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


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

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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 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.
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Product Details

  • ISBN-13: 9780814417515
  • Publisher: AMACOM
  • Publication date: 10/25/2011
  • Sold by: Barnes & Noble
  • Format: eBook
  • Edition description: 1
  • Edition number: 1
  • Pages: 256
  • File size: 2 MB

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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Read an Excerpt

The Vigilant INVESTOR

A Former SEC Enforcer Reveals How to Fraud-Proof Your Investments
By Pat Huddleston


Copyright © 2012 Pat Huddleston II
All right reserved.

ISBN: 978-0-8144-1751-5

Chapter One

Vigilant or Vigilante?

Protecting Your Investments in the Age of Fraud

Know thyself

—The Oracle at Delphi

He who trusts himself is a fool, but he who walks in wisdom keeps safe.

—Proverbs 28:26

Roland Koenig is 76 years old. He lives in Traunstein, Germany. Roland's wife, Sieglinde, is 81. She does not live with Roland, but she visits him as often as her arthritis allows.

Roland is in prison. If he survives his prison stretch, he will walk free in 2015 at the age of 81. When he earns time in the prison yard, Roland gets to see his friend Willy Dehmer, who entered prison with him a year and a half ago. Their path to prison made international news, and their story resonates with the millions of investors who fall victim to financial scams every year.

The Federal Bureau of Investigation (FBI) says that Americans lose $40 billion to investment fraud each year. My experience tells me that the total is much higher than that and that American losses are only a small fraction of the worldwide totals.

Despite our unprecedented access to information, the problem is only getting worse—much worse. Something is happening that access to more information by itself cannot cure. We will discover what that something is and learn how we can make ourselves, and those who count on us, safer by adding—of all things—an accurate mirror to our investment toolbox.

The Geritol Gang

In the early 1990s, the Koenigs, Dehmer, and their friends Gerald and Iris Fell traveled from their homes in Germany to vacation together in Naples, Florida. That's where they met investment adviser Jim Amburn and learned how much they had in common with him.

The son of a German mother and an American G.I., Amburn was born in Germany and lived there until he was 10, when he moved to the United States. He studied economics in college and worked on Wall Street for a decade before moving to Florida to open an investment advisory business called Digital Global Net USA, Inc. Amburn still had a home in Speyer, Germany, near the southwestern border with France.

A friendship blossomed. In 1997, when the Koenigs decided to buy a vacation home in Aventura, Florida, Amburn helped them buy it. When the Koenigs and their friends traveled there, Amburn made the two-hour drive across Alligator Alley to pay them a visit. It seemed only natural that they would say yes when Amburn proposed helping them invest their retirement savings.

According to testimony in the trial that sent Roland Koenig to prison, Amburn told the Koenigs and their friends that he could earn them 18 percent per year through a "money fund" tied to the real estate market. They believed him and handed over a total of $3.2 million.

At first, the German retirees were pleased with Amburn's management. The interest checks from Amburn arrived right on time ... until they didn't. Amburn ultimately told his German friends that all of their money had been lost, a casualty of the subprime mortgage collapse.

In the summer of 2008, Amburn was staying at his home in Speyer. Returning from the local pub one day, he walked into an ambush at his front door. Roland Koenig and his friends were there. They talked their way into Amburn's house by saying that they wanted to discuss their investments. Perhaps hoping to pacify the group, Amburn invited them in. At Roland's signal, the group attacked Amburn, knocked him down, and beat him with their walkers. The senior citizens used duct tape to bind Amburn, stopping several times to catch their breath. When they were finished, Amburn looked mummified and was certain that he was destined for the fate of the pharaohs.

The Geritol Gang, as the press called them, consisted of Roland; Sieglinde; Willy Dehmer (61 years old); Gerald Fell (68 years old); and his wife, Iris (64 years old). The gang put Amburn in a box that Roland had built for the occasion. They used a hand truck to wheel Amburn to an Audi 8 sedan, loaded him into the trunk, and began a 300-mile trek to the Koenigs' home on the shores of Lake Chiemsee in Bavaria. The gang stopped for gas once and opened the box, perhaps to make sure that their captive was still alive. Amburn, who had worked himself partially loose from his bonds, attempted to escape, earning himself a beating that broke two of his ribs. The gang stuffed him back into the box and continued the journey.

What awaited Amburn at the house on the lake gave him little hope that he would survive the ordeal. In the basement of the house were a metal cot, to which he was chained, and a portable toilet. According to Amburn's testimony at the trial, the gang burned him with cigarettes, beat him with a chair leg, and threatened him with a visit from the Russian mafia, all the while demanding that he return the money that they had entrusted to him. He repeated his claim that it had all been lost in the subprime crash. The gang did not believe him.

After more than two days in the dungeon, Amburn hatched a plan. He told the gang that he could wire money from a Swiss bank to their accounts if they would give him access to a fax machine. The gang told Amburn to write out the instructions for the wire transfers, which he did. He then added the plea "CALL POLICE" in the written instructions. Whether because of their bad eyesight or the spelling of the German word for policy (p-o-l-i-c-e), the kidnappers did not notice Amburn's ploy. They faxed the phony instructions to Credit Suisse. Amburn had no money there, but he prayed that someone would see his message. Someone did.

Convinced that their captive had finally seen the futility of denying that he could return their money, the gang allowed him a smoke break in the walled-in courtyard behind the house. A thunderstorm was brewing as Amburn, stripped to his underpants, smoked a cigarette and worried that no one at the bank would notice his plea for help. As the storm broke, dropping a curtain of rain between him and the elderly sentinels watching him from inside the house, Amburn's desperation overtook him. He gathered his remaining strength and scrambled over the brick wall. He made his way to the road in front of the house and began running toward town, screaming as he went.

Realizing that they could not catch a 57-year-old with several yards' head start—walkers being good for balance and for bludgeoning investment advisers, but a serious hindrance to speed—the gang piled into the Audi and pursued Amburn up the road, yelling out the windows that they had caught the man burglarizing their home. A pair of neighbors knocked him down and pinned him to the road until the gang could bind him again and stuff him back into the car. Amburn testified at the trial that the escape attempt earned him another beating when the gang got him back to the makeshift dungeon.

Tipped off by bankers at Credit Suisse, 40 German police officers in commando gear descended on the house and freed Amburn, then had to call a doctor to help the gang members into police vans because of their various infirmities. Amburn's ordeal had lasted four days.

A judge in Traunstein, Bavaria, sentenced Roland to six years in prison. Willy Dehmer received four years. Sieglinde got 21 months, and Iris Fell 18 months, but the judge suspended their sentences. Gerald Fell was too ill to stand trial. He will be tried later if he ever recovers.

As of this writing, Amburn is under investigation. Whether he considers that investigation more humiliating than having his can kicked by slow-moving, arthritic senior citizens, one of whom had exceeded her actuarial life span, only he can say.

Unless you have lost your life savings to fraud or to a reckless or incompetent financial adviser, you cannot appreciate the desperation that grips people who learn that the product of their hard work and diligent saving is suddenly gone. Having spoken to hundreds of such people, I can tell you that it is the rare person among them who does not at least consider extracting vigilante justice from the individual who caused the loss. The reversal of financial fortunes hits like a physical impact, like a spine-splintering highway collision that alters the trajectory of one or more lives.

Among the tragedies wrapped up in the wreckage is that the collision was avoidable. Although victims sometimes console themselves with the idea that their situation was "the perfect storm," that there was nothing that they could have done differently to avoid the scam, such is not the case.

To be fair to those investors, avoiding these life-altering financial collisions is not nearly as easy as those who view it from the sidelines think as they comfort themselves with the thought, "I'd never have fallen for that." The truth is that almost every human being in identical circumstances would have fallen for it. Believing otherwise is an invitation to be proven wrong in a devastating and humiliating fashion.

As the story of the Geritol Gang illustrates, attempts at vigilante justice always end badly. What works instead is preinvestment vigilance. And that vigilance must begin with an understanding of the psychological and neurological factors—common to all healthy humans—that make us all so susceptible to losing our nest eggs. Until we understand that scam victims are not a genetically deficient subset of extraordinarily gullible and/or greedy rubes, we cannot become the vigilant investors who reap the benefits of hard work and careful saving and pass wealth on to the next generation.

"That Could Never Happen to Me"

Imagine that you open the newspaper, or your favorite news web site, this morning and read that a group of 300 senior citizens in Nebraska have lost a total of $100 million to a phony certificate of deposit scam. You read the details about the scam operator's lavish lifestyle and previous run-ins with securities regulators in Iowa, Kansas, and South Dakota; about the 10 percent rate of return that he guaranteed; and about how he prepared phony account statements to lull his victims into believing that their money was safe and sound. What would be your initial reactions to that story? Write them down.

Now check the list. Somewhere on that list is a reaction that blames the victims. You might not come right out and call them "gullible," "stupid," or "greedy," but you have at least some sense that through their negligence the victims were contributors to their own financial ruin. We see the same phenomenon when we read about a tragedy involving a child. Among our first reactions is, "Where were the parents?" Is that not so?

Do you see what is happening? Very quickly, we begin to focus on the victims and what they did or failed to do that contributed to their downfall. Give yourself some credit; the questions about what the victims could have done to protect their nest eggs are valid. Answering those questions is what this book is about. But what I want you to notice is how quickly the thought occurs to you. Why is that?

We have a hardwired defensive reaction to stories about tragedy. Our minds automatically work to distance us from the victims as a way of protecting us from the painful contemplation of what it would be like to be in the victims' shoes. We hate feeling vulnerable. So we mentally distinguish ourselves from the group that is feeling the pain of the tragedy. The unspoken subtitle to "I'd never have fallen for that" or "Where were the parents?" is, "That could never happen to me."

"Too Smart to Fall for It"

Another unspoken reaction to learning of the tragedy of a stolen nest egg is, "I'm too smart to fall for that." Those with higher education, white-collar jobs, substantial wealth, and/or investment experience are especially prone to that very dangerous thought.

Before they invested with Bernard Madoff, the people whom he preyed upon had lost more money in their collective couch cushions than I will make in the next two years. They were high achievers who had combined intelligence, education, and hard work to provide themselves with very comfortable circumstances. Before they met Bernie Madoff, they would have judged themselves the least likely people in the world to lose money to an investment fraud. And yet, many of them lost everything.

So impressive were Madoff 's victims that, if you could move past your visceral reaction to Madoff, you might even be tempted to feel a kind of disgusted admiration for his ability to pluck such difficult pigeons. How persuasive must he have been to convince people who were that smart—corporate titans and advisers to America's wealthiest people—to invest with him? Those of us in the investor protection business, though, know that Madoff 's "sophisticated" victims were actually low-hanging fruit, easy prey, the $100 question on Who Wants to Be a Millionaire?

In my time at the U.S. Securities and Exchange Commission (SEC) in Atlanta, we used to say that if you found an investment that more than two medical doctors had invested in, it was definitely a scam—they fall for scams that often. We worked on a case in which an astronaut—literally a rocket scientist—lost hundreds of thousands of dollars. And, if you gathered together all the Ph.D.s, MBAs, DDSs, CPAs, attorneys, and other college graduates we talked to who had lost six figures to a scam, you could not stuff them all into Ted Turner's biggest house.

What is it about successful, well-educated people, then, that leads them to fall for investment scams at least as often as the average Joe? No doubt, scam artists target them more often, because, as Willie Sutton said, "That's where the money is." But, even adjusting for income, well-educated, financially savvy investors fall for scams more often than those with less financial knowledge.

Pride Goeth Before ...

The problem is our pride—not the kind of pride we are expressing when we tell a family member or friend, "I am proud of you," nor the kind we feel at hailing from a particular country, state, school, or team. The kind of pride we mean is the kind we describe down south as "putting on airs," the kind that makes us feel puffed up with the thought that we are smarter, better looking, more insightful, and so on than the next guy, and that makes us hate to admit that we are wrong.

To be sure, self-confidence is important to success. No one who walks around convinced that he is an idiot will go very far. But there is an imperceptible line between self-confidence, which is healthy, and hubris (overbearing pride or presumption), which is deadly. The gravitational pull on the hubris side of that line is strong. The closer we come to it, the less likely we are to resist its pull. The scam artist's modus operandi always includes pushing prospective marks closer to that line.

The pride attack is subtle and effective, but it requires very little work on the part of the scam artist; the mark does all of the heavy lifting. Whether the amount of the investment is $1 million or $10,000, the scam artist will feign an assumption that you have the education and experience to know the definition of all the terms she uses and to understand how all the moving parts of the investment work together to generate an attractive return. The scamster knows that, being human, you will not want to make any statement that might be translated as, "I am not that smart," especially when you think you ought to know what the communicator is talking about.


Excerpted from The Vigilant INVESTOR by Pat Huddleston Copyright © 2012 by Pat Huddleston II. Excerpted by permission of AMACOM. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents


PART 1: The Wide World of Fraud: First Steps and Advanced Tactics on the Path to Vigilant Investing....................9
1. Vigilant or Vigilante? Protecting Your Investments in the Age of Fraud....................11
2. The Posse and the Prey: The Investment Cops and the Scam Artists They Pursue....................33
3. Rich Man, Poor Man: An Investment Scam for Every Economic Bracket....................59
4. The Phantom Factory and the Origami Airline: Offering Frauds, Pump and Dumps, and Why You Can't Believe Your Eyes....................81
5. Affinity Fraud and the Evil Twin: How Someone Who Looks a Lot Like You Is Plotting to Take Your Nest Egg....................97
6. Only Amateurs Make It Sound Too Good to Be True: Tricks of the Trade and the Future of Financial Fraud....................113
PART 2: The Securities Industry: Hunting the Wolf with the Million-Dollar Smile....................137
7. Truth, Lies, and "Why Don't They Supervise?" Inside Boiler Rooms and Brokerage Firms....................139
8. Managing Mavericks: Knowing How Compliance Systems Work Can Help You Protect Your Nest Egg....................157
9. Sales Scripts, Bullets, and the One-Two Punch: A Peek into the Stockbrokers' Bag of Tricks....................173
10. Variable Annuities: Bells, Whistles, and Porcine Cosmetics....................189
11. Making Sense of Alphabet Soup: RIAs, CFAs, CFPs, and Your Friendly Neighborhood Insurance Agent....................207
12. Low-Hanging Fruit: Seniors, the Sick, and the Solution....................225
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Sort by: Showing all of 7 Customer Reviews
  • Posted October 14, 2011

    Highly Recommended for anyone that invests any amount of money

    The beauty of The Vigilant Investor is its simplicity (not alot of stock broker verbiage)The sports analogies that Pat Huddleston uses throughought keep the book interesting from cover to cover. My favorite part was the section having to do with why very intelligent people and those that are educated investors are likely to get bilked. Indeed it is scary to see how I could become a victim in a matter of minutes. I now know what questions must be answered before I invest a dime!

    2 out of 2 people found this review helpful.

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  • Posted October 8, 2011

    Very highly recommended

    This is required reading for anyone who an interest in protecting their hard earned nest other words- everyone. Not only was the information that the author provides very useful in detecting and avioding the potetial scam artists out there, it was actually really entertaining reading! I rest a bit easier knowing that there are things that i can proactively do to make sure that my family's future is in good hands thanks to this book.

    2 out of 2 people found this review helpful.

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  • Posted September 16, 2011

    I Also Recommend:

    Great book

    Received my book early. Couldn't put it down. Full of great stories that translate into lessons about how to protect yourself from fraud. Author lives close by and agreed to sign it for me- how awesome is that! Will recommend to friends and family.

    2 out of 2 people found this review helpful.

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  • Posted October 6, 2011

    Memorable and valuable book.

    The Vigilant Investor is an entertaining read, rich in humor, intrigue and spellbinding characters. Most importantly it is a book that provides information and protection to every potential or existing investor whether sophisticated or novice, whether individual or institution. Not reading this book can cost you big money:reading it can save you misery and make you a valued resource to both family and friends.

    1 out of 1 people found this review helpful.

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  • Posted April 13, 2012

    This is a very good book for anyone who is considering how they

    This is a very good book for anyone who is considering how they should approach building thier nest egg. Author uses many good examples of real life investors who mislead thier clients and as a result helps expose the warning signs of unscrupulous behavior. I especailly like the fact that it is not written in complicated legal terminology and is an entertaining read.

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  • Anonymous

    Posted April 13, 2012

    Great Read - Valuable Information

    With stories like the one involving Madoff in the news everywhere, there has never been a more critical time for protecting a nest egg. In "The Vigilant Investor", Pat does a great job in making the reader aware of the multitude of scams and schemes that could put our investments in jeopardy daily. He uses real world examples to illustrate his points and gives valuable advice on how avoid falling victim to some sort of fraud. Admittedly, when I began reading this book, I exected something along the lines of a college textbook - lots of information and a slow read. I could not have been more wrong. Pat's style of writing makes this read more like a mystery novel than just a source of information.

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  • Anonymous

    Posted September 21, 2011

    No text was provided for this review.

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