Protecting Investors From Fraud - June 2012

Investor fraud schemes are among the most pervasive types of cases handled by the White Collar Crime Unit of the U.S. Attorney's Office for the Eastern District of Michigan. We are targeting this crime by bringing perpetrators to justice and by raising public awareness.

In the past year, our prosecutors have charged a number of investment advisors and stock brokers with defrauding their investors. In one case, a defendant encouraged elderly investors to liquidate legitimate investments to invest with him. In fact, he kept their funds for his own use, depleting many of the victims of their life savings, totaling $4 million. In another case, a defendant offered investments over the Internet, promising high returns and taking in $72 million in investor dollars. Instead, the investments either generated losses or were never made at all.

Victims of fraud include individual investors with modest portfolios as well as institutional investors with large investments, such as pension funds.

President Obama’s Financial Fraud Enforcement Task Force was designed to attack fraud, waste and abuse by increasing coordination among various agencies and by fully utilizing the government’s law enforcement and regulatory system. As part of that effort, the U.S. Attorney’s Office for the Eastern District of Michigan is targeting fraud by prosecuting unscrupulous investment advisors. In the largest investment scheme in the history of this district, a defendant was recently convicted of inducing more than 1,200 individuals to invest more than $350 million in fictitious limited liability corporations. He was sentenced to 16 years in prison.

In addition to prosecuting perpetrators, we are also combating fraud by raising public awareness to help investors protect themselves from becoming victims of fraud.

One of the most common investor fraud schemes we see is the classic “Ponzi” scheme, named for its well-known perpetrator Charles Ponzi, who devised the concept in the 1920s. In a Ponzi scheme, the investment promoter promises investors a high rate of return for their investment, then uses the funds of new investors to pay the promised return to the earlier investors. These early investors then unwittingly help advance the scheme by bragging about the high rate of return on their investment. Eventually, of course, the scheme collapses when the swindler needs to pay out more than he can take in. Bernard Madoff later executed a Ponzi scheme of an enormous magnitude.

Another common scheme is known as affinity fraud. In these schemes, perpetrators prey on members of an identifiable group, such as a church community, a school parent-teacher organization, a country club or a professional group. Because the investment advisor is part of the group, or pretends to be, he enjoys an inflated credibility that causes members of the group to put misplaced trust in him.

Another common strategy used by perpetrators of investment fraud is to ingratiate themselves with their victims. In one recent case, a defendant regularly visited his clients at home, shared details of his personal life with them, attended family functions, such as birthday parties and weddings, provided gifts to family members, made donations to the clients’ preferred charities, and assisted clients in life decisions. Once obtaining their trust, he took their money for his own use.

Investors can protect themselves from fraud by doing their homework on potential investments as well as on the investment advisor. Investment tips are available at stopfraud.gov, www.sec.gov and www.investor.gov. Information about financial fraud occurring in Michigan should be reported to the FBI at 313-965-2323.

Barbara L. McQuade
United States Attorney
Eastern District of Michigan