THE PROBLEM
The Risk of Investment Fraud is Real
In December 2008, the Bernie Madoff Ponzi scheme exposed losses of an estimated $64.8 billion—$19.56 billion of actual investor cash principal and nearly $46 billion in phantom profits that 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 to financial advisors without proper due diligence.
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However, lessons learned from the Madoff scandal have been short-lived, as tens of thousands of investors lose billions of dollars annually to investment fraudsters. Newswires report instances of investment fraud uncovered by regulatory authorities and law enforcement almost daily. 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 North America Securities Administrators Association's (NASAA) U.S. members reported Ponzi schemes as their number one type of investment fraud investigation.
Lack of Transparency
Investment transparency is how investors can access information about investments, their managers, and the management company compliance framework to identify and deter fraudulent activity. Operational risk can be the most devastating of all the types of risk that can negatively affect investment performance. 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 2015 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.
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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 verifying 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.
BIG SIX INSTIGATORS
OF INVESTMENT FRAUD AND LOSS
Investment fraud and financial losses often stem from deceptive practices by unscrupulous individuals or organizations. These tactics are designed to manipulate investors, conceal financial realities, and exploit regulatory loopholes for personal gain. Investors can better protect themselves and their assets by understanding the common strategies used in financial deception. Each of these instigators can lead to significant financial losses for investors and damage the integrity of financial markets. They often overlap and can be combined to perpetrate complex fraudulent schemes.
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1. Misappropriation of Assets
The unauthorized use or theft of investor funds or company assets for personal gain. It can include embezzlement, unauthorized loans, or diversion of funds to non-business activities.
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2. Misevaluation of Assets
Assets are deliberately over- or under-valued to manipulate financial statements. It can involve inflating the value of investments, inventory, or property to make a company appear more profitable or stable than it is.
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3. Existence of Assets
Claiming ownership of assets that don't exist or exaggerating the quantity of existing assets. It can include phantom inventory, fictitious investments, or non-existent subsidiaries.
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4. Concealment of Losses
Hiding or disguising financial losses to maintain investor confidence. Techniques may include off-book transactions, manipulating accounting periods, or creating complex financial structures to obscure poor performance.
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5. Legal and Regulatory Violations
Activities that breach laws or regulations governing investments and financial markets. Examples include insider trading, Ponzi schemes, or violating securities laws.
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6. Marketing Misrepresentation
False or misleading claims about investments or financial products to attract investors. It can include exaggerating potential returns, downplaying risks, or falsely claiming endorsements or credentials.​
THE SOLUTION
Investment Fraud Red Flag Reports (RFRs)
A comprehensive and robust due diligence process is a crucial component of investor protection. Many investors lack the expertise to identify risk factors that may lead to fraudulent activity. Our due diligence process includes a unique Red Flag Report, summarizing over 150 potential indicators that directly or indirectly predict financial misconduct. This report provides a powerful tool for identifying and assessing risks that might go unnoticed.
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Proper due diligence, enhanced by our Red Flag Report, offers investors a snapshot of potential operational, financial, investment, and liquidity risks associated with a specific firm, financial professional, or product. It helps investors understand the interconnection between different types of risk, as seemingly minor issues may have significant impacts on financial statements. We investigate numerous independent warning signals, test for distinct patterns that reliably predict fraudulent activity, and help recognize possible misconduct before an investment is funded.
Our Fraud Prevention Process
Correctly done, the due diligence process thoroughly examines 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.
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Our process begins by intensively interrogating the firm's principals, key employees, and investment advisor’s background objectivity and actions.
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We evaluate the soundness of strategy and overall investment quality.
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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 detect and deter wrongdoing, leading to the “Big Six” instigators of investment fraud and loss.
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The validity and credibility of an investment firm's third-party service providers are reviewed for proper oversight and any conflicts of interest.
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The deliverable is an intelligent due diligence report with a professional opinion that pinpoints the source, nature, and degree of danger—a 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 schemes.
SERVICES
Advanced
Background Verification
Our rigorous background checks thoroughly validate investment professionals' credentials, resumes, and litigation history. We meticulously research careers to uncover adverse information, safeguarding your assets from undue risk. This vetting process ensures you entrust your investments to legitimate, qualified professionals, minimizing fraud exposure.
Extensive
Fraud Risk Examinations
Our proprietary process methodically identifies critical red flags that may lead to fraud. We analyze traditional securities, derivatives, real estate, and private equity investments using sophisticated techniques. Our intelligent solutions help protect assets across diverse product types, ensuring comprehensive safeguarding of your investments.
Empowering
Investment Fraud Prevention Presentations
Investment fraud prevention expert James Brandolino delivers impactful keynotes and workshops. Drawing from authentic case studies, his tough-love approach resonates with audiences, raising awareness and providing practical solutions. James educates investors on identifying critical red flags, empowering them to protect their assets from fraudulent schemes.
START THE CONVERSATION
Seeking an assessment of fraud risk with a prospective investment opportunity and its financial sales professional?
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​Are you looking to enhance your client services with specialized investment fraud prevention expertise? We can partner with you to provide tailored strategies that complement your professional advice and help protect your clients' assets.
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