The Vigilant Investor: A Former SEC Enforcer Reveals How to Fraud-Proof Your Investments

The Vigilant Investor: A Former SEC Enforcer Reveals How to Fraud-Proof Your Investments

by Pat Huddleston

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Making sound investments is tough enough without having to worry about unscrupulous financial advisers and outright frauds. But recently strengthened laws aren’t enough to stop the “professionals” intent on profiting from—or just plain stealing—your money.

As an Enforcement Branch Chief at the Securities and Exchange Commission, Pat


Making sound investments is tough enough without having to worry about unscrupulous financial advisers and outright frauds. But recently strengthened laws aren’t enough to stop the “professionals” intent on profiting from—or just plain stealing—your money.

As an Enforcement Branch Chief at the Securities and Exchange Commission, Pat Huddleston witnessed countless people lose their life savings to reckless stockbrokers and fraudulent schemes. Now an SEC-recommended Receiver and CEO of a securities and investment fraud investigation agency, Huddleston has intimate knowledge of how scam artists and bad brokers operate. In The Vigilant Investor, he explains WHY we fall for investment scams, HOW con artists play on our emotions, and WHAT we can do to protect ourselves from predators. With its unique look into the science of financial decision making, the book blows up the popular myths and simplistic “do’s and don’ts” of investing while sharing techniques anyone can use to perform due diligence even better than the “experts.”

With gripping stories of actual cases, Huddleston sheds light on the dark corners of the investment industry and teaches investors and professionals alike how to spot fraud and guard themselves against financial catastrophe.

Editorial Reviews

From the Publisher
"… how to protect oneself from unscrupulous scammers... good investment for readers seeking to protect their financial assets." —ALA Booklist

“A great addition to the bookshelf of any investor. Huddleston's examples help simplify these complex issues.” —Library Journal

“With the misdeeds of Bernie Madoff still fresh in our minds, this humorous yet insightful look at how to protect yourself from scams and con men is sure to be a hit.”—

“…belongs in the libraries of all investors everywhere. Not just filed away as a reference and resource, but read and read again….Highly recommended.” —

“…details more kinds of investment fraud than you could ever conjure up in your wildest imagination....both a compelling read and a cautionary tale. It’s well worth a look." —

"So how do you go about protecting yourself? Educate yourself, and here's an excellent starting point: It’s Pat Huddleston's book, The Vigilant Investor.” —The Retirement Plan blog

“Who better to fill us in on the best way to protect ourselves from all the hucksters, cheats and villains lurking in the investment world than Pat Huddleston…” —Better Investing

“…beautifully written, nicely edited and the author makes excellent point after excellent point, and—whew!—he details scams that make movies like The Sting come to life.” —Life Insurance Selling

“Before reading this book I wondered how so many people could fall for scams that seemed obvious…author shows that the scams aren’t as obvious as they seem.” —My Retirement blog

“I would be hard pressed to find another book that is as extensive and loaded with so many insightful examples concerning the day-to-day reality of the investment world…" —

"...educate readers on what they don't know about how brokerage firms operate and on the red flags they should look for…” —Pittsbugh Post Gazette

“...full of in-depth descriptions of investment scams, which are always fun, and also details dozens of quick and easy due-diligence tips.” Accounting Today

“As Bernie Madoff's Ponzi scheme made painfully clear, investment fraud can strike almost anyone. Which is what makes The Vigilant Investor a fascinating and valuable read.” —Wall Street Journal

“Another excellent book is The Vigilant Investor…Take some time to read and protect yourself. You won't regret it.” —Elliot Raphaelson, The Money Game column

Library Journal
Every year "Americans lose $40 billion…to investment fraud," an amount, Huddleston (CEO, Investor's Watchdog) argues, that is more than any agency can monitor. It's up to individual investors, then, to protect themselves and their investments by remaining on the lookout for con artists. Huddleston divides his discussion into two parts, the first focusing on the types of fraud one may encounter, and the second focusing specifically on the U.S. securities industry. With a variety of examples and stories of real people, he considers archetypal con artists and shows how investors can avoid their traps. Particularly valuable is the chapter that breaks down the alphabet soup of designations used by financial advisers and other money managers and details the obligations of these professionals to the investor. VERDICT A great addition to the bookshelf of any investor. Huddleston's examples help simplify these complex issues, and the "Due Diligence for the Vigilant" sections at the end of each chapter provide a quick summary and key takeaways for easy use.—Elizabeth Nelson, UOP Lib., Des Plaines, IL

Product Details

Publication date:
Product dimensions:
6.20(w) x 9.00(h) x 1.00(d)
Age Range:
18 Years

Read an Excerpt


In July 2006, I closed the door of my law office after saying good-bye to a 70-year-old man who had lost his life savings to a Ponzi scheme.

This retiree—a family patriarch who had saved for decades in hopes of paying for his grandchildren’s college educations—had come to me because he knew that I had been an Enforcement Branch Chief at the

U.S. Securities and Exchange Commission (SEC). He wanted me to help him get his nest egg back, but I couldn’t. The confidence man who had taken it had no liability insurance, and he had never worked for a brokerage firm that could have detected and prevented the scam.

The con man had spent this senior citizen’s nest egg, and many others’ a on homes, cars, expensive vacations, and phony ‘‘distribution’’

payments to earlier investors. I could have won this prospective client a multimillion-dollar civil judgment—including punitive damages and attorney’s fees—but we would never have collected a dime.

In more than two decades of protecting investors, both as an SEC

enforcer and as an attorney for investors, I’d had conversations like this one with hundreds of investors, from institutions to blue-collar retirees. It’s never fun, especially with seniors, who cannot rebuild their nest eggs through several more decades of work. Usually they try to remain stoic, but you can see them deflate and their minds wander to the painful practical implications of the bad news. The blood drains from their faces as they try to reconcile their image of themselves as smart and competent with the reality that a stranger has already spent the money that it took them decades to earn and save. Sometimes they shed tears of shame and humiliation, feeling more guilt in that moment than the people who defrauded them will feel in their entire lives.

I expected nothing more from the rest of the afternoon than I’d experienced all of the other times I’d given this kind of bad news: a lingering sadness. But this day was different. As I turned away from the door, a thought exploded into my head with lightning-strike power; I actually felt a physical impact. How long are you going to keep having these conversations before you do something to protect these people?

In that moment, Investor’s Watchdog, LLC, was born.

We began by building a database to hold information on stockbrokers a investment advisers, and scam artists nationwide. We added thousands of customer complaints that had been expunged from stockbrokers’ official regulatory rap sheets—not because the brokers were exonerated, but because the brokers made this a condition of settlement with their victims. We gathered information on actions against the horde of unregistered salespeople who operate off the regulatory grid. We put it all in the IW database.

Within days of launching Investor’sWatchdog, we saved a church in Arizona from losing its entire building fund to a con man who was operating under an assumed name. Since 2006, Investor’s Watchdog has investigated unregistered investments on three continents, including supposed luxury resorts on the Red Sea; investments in renovated hotels in the United Kingdom; private banks in Geneva, Switzerland;

and oil and gas projects in Texas.We’ve also investigated stockbrokers that the Financial Industry Regulatory Authority (FINRA) rates as perfectly clean but who have been the subject of so many customer complaints that no investor would ever use them if he knew the truth.

Shortly after opening Investor’s Watchdog, I received my first assignment as a court-appointed receiver in an SEC fraud case, cleaning up the mess from the collapse of an investment scam in South

Carolina. I’ve cleaned up that kind of mess in three SEC cases as of this writing (one involving an international hedge fund fraud), and two more for the Federal Trade Commission. That work has taken me all over the United States and beyond, closing down fraudulent operations, recovering assets from overseas, and pursuing litigation (against people who received investors’ funds or who contributed to the scam) to generate a fund from which to repay investors. Sometimes we’ve been able to pay back more than half of what was lost.

Other times, we’ve been able to return only nickels on the dollar.

Although our receivership work always produces far more for investors than it costs, we cannot make the victims whole. We can neither unscramble their nest eggs nor fully assuage the feelings of humiliation and misplaced guilt that grip them in the wake of their financial loss.

In 2008, hoping to reach more investors, I launched www.invest, where we cover the hundreds of financial scams that come to light every year. I write a new post every weekday, linking to a news story about the case and drawing lessons from it that can help others avoid a similar fate. Most days I have to choose from among several scams that have come to light in the previous 24 hours.

The FBI estimates that Americans lose $40 billion annually to investment fraud. That’s the equivalent of one Madoff-sized megafraud every single year. And the problem is only getting worse.

Despite access to innumerable resources published by regulators and consumer reporters on how to avoid scams, we are falling for them in record numbers. Why? There are three reasons. First, the pool of attractive victims is bigger. If there was ever a time to get into the investment fraud business, this is it. The first baby boomers began turning 65 in May 2011 and will turn 65 at the rate of 10,000 per day until 2030. As they retire, those boomers will move $2.5 trillion in assets from the relative safety of company-sponsored 401(k) accounts into self-directed accounts at brokerage firms, where they will be as vulnerable as a wounded rabbit in the forest.

Second, the world is getting smaller. Technology allows con men in Russia and Dubai to rob pension plans, business owners, baby boomers, and senior citizens in America, while American scamsters can return the favor, swindling investors wherever people speak


Finally, the advice we get from regulators and well-meaning consumer reporters is always dangerously incomplete. It fails to address key information that is emerging from those who study the science of decision making. That information explains why, despite all the warnings, we are so prone to fall victim to investment fraud and unethical brokers.

Contrary to almost universal belief, neither gullibility nor low intelligence is the problem. U.S. presidents, rocket scientists, Ph.D.s,

MBAs, CPAs, FBI special agents, lawyers, experts on gullibility, and more members of the American Medical Association than you could fit in the nearest major league stadium have been victimized by investment fraud. The real culprit behind the worsening epidemic is the human brain—specifically, the cognitive biases that come as default settings in every healthy mind. While they are helpful in other contexts a those biases skew how we view information in the investment context, leading us to trust people who have every intention of breaching that trust and leading us into shallow inquiries that we mistake for in-depth investigations. An investor who memorizes a complete list of helpful ‘‘dos and don’ts’’ without first appreciating the power of cognitive biases is like an NHL All-Star without his skates; he has impressive knowledge and talent without having the ability to put it to practical use.

And it isn’t only individual investors who fall victim to scamsters.

Underfunded pension plans, desperate for a rate of return that will bring them back into the black, fall prey to world-class con artists, as do endowments, school districts, and family offices. People who make decisions for institutional investors are more popular with scam artists than sweet tea at a barbecue.

The securities industry is as dirty as a plumber’s boots. Multimillion-dollar advertising budgets and the charisma and salesmanship of individual brokers keep most investors in an anesthetic fog, through which they cannot perceive a landscape that is strewn with mines and traps. The Vigilant Investor burns away that fog.We’ll tour an industry that is indifferent, at best, to the welfare of investors. This journey will equip you to protect yourself from characters who are determined to take as much of your money for themselves as possible.

Sir Arthur Conan Doyle understood that the ability to uncover carefully crafted and expertly concealed misconduct has everything to do with experience. In A Study in Scarlet, Sherlock Holmes explains,

‘‘There is a strong family resemblance about misdeeds, and if you have all the details of a thousand at your finger ends, it is odd if you cannot unravel the thousand and first.’’ What investors lack, and what they desperately need, are the details of the thousand misdeeds to which

Holmes refers. This book puts the details of many misdeeds at your finger ends to better enable you to unravel the many scams and unethical advisers that will target you over a lifetime of investing.

Because experience is the best teacher, those who have seen hundreds of scams and reckless brokers are best equipped to uncover a well-disguised ongoing scam or a broker who intends to feast on your savings. I’ve spoken to every type of investment criminal imaginable a from professional con artists to fund managers who began with good intentions, from highly functioning sociopaths to ineffectual bunglers a from those who flee the country when the jig is up to those who attempt to fake their own death. I’ve seen scams and unethical financial advisers up close from a unique combination of perspectives: SEC

enforcer, court-appointed receiver, attorney for investors, blogger on breaking scams, and founder and CEO of a professional due diligence company. I know how scams and unethical advisers begin, how they operate, what contributes to their longevity, and what tactics they use to ensnare individual and institutional investors alike. I know how to recognize scams and bad advisers that other investigators miss. This book is my way of equipping you to do likewise.

We’ve organized the book in two parts. Part 1 explores the wide world of investment fraud. It begins with an examination of cognitive biases and explains how to defuse them. We then look at several categories of scam artist, some of their favorite con games, and the advanced tactics that they use to pull off these games. Along the way a we give you advice that will protect you from getting conned. We

close Part 1 with a look into the future of investment fraud, where scams will be bigger, last longer, and be harder to spot.

Part 2 narrows the focus to the U.S. securities industry. We begin by introducing the investment cops and the limits of their power. We

then perform a harsh light-of-day examination of the usual suspects (stockbrokers, registered investment advisers, and insurance agents) a the duties they owe to investors, and how they often use investors as tools for their own enrichment. We also look at brokers who target the most vulnerable of investors, the elderly, and provide advice on how adult children can protect their elderly parents. We close the book with a vision of how vigilant investors can band together to cleanse the investing landscape as no investment cop ever can.

Each chapter uses actual examples of scamsters and brokers who swindled very bright, but not-yet-vigilant, investors.We provide guid-ance on how a vigilant investor should approach an investigation of those scams. We conclude each chapter with a section entitled ‘‘Due

Diligence for the Vigilant,’’ which sums up, in bulleted list form, the action items that will keep the vigilant investor clear of the characters and tricks that have cost so many so much.

As hard as they work and as dedicated as they are, regulators cannot keep you safe. Because it has more lobbying dollars than investors can ever contribute, the securities industry has been—and will always be—successful in keeping the investment cops severely understaffed and underfunded. Even causing a once-in-a-century financial crisis has not diminished the securities industry’s influence. The successful solution, therefore, to an epidemic that will rob institutional investors a baby boomers, and the elderly of more than $1 trillion over the coming generation cannot involve Congress and must be immune to the influence of lobbyists.

Where can we find such a solution? In your mirror. Using the tools you’ll find in here, you can do what no Congress or investment cop ever will. You can close down professional scams before they get off the ground. You can run unethical brokers out of the business. You can protect not only yourself and those you love, but countless others.

There is a path through the well-disguised traps and pitfalls that litter the investing landscape to a retirement full of the blessings that hard work and savings make possible. This book maps that path for all who are wise enough to follow it. Let’s go.

Meet the Author

PAT HUDDLESTON is CEO of Investor’s Watchdog LLC, an investment fraud investigation agency. He has been an SEC Enforcer, court-appointed Receiver, and investment attorney. A frequent guest on television and radio, he has been quoted in The New York Times, The Wall Street Journal, The Washington Post, USA Today, Kiplinger’s Personal Finance, Investment News, and many other publications.

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