It seems a sad indictment of the human condition that even in this cynical 'seen it all before' age, greed still drives human beings to commit crimes and still makes victims of those criminals. Almost every month somewhere in the world there are arrests of individuals accused of creating massive Ponzi schemes or perpetrating other heartless investment frauds.
Familiar Patterns in Investment Fraud
The indictments are depressingly familiar and run along the lines of, "X set up a fake investment scheme which promised contributors a 60% return within eighteen months but really X was living a life of luxury on investors' money all of which has now gone."
Take Winning Express for example, a sports betting investment fund allegedly worth £27m which has collapsed taking its investors' money with it. It promised big returns, up to 27% per annum from what it described as 'sporting arbitrage.' It was run by a man called Graham Bradbury, who had previously been banned from being a company director for running a pyramid scheme. Come on, 27% growth a year? In this environment? Really?
Another example – Benjamin Wilson, a financial trader who swindled his friends and employees out of £22m through a bogus investment fund called SureInvest. He got seven years; investors will get about a third of their money back. One individual lost his retirement fund and has had to go back to work; another family lost their entire life savings.
What Sets Ponzi Schemes Apart?
Ponzi schemes are different from other forms of investment fraud insofar as they purport to be investments that will provide a return i.e., invest £X and get a return of Y% per year. In other words, they pretend to be an ongoing investment vehicle.
The trick to beating Ponzi schemes is to get in early and get out quick, before the money meant to provide a return for the later investors runs out, and the scheme collapses. In that way, as an investor, you get the benefit of the real initial high returns and are still able to cash out because later investors are still investing and providing the money to pay the returns. The trick is to spot the time before the scheme has peaked and the fund still will cash you out. Hang in too long and you go down with all the rest.
Sadly, very few people are able to do this. Most hang on 'just a little bit longer,' and down they go. So the best way of surviving a Ponzi scheme is not to join it in the first place. If it seems too good to be true...
The Rise of Other Investment Frauds
Investment fraud is now one of the fastest-growing financial crimes. Apart from Ponzi schemes, other forms of investment fraud just sell you something; colored diamonds are popular at the moment, as are fine wines and property. These just persuade you into buying something that, they say, will escalate in value over time and thus provide a significant return. In reality, what the victim buys is virtually worthless.
The main targets are older men because they are more likely to have savings and are presumably seen as being more gullible; maybe looking for a retirement nest egg or a big score to prove to their mates what a financial genius they are. The end result is invariably the same—loss and disappointment.
Case Study: The Eshpari Family
In 2015, five members of the Eshpari family were jailed for flogging so-called 'colored diamonds' to ignorant investors at several times their real value, thus funding the usual lavish lifestyle of cars, villas, and champagne. Nobody checked the actual diamonds they were buying.
The Cost of Hope and Vulnerability
Fraudsters say that if it wasn't for the greed of investors, they wouldn’t be able to succeed to the level they do, so it's basically their own fault—but this isn't the whole truth. Once revealed, the truths behind these kinds of frauds are quite depressing, not because they are fueled by greed, but more probably by the same kind of motivation that makes people buy lottery tickets every week: hope.
Hope is one of the strongest of human emotions and makes people vulnerable to get-rich-quick schemes. That is why S419 frauds—those emails from individuals with millions in locked bank accounts which only need your bank details to open them in return for a huge (and sadly fictional) wedge of cash—still catch victims.
How people like the Eshparis and Benjamin Wilson succeed in swindling money out of people who can ill afford to lose it is cold comfort, even as they are invariably locked up because investment fraud generally has a very short shelf life. If all your money has gone, the truth is to beware of the hope that this time it will all be OK; that the big returns are genuine, that the diamonds will be worth a lot of money, that what you are buying into is real gold and not fool's gold. Despite all the warnings, people still succumb to the blandishments of the snake oil salesmen and will continue to do so.
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