and litigation history. With your assets exposed to undue risk with the wrong professional, we meticulously research their career and background to expose adverse material information.
Fraud Risk Investigations
We methodically employ a proprietary process to identify and expose regulatory violations and best practice standards that may lead to fraudulent activity. From misrepresentation to unauthorized trading, the threat is rampant. Through our complex analysis, we can deliver intelligent solutions to help protect assets.
Fraud Prevention Presentations
Clients who book our investment fraud expert James Brandolino for a keynote or workshop benefit from a memorable one-of-a-kind experience. Based on real stories from real fraudsters and victims, James’ tough-love approach connects with audiences as he raises awareness and delivers solutions to reduce investment fraud risk.
START THE CONVERSATION
Seeking an assessment of fraud risk with a prospective investment opportunity and its financial sales professional?
Concerned about potential “warning signals” with an existing investment or financial advisor?
Driven to help your audience avoid the devastating financial, emotional, reputational, and legacy consequences of falling victim to investment fraud?