Ponzi Schemes, Identity Thieves and NFT Fraud, Oh My!

Recently, the UK’s Financial Conduct Authority reported British consumer losses 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, totaling $3.4 billion in losses, up bigtime from 2019.^[ii] Notably, younger folks reported falling prey more often than older people (although the latter’s median loss was much higher). Financial ploys that make off with investors’ cash are, sadly, a constant. The particulars change, as do the tools employed, but the overarching themes basically hold true over time. 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 SEC uncovered an alleged Ponzi scheme that swindled over $110 million from more than 400 investors in 20 states. It seems just as Bernie Madoff’s mega-con collapsed more than a decade ago, another was taking off. While there isn’t anything particularly “innovative” about this investment scam, as Ponzis date back decades and regularly crop up, it suggests they remain all too prevalent despite society’s repeated opportunities to learn better.

Apparently, as the SEC complaint goes, one John J. Woods hatched the vehicle for his Ponzi—Horizon Private Equity—in 2007. But what really seemed to get it rolling was in 2008, when he bought an investment advisory firm, Southport Capital, from a wealthy Chattanooga, Tennessee 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.”^[iii]

While fraudsters often use flashy tactics and complex strategies to hoodwink investors into falling for something too good to be true, Woods and Horizon opted for an ever-changing grab bag. According to the SEC, clients heard by turns that it was an annuity, it invested in government bonds or collateralized mortgage obligations, it was low risk and diversified and that there were no costs or fees. 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 doesn’t mean it is safe—or that you can let your guard down—underscoring a few perennial defenses against investment fraud:

1. Don’t trust promises of returns that are too good to be true. At a time when market interest rates are closer to zero than 7%, any fixed-income investment that purports to return the latter involves significant risk. Investment returns don’t have to be astronomical to be sketchy. Steady ones are another tell.
2. Avoid unconventional approaches to investing that mix your money with other investors’, giving the manager easy access without checks and balances. In this case, critically, “Woods and Southport directed the Trust Company [an independent custodian] to deposit new investor funds to bank accounts in the name of Horizon.”^[iv] That isn’t a typical mutual fund arrangement, and it isn’t transparent. Your investments should be held in an account under your name at a reputable custodian, who sends you regular statements you can verify. It should always be accessible to you.
3. Beware “affinity marketing,” which relies on personal connections rather than investment experience and audited performance records to drum up business. While 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.^[v] If they can’t plainly explain how they are compensated, what they invest in and list their underlying holdings, then it is better to walk away. If your advisory firm changes hands and the new guard starts flogging a fund you have never heard of and bizarre custodial structures, it is time to be extra-skeptical.

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. 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. Modern-day pickpockets, in disguise, call unsuspecting account holders—who may be new to internet banking and two-factor authentication—request their passcode and use it to make fraudulent purchases.

How do they get victims to divulge such sensitive information? By gaining their trust and using scare tactics. The common method: 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, is to never give away your personal information over the phone (or email), much less bank account identification and any password or passcode protections. The key to this, in the moment, is to recognize when someone is trying to take advantage of you—especially when they put you in a vulnerable position to shortcut your natural skepticism.

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 (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 recognize 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 guerilla-stunt artist Banksy. It wasn’t. 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. This one was actually marketed from Banksy’s website, via a page the scammer had somehow set up. Thankfully, the funds were eventually returned (minus a £5,000 transaction fee). But the incident highlights wider problems with the NFT market: unauthorized trading and lack of consent from the originator.

NFTs are alluring to collectors because they provide cryptographically secure authenticity in a manner similar to cryptocurrencies—they are one of a kind. Hence, their apparent value, with people seeing them as a cross between cryptocoins and art or other kinds of memorabilia. The flaw: Although an NFT itself may be unique and un-copyable, that doesn’t guarantee its provenance. How do you know who made it?

We see two lessons here. New technology—and its implications—are inherently exciting, but their flashiness can also blind. Don’t leave your senses behind. Additionally, as always, buyer beware, especially when making a high-priced purchase. While 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 and depend on whims and fancy.

So whether with seeming investment opportunities, financial communications or collecting fads, 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.