Caution: Fraudsters Are Still Hard at Work

Some things make us happy when they are routinely in headlines, like great tennis matches and the drama of football season. But when it is a flurry of investor scams, that is the reverse. So it is disheartening to see that, in the last week alone, headlines brought us an unsealed indictment revealing the principal behind an alleged Ponzi scheme uncovered by Wall Street Journal reporting last year has been charged with securities and wire fraud. There is also a Florida man who was just charged for peddling fraudulent real estate investments. Rounding out the herd, prosecutors are reportedly investigating a company selling bogus tax breaks. Tragically, people continue falling for these schemes, losing piles of money in the process. So let us review these latest scams for their common threads and red flags.

We start with the operation the Journal brought to light: the tandem of Yield Wealth and Next Level Holdings. These affiliated outfits advertised “Mega High-Yield Term Deposits,” which they claimed could guarantee returns up to 15%, with principal and interest fully insured, an echo of R. Allen Stanford’s high-yield CDs in the early 2000s.^[i]

In this case, the accused claimed to generate high returns with no risk by securitizing Affordable Care Act insurance policies—think of a mortgage-backed security, only with health care policies generating the return instead of mortgage loans. The salespeople claimed these securities behaved like CDs and were fully guaranteed and insured by Lloyd’s of London, yet the fine print said they carried the possibility of “total loss.”^[ii] The few hundred people who signed up transferred their IRAs and other retirement plans to the operation’s affiliated brokerage, and when Next Level and Yield suspended operations late last year, they got slips of paper. That theoretically entitles them to the proceeds of their investments, but federal prosecutors allege the principal blew it on a lavish lifestyle. For now, the perpetrator is at-large, with US authorities pursuing his extradition, so we shall have to wait and see how it all plays out.

The case in Florida appears to be further along, with the suspect arrested and charged. Local news reports he “would solicit real estate investments through cash and bridge loans, and promised the victims a guaranteed return, which never happened.”^[iii] Instead, he made off with millions for his own personal use. Details are scant for now, with investigators not yet revealing how the alleged scammer accessed customers, but they confirmed the investigation started nearly two years ago.

Our third case is just an investigation, for now. But the Feds are looking into whether an Arkansas-based firm illegally sold non-existent tax credits. The firm claimed people could lower their tax bill by purchasing “tribal tax credits,” which would supposedly give individuals access to tax breaks intended to aid Native American tribes. But several customers have come forward, alleging they bought six or seven figures’ worth of credits, then discovered it was bogus. One, interviewed by The Wall Street Journal, claims the firm told him at the last minute that the credits weren’t available. Another alleged in a lawsuit “that they purchased $2.7 million in the tribal tax credits from the company. The couple said the IRS rejected the credits and assessed them $149,000 in penalties.”^[iv] Bloomberg conducted a separate investigation into this over the last few years.^[v] The upshot: A lot of people who sought to lower large tax bills using these “credits” found themselves with overdue tax bills. While the investigation continues, the IRS has stated these credits don’t actually exist.

If you are caught in a scam, there is a very real risk you will never get your money back. Even if the perpetrator is caught and convicted, any compensation the victims receive is usually a small fraction of what they lost and may take years to arrive. So it is paramount to avoid these things by knowing the red flags and doing some due diligence. Here are a few, which we have distilled from these cases and the timeless framework Fisher Investments founder and Executive Chairman Ken Fisher detailed in his classic book How to Smell a Rat.

1. Avoid anything that looks too good to be true.

    

   Guaranteed 15% returns and guaranteed real estate returns have something in common: There is no logical, legal way you would ever be able to get them in the real world. All investments carry risk, including the risk of loss. Returns are generally compensation for risk, with higher payouts going hand in hand with higher risk. Bank accounts and US Treasurys offer little return, in exchange for their low risk. Stocks have earned annualized returns of about 10% in the very long run, but it has always come with volatility and the risk of loss. Real estate, too, doesn’t go one way. Any security that claims it can guarantee a return far above stocks’ and insure against loss is selling a fairy tale.

   Now, tax credits differ slightly here in the sense they don’t include an unreasonably lofty return. But the idea you can easily defray a large tax bill—sometimes going so far as to say you could avoid paying any federal taxes at all—sings from a similar songbook and should be a sign to do deep due diligence.

    

2. Remember capital preservation and growth are mutually exclusive.

    

   No investment can target capital preservation and growth. True capital preservation means never losing money, ever—which means no volatility. And that means no growth. Anything that grows over time, by contrast, is subject to the risk of short-term declines—sometimes severe ones—which is not capital preservation. You can’t have your cake and eat it too.

    

3. Beware flashy tactics.

    

   A scrupulous investment professional should be able to explain in simple, logical terms why their investment makes money. There should be no smoke and mirrors, no exotic or weird securities, no jargon. It should be simple and transparent and the sort of thing you can confirm with a simple Internet search. Like, if an adviser says they can build a portfolio that targets your investment goals using stocks and bonds because the risk and return profile of these securities is a good match for your needs and the length of time you plan to invest, that is transparent and simple. If they start banging on about investing in insurance policies and using bridge loans to get in on hot real estate—or if they are offering you tax breaks that you quite plainly wouldn’t qualify for based on the inherent complexity in the tax code—there is probably something bad going on.

    

4. Do not give custody of your assets to people advising on these hot investments.

    

   Of the three, we know for sure that only Yield Wealth/Next Level was outright taking custody of client assets. We see a high likelihood the Florida fellow was, as well, given this would generally be necessary for him to abscond with them.

   Shady financiers can’t steal your money if you don’t give them access to it. If someone says you must give them custody of your money in order to access your investment, that is a bad sign. A reputable outfit will be able to work with a third-party brokerage firm to custody your account, ensuring you keep full ownership of your assets in your name.

    

5. Always do your due diligence.

In all three cases, Internet searches could have given folks the information needed to stay away. Yield Wealth’s principal was barred for life from the securities industry in 2004 and fined by Oregon state regulators “for allegedly stealing more than $140,000 from an elderly customer with dementia.”^[vi] That information is a matter of public record, accessible in FINRA’s BrokerCheck application. The alleged Florida scammer was named as one of three perpetrators in an SEC ruling on a fraudulent investment scheme in 2001.^[vii] An Internet search turned that ruling up pretty easily. And while the US tax code is notoriously complicated, it is pretty easy to find out if a tax credit exists. Ultimately, even if you can’t locate something on your own, when something seems so impossibly great, get a second opinion!

A lot of this may seem blindingly obvious. But even after Bernie Madoff’s high-profile fraud and downfall, people sadly keep falling for these things. Yet the tricks don’t ever seem to change, so if you can drill these tips into your head, you will hopefully be armed against the ne’er-do-wells who want to take your life savings.