The Sneeze: Guide to Avoiding Illegitimate Investments

photo credit: iStockphoto

photo credit: iStockphoto

Elaine and George Butcher, a couple in their late 60s, live outside of Spokane, Washington. Elaine is a retired teacher and her husband George, a retired principal. When George is diagnosed with terminal cancer he suddenly realizes he doesn’t have enough money to provide for Elaine after his death.

During his weekly chemotherapy treatments he confides in his doctor that his investments are not making enough money to leave behind anything substantial for his wife.  Dr. Lewis mentions he is investing in a company called Resource Development International (“RDI”) that is providing guaranteed returns of 6% per month. Desperate to increase his nest egg, George jumps at the opportunity.  The doctor says he will have his broker give him a call.

The next evening, Gary Roberts, an insurance broker in Spokane, meets the Butchers at their home. They sit around the kitchen table and Gary says he offers only his most affluent and aggressive investors the chance to invest in RDI.  He says the minimum investment is $100,000 and interest is guaranteed at 6% per month.  Gary hands the Butchers a booklet about the investment and elaborately and confusingly explains their investment will be pooled with other investments until $12 million is raised and that $12 million will be deposited into foreign banks and transferred between banks as collateral for various loans that will generate enough interest to pay investors the guaranteed return.

This discussion makes Elaine very nervous.  The minimum investment of $100,000 is nearly half of their entire savings and the process is too complicated for her to understand.  She prays for a sign they should make the investment. Just then the broker lets out a huge sneeze. This was the sign!

With the affirming sneeze from Gary, the Butchers invest $100,000 in RDI. One month later the Butchers receive a check from RDI for $6,000 and a statement showing their principal investment of $100,000. George and Elaine celebrate their good fortune.

For the next 3 months, just like clockwork, the Butchers receive their monthly check for $6,000. As his health declines, George decides he needs to put as much money as possible into the RDI program to leave Elaine a sufficient nest egg. Without talking to Elaine, George borrows as much as he can on their house and withdrew nearly all of their savings to put together another $400,000 to invest in RDI.  George calls Gary and finalizes the investment. With $500,000 now invested in RDI, George expects an interest check each month of $30,000.

Thirty days later George anxiously awaits receipt of his check.  This time, however, the check doesn’t arrive. It never will. The Butchers just invested nearly every penny they owned into one of the largest Ponzi schemes in the State of Washington. George Butcher dies shortly after the SEC shut down RDI. Elaine Butcher is left with nothing, loses her home, returns to work as a substitute teacher, and has to sort through the RDI litigation in hopes of getting at least some of her investment returned from the Receiver who seized and liquidated all of the assets of RDI and its officers.

HOW TO AVOID INVESTING IN A PONZI SCHEME:

Any one of the following warnings, if observed by the Butchers, would have likely saved them from losing their life’s savings in a Ponzi scheme:

  1. If the investment is too good to be true, chances are it is not legitimate.  A guaranteed return of 6% per month or a 72% annual return is entirely inconsistent in a market where the only guaranteed returns are generally certificates of deposit at usually less than 1% interest per year.  “One thing we learned from the Madoff case is that when you have a firm with unusual performance that is very steady for a long period of time, while their peers are experiencing volatility, that is a red flag” said Carlo di Florio, director of the Office of Compliance Inspections and Examinations at the U.S. Securities and Exchange Commission.
  2. Make sure you understand how the investment works and how you earn returns on your money.  Ponzi schemers often make the explanation of the investment so complicated that investors out of pride won’t ask questions in fear they might be considered ignorant.
  3. Don’t rely solely on intuition or your gut instinct.  In many instances investors in a Ponzi scheme are solicited by a trusted friend or family member.  This relationship gives the investor the comfort and confidence to make the investment. The person soliciting the investment, however, may not know it is a Ponzi scheme.  Indeed, he may be a solid believer in what he is soliciting.
  4. Consult with your attorney, accountant, or an independent financial advisor before making the investment.  Ponzi schemers hate for investors to seek advice from others.  In fact, they often tell potential investors the opportunity is “confidential” and they are not allowed to discuss it with a third party.  Or, they may even say that if you ask a banker about the mechanism for making money they will deny it exists because it is a secret only available to the extremely wealthy.

Kelly Crawford has extensive experience in receiverships and has served as a Receiver in a number of significant cases involving Ponzi schemes brought by the SEC and the U.S. Commodity Futures Trading Commission. The foregoing is a true story from a receivership in which Mr. Crawford represented the Receiver.  The names of the investors and broker were changed. 

Categories: Fraud, Ponzi schemes

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