How to Defend Against a Rising Tide of Ponzi Schemes, Identity Thieves and NFT Fraud

Recently, the UK’s Financial Conduct Authority reported British consumer losses due to fraudulent activity have tripled over the last few years to £570 million (at least according to official records).^[i] Similarly, America’s Federal Trade Commission logged 2.3 million fraud cases in 2020, totalling $3.4 billion (£2.5 billion) in losses, up markedly from 2019.^[ii] Notably, younger folks reported falling prey more often than older people (although the latter’s median loss was much higher).^[iii] It seems financial ploys that make off with investors’ cash are, sadly, a recurring phenomenon. Whilst the particular techniques may change, our coverage suggests their underlying structure stays mostly the same over time, which we think you can learn to recognise. Here we run through some of the latest approaches criminals have used to abscond with people’s funds—and offer some lessons on how to protect yourself against this rising tide.

Plain-Vanilla Ponzi: Last month, the US Securities and Exchange Commission (SEC) uncovered an alleged Ponzi scheme (when earlier investors are paid out with new investor money without their knowledge) that swindled over $110 million (£81 million) from more than 400 investors in 20 states.^[iv] Just as history’s largest Ponzi run by Bernie Madoff collapsed more than a decade ago, another was apparently taking off.^[v] Whilst there isn’t anything particularly innovative about this investment scam, in our view, as Ponzis date back decades and regularly crop up, it suggests they remain all too prevalent despite society’s repeated opportunities to learn better.

As the SEC complaint goes, one John J. Woods hatched the vehicle for his Ponzi—Horizon Private Equity—in 2007.^[vi] But what really seemed to get it rolling was in 2008, when he bought an investment advisory firm, Southport Capital, from a wealthy family and took advantage of trust and relationships there that he hadn’t built himself. Southport then began peddling Horizon, Woods’ fictitious fund, which advisers told clients would guarantee them 6% to 7% returns. The SEC alleges Woods used Horizon as “his own personal piggy bank.”^[vii]

Whilst fraudsters often use flashy tactics and complex strategies to hoodwink investors into their financial schemes, reports indicate Woods and Horizon used a number of different sales pitches. According to the SEC, clients heard by turns that it was an annuity, it invested in government debt or mortgage-related debt securities, it was low risk and diversified and that there were no costs or fees.^[viii] It seems intended to sound boring and run-of-the-mill to lure investors seeking the impossible right now—a relatively lofty return on a low-volatility investment.

But just because an investment appears ordinary in isolation doesn’t mean it is safe—or that you can let your guard down—underscoring a few perennial defences against investment fraud, in our view:

1. We think promises of returns that seem too good to be true should be a warning sign. At a time when market interest rates are closer to zero than 7%, any fixed-interest security that purports to return the latter likely involves significant risk.^[ix] Investment returns don’t have to be astronomical to appear sketchy—we think something steady and above comparable securities is a tell.
2. We think you should be wary of so-called affinity marketing, which relies on personal connections rather than investment experience and audited performance records to drum up business. Whilst Southport advisers cultivated long-standing relationships with many Horizon investors and Woods was “described as a businessman, philanthropist and children’s sports development enthusiast,” that isn’t enough, based on our experience.^[x] We think due diligence shouldn’t stress personal connections or shared interests. In our view, hiring an investment professional is a business decision and should be approached unemotionally.
3. Your adviser should be able to clearly describe, in common terms, what their investment approach is, how they are compensated and what they invest in. Moreover, if your advisory firm changes hands and the new guard starts flogging a fund you have never heard of and bizarre custodial structures, it may be time to be extra-sceptical.

Online Bank Robbers: In the UK, there has been a rash of identity thieves impersonating bank employees—or police—who glean information from you to compromise your account.^[xi] For those unfamiliar with banking online and using debit cards attached to such accounts, they generally require two-factor authentication to access and direct funds: your regular identifying information (username and password) and a one-time passcode your bank sends you, either by phone, text or email. Reports describe modern-day pickpockets, in disguise, calling unsuspecting account holders—who may be new to internet banking and two-factor authentication—requesting their passcode and using it to make fraudulent purchases.

How do they get victims to divulge such sensitive information? A bank encountering this problem says they do so by gaining their trust and using scare tactics.^[xii] The common method, as the bank relates: Perpetrators establish themselves as an authority figure—a bank official or law enforcement—and then claim they need your information to prevent an imminent theft of your funds, or to recover what they say has already been stolen. The solution, like with most online scams in our experience, is to never give away your personal information over the phone (or email), much less bank account identification and any password or passcode protections. We think the key to this, in the moment, is to recognise when someone is trying to take advantage of you—especially when they put you in a vulnerable position to shortcut your natural scepticism.

If a call is unsolicited, coming from someone you don’t know asking you to take immediate action—out of fear (or greed)—they may be up to something. If it involves sensitive information or money, they probably are—and it likely won’t help you (possibly quite the opposite). Just knowing about such tricks can be half the battle. But limiting your exposure in the first place—an ounce of prevention—can also greatly lower your risk with just a little effort. In this day and age, we humbly suggest that not answering calls from a number you don’t recognise is probably best. If it is important, after all, they will likely leave a message.

Cyber-Art Heist: Another high-profile hoax that has surfaced recently: A buyer bought a fake non-fungible token (NFT)—a digital collectible that can’t be copied—for £244,000 at auction, thinking it was created by the (in)famous English guerrilla-stunt artist Banksy; it wasn’t.^[xiii] But it plausibly could have been, as many artists and other hawkers have flocked to issue newfangled NFTs to cash in on their current cryptographic cachet.^[xiv] This one was actually marketed from Banksy’s website, via a page the scammer had somehow set up.^[xv] Thankfully, the funds were eventually returned (minus a £5,000 transaction fee).^[xvi] But we think the incident highlights wider problems with the NFT market: unauthorised trading and lack of consent from the originator.

NFTs are allegedly alluring to collectors because they carry digital authenticity certificates—they are ostensibly one of a kind. Hence their apparent value, with some seeing them as a cross between cryptocurrency and art or other kinds of memorabilia. The flaw, in our view: Although an NFT itself may be unique and un-copyable, that doesn’t guarantee its provenance. How do you know who made it?

We think there are two lessons here. New technology—and its implications—may be exciting, but its flashiness can also blind, in our view. We suggest not leaving your senses behind. Additionally, we think buyers should always be aware of their purchases’ terms and conditions, especially for high-priced items. Whilst we aren’t automatically anti-NFT, we think art (digital or otherwise) should be owned for its pleasure, not for the returns it might generate, which are speculative, depending on whims and fancy.

In our view, whether with seeming investment opportunities, financial communications or collecting fads, it is good to stay alert and be prepared: Forewarned is forearmed. Proper due diligence and keeping your wits about can save you a lot of headache—and money.