Each year Americans lose billions of dollars to fraudulent activity.
The Madoffs Among Us shows you in graphic detail why and how people fall prey. Most important, it shows you how to easily identify the people who perpetrate these crimes and avoid their deceitful practices. Why do smart people fall for these cons? What are today's most common scams? And how can you avoid becoming a victim?
Many people abdicate their responsibility to participate in the investment process because they just don't know much about financial planning, and they rely upon an advisor. The Madoffs Among Us arms you with tangible and simple actions to protect your wealth, no matter its size. From the very first chapter, you will appreciate why good advisors are worth their weight in gold and bad advisors could cost you a fortune.
With uncertainty surrounding the potential repeal of some of the most important protections of the Dodd-Frank Act this book will become even more important.
The real-life examples of fraud are numerous and alarming, but The Madoffs Among Us gives you the concrete measures you can take to minimize the possibility of being ripped off.
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About the Author
William M. Francavilla is a Certified Financial Planner® with more than 30 years of experience in the financial services industry. He has worked as an investment advisor and professional trainer for several Fortune 500 companies, and retired from Legg Mason as senior vice president and director of corporate wealth management. Francavilla presently is a consultant to some of the most successful financial advisors and financial firms in the country. He speaks and writes to help clients and advisors better understand how best to succeed. His book is highly acclaimed by leaders in the financial industry.
Read an Excerpt
Pay Attention or Pay Dearly
"I've had a wonderful time, but this wasn't it."
— Groucho Marx
NHL great Bryan Berard is my new hero. Most people who are defrauded or scammed out of their savings either don't want to admit it or are too embarrassed to tell. Not Bryan. He lost about $3 million to a purported investment professional he met through a mutual friend. While Bryan was busy making money playing hockey, Phil Kenner was busy spending it. Kenner told Berard that he was making Hawaiian real estate purchases that would grow exponentially in value. Kenner had also defrauded a number of other NHL players as he became the broker to the pros.
According to Berard, "I was playing in Russia in 2009, and I started paying more attention, which I probably should have been doing earlier in my career, but I started paying attention to a lot of deals to do with Kenner and things weren't matching up."
Kenner and an accomplice, Tommy Constantine, were eventually convicted of wire fraud, wire-fraud conspiracy, and money-laundering conspiracy. Kenner and Constantine knew as much about playing hockey as Berard and several other professionals know about personal finances. "He [Kenner] knew when guys were playing hockey, we were concentrating on hockey," said Berard.
Kelly Currie, acting United States Attorney for the Eastern District of New York, is quoted as saying, "Driven by personal greed, Kenner and Constantine spent years lying to investors and stealing their money, and then attempted to conceal their fraud by repeatedly and brazenly avoiding responsibility, shifting blame and scapegoating others."
As impressive as Bryan Berard was on the ice, with 76 goals and 247 assists in 619 career games, what impresses me most are his courage, honesty, and resolve to warn other professional athletes about bad people who steal their wealth. If this were an isolated case of a pro athlete or public person getting scammed, we would all agree how unfortunate this was for the victim. But this is one of thousands of similar cases where people earn money plying their trade only for the funds to be absconded by bad guys.
In 2012, the Certified Planner Board of Standards conducted the Senior Financial Exploitation Study. The study revealed the following:
74% of investors may have purchased unsuitable products.
58% of advisors omitted important facts.
48% may have misrepresented an investment.
46% are guilty of negligence or lack of follow-up.
19% committed fraud with intent or lying.
It's actually the last point, indicting 19 percent of advisors, that concerns me most. I'm going to chalk up the previous (albeit alarming) findings to human behavior. Yes, financial advisors are human and might omit a fact or not follow up properly but to outright defraud? Unacceptable.
The information in this book, when utilized in conversations with advisors, will greatly minimize the probability of fraudulent activity. But it's not foolproof. Look at the following examples of people who should have known better or maybe were better equipped to uncover fraud because they have the advantage of attorneys and accountants presumably assisting their financial efforts.
How about Billy Joel, who lost $90 million? His wife Elizabeth's brother, Frank Weber, godfather to Joel's daughter, became his financial manager. Weber enriched himself at Billy Joel's expense by funding several of his own businesses, taking unauthorized loans. Weber also double-billed Joel for services rendered. Worst of all, he fabricated financial statements and convinced his client, Joel, that they were doing quite well. Readers will ask themselves, "How in the world did someone steal $90 million? Didn't someone as smart as Billy Joel suspect something was wrong?"
After several years, Billy Joel hired an attorney and accounting firm to do an investigative audit of his financial position. This effort resulted in the uncovering of one of the largest scams perpetrated upon any one individual. Joel trusted Frank Weber. Naturally one would trust a family member, especially one who probably swooned over one's baby girl. Weber knew the trust was high, and he also knew that this brilliant songwriter and performer probably knew very little about investments and finance. Subtlety and naïveté were able to rear their ugly heads and cause major financial mayhem. It wasn't until Joel introduced objectivity, experience, and expertise to the equation that naïveté gave way to truth. In retrospect, Billy Joel probably wishes that he had enlisted the support of his attorney and accountant much sooner as doing so would have saved him a fortune, but we are human, subject to human frailties and emotions. Like you and me, he chose to trust the subtle Frank Weber; after all, his specialty was earning millions of dollars, not investing it. Billy Joel was in the same position as all people who are conned, scammed, and defrauded. He was caught at the intersection of subtlety and naïveté. Billy Joel was very busy doing what he did best, composing and singing.
Robert De Niro became ensnared with a crooked art collector named Lawrence Salander. Salander stole more than $88 million from investors and art owners. This list included such notables as Robert De Niro and tennis professional John McEnroe. It seems Salander sold fifty pieces of artwork belonging to De Niro for a huge profit and kept the money to pay off his own debts. De Niro's father, Robert Sr., was the artist, and his son was very proud of his father's achievements; Robert Jr. would showcase his father's artwork around the world. He and so many others never imagined that Salander, a highly reputed art dealer, would ever betray them. Salander, currently serving time at a medium-security prison in New York, enjoyed a lavish lifestyle, one that he could hardly afford. So he simply stole art and sold it for his own profit. He finally pleaded guilty to thirty counts of grand larceny and fraud, having stolen more than $100 million of artwork. In a Barron's article, author Philip Boroff states, "There are lessons galore here, from the dangers of doing deals with 'friends' in a murky business you don't really understand, to the ease with which art dealers who have been to jail continue to practice their trade." Sounds like so many victims of Lawrence Salander found themselves at the same intersection as Billy Joel. "Pay attention or pay dearly" is more than just a catchy phrase. It is real, and real consequences follow anyone unfortunate enough to wade into an arrangement where subtlety and naïveté pervade.
Gordon Matthew Thomas Sumner (aka Sting) lost $9.8 million to his advisor of fifteen years, Keith Moore. Moore took the funds and invested them on various deals, including a chain of Indian restaurants in Australia, a scheme to convert Russian military aircraft into passenger planes, and development of an ecologically friendly gearbox. With the balance, Moore paid off his considerable debt. Sting claimed that his personal financial system, designed by Moore, involved 108 accounts and was hard to "get a handle on." Sting simply didn't have the time to pore over his investments, as he too was busy earning the money, not investing it. Interestingly enough, Moore had previously declared bankruptcy and had been disciplined three times for professional misconduct after clients levied complaints against him.
According to a study conducted by Mark Egan, Gregor Matvos, and Amit Seru entitled "The Market for Financial Advisor Misconduct," dated February 29, 2016, between the years 2005 and 2015 over 45,000 advisors were disciplined for misconduct. That figure works out to be 7 percent of the advisor population. What is especially alarming is that if the advisor was indeed terminated for his or her discretions, 44 percent were back working at another financial firm within one year. Is it any wonder why the Edelman Trust Barometer 2015 ranked financial advisors among the least trustworthy professionals in America? When one considers that over 650,000 advisors help manage more than $30 trillion and that 56 percent of Americans seek professional advisors, we better well be vigilant.
There are not hundreds of examples of people being defrauded. There are hundreds of thousands of ordinary Americans being conned and scammed each and every year. It's not only professional athletes and performers who are too busy earning lots of money to pay attention. It's you and me as well. Most Americans outside the financial industry are busy earning income and taking care of their families. They hire trusted advisors to help them grow their assets in the hope of retiring comfortably, bequeathing assets to heirs or charities, or simply funding education for children. Their business may be medicine, education, civil service, military, and many other disciplines. They don't have the time, interest, or expertise to engage in the day-to-day rigors of financial management. It is incumbent upon each and every person to be vigilant and participate to the extent they can in the financial process.
So are there constants? Are there warning signs? Are there measures that we can take to minimize the probability of being scammed? The answer is an unequivocal and resounding yes. But notice that I said "minimize the probability." This was quite deliberate because mine is not a foolproof system, and I don't believe one exists. This is merely an attempt to equip you, the consumer and investor, with tools to fortify and protect your wealth. Some of the individuals I will describe made the national headlines (similar to the aforementioned) and others were what I call the Madoffs next door. These are the truly sinister, as they prey upon the moms and pops of the world and take delight in spending other people's money.
The constants include the two pillars of deception: naïveté and subtlety. Trusting men and women like Berard, De Niro, Sting, Joel, and millions of others simply believe that the people who promise to deliver safety and high returns are noble, intelligent professionals. In reality, the bad people are often subtle financial sociopaths who feel no remorse while stealing the savings of so many, thus ruining their financial lives. Rather, they delight in their abilities to deceive people and feel that they (the investors) are so gullible, they deserve to lose their savings.
And we are all perfectly capable of losing money to others. Your humble author was victimized by a con game many years ago. I was convinced I was dealing with honest inventors who had a legitimate new product that would revolutionize automobile gas efficiency. Several thousand dollars later, I found out that it was a façade, and the principals of the company were convicted and imprisoned. Victims, such as me, say, "I never thought he would do such a thing." Of course — otherwise you and I would never have trusted the person in the first place.
When faced with the opportunity to buy an investment or other opportunity, we should ask ourselves the following two questions:
1. Do I know enough about this financial opportunity to make an educated and prudent decision?
2. Is this person who wants me to buy his or her opportunity too new to the business, too "salesy," or just too opinionated?
Maybe if I just ask for a referral from a friend who knows a financial advisor or has done business with him. His or her website seems to be so professional, they can't possibly be dishonest. He or she has impeccable credentials or investment history.
Permit me to remind you that the several people referenced thus far did just that. They were referred or impressed with the person whom they entrusted, and they were bitterly disappointed.
Please let me also remind you that the overwhelming majority of investment professionals are honest, caring professionals who genuinely do a stellar job for their clients. They are not sales focused, but rather solutions focused. With them reside what's great about the financial services industry. I have spent more than thirty years helping people reach their financial goals. And during my tenure many colleagues and I have made wrong decisions about investments or markets. But wrong decisions about investments are quite different from dishonest intentions. The point is, no one is impervious to market corrections or just plain bad decisions, but I'd rather make a bad deal with a good person than a good deal with a bad one. To the thousands of good advisors, I salute you and support you. You are making wonderful improvements in the lives of so many Americans as you solve their financial puzzles.
Investors should hire problem-solvers and not salespeople. When the advisor focuses on providing you with a solution to your stated problem (for example, retirement planning, funding education, making sure you are properly insured against risk, minimizing taxes, ensuring tax-advantaged bequeathing of estate assets), you're in good company. On the other hand, when you find yourself at a free luncheon or dinner at which an advisor has a single product designed to solve all your problems, or when you receive an unsolicited call from your or an unknown broker with a deal you can't ignore, watch out. Here is where you ask your two questions: Do I know enough about the investment, and do I know enough about the advisor? If you can't answer yes to both questions, step back.
In my study of people losing money, I've come to recognize that the bad guys perpetrate many services and businesses. It may be romance, charities, grandparents, or other family scams; home repair rip-off; health-care fraud; or investments. The bad guys know some things that you and I don't. They know that they can be most successful operating in an environment in which most people are inexperienced. They know charitable giving is almost always emotion driven. They know that greed and fear both sell. They know that by simply referencing something as scary as the Internal Revenue Service they've introduced fear to the inexperienced. They have become expert at using the Internet and obtaining people's Social Security numbers and credit card numbers. They know how to handle objections by giving the potential victim a sense of urgency. ("This offer will only be available until 5:00 this evening!") They are proficient at tugging at heartstrings, or appealing to one's greed and fear. They also know that their window of opportunity with any one person is limited. They may be running from town to town or state to state to keep ahead of the law. A quick sale is just that, and prudent consumers must ask themselves the aforementioned, "Do I know enough about this investment, and do I know the person trying to sell me?"
What about five of the greatest con artists in the history of the world? I call them the Infamous Five and describe their personas and crimes so as to advantage the reader. It's helpful to recall how Madoff, Ponzi, Law, Lay, and Ebbers each perpetrated their respective crimes. And perhaps by recognizing similar traits we can indeed stay one step ahead of the bad guys.
The Infamous Five
"O, what a tangled web we weave when we first practice to deceive."
— Sir Walter Scott
There are probably three divisions of Bad People. I submit that they can be considered infamous, famous, and the guy next door. I took license assigning these three designations choosing to classify them relative to either the extent of their deception or their professional status.
Ancient and certainly recent history provides us with examples of thousands of financial reprobates. It is important to understand personal aspects of these individuals as well as the ploys they've perpetrated upon unsuspecting but very willing "investors."
It is also important to understand that not all bad advisors conduct so-called Ponzi schemes. But these are the people who oftentimes pull off the truly outrageous and make large sums of illegal money by paying early investors with newly acquired money from later investors. It works until the perpetrator runs out of new investors. Just as a rapidly appreciating market compels ever more investors to chase returns, it's always the low man on the totem pole who loses most. These are the people who trusted the person, the market, or the government to solve their problems — and of course they are always the people who wind up losing their money.
Bernie Madoff was born in Queens, New York, in 1938, the son of Ralph and Sylvia Madoff. His parents had married during the Depression and struggled financially for many years. In the 1950s, Ralph became involved in finance, registering as a broker-dealer for a company he started, Gibraltar Securities. (Many have suggested that the company was a front for Ralph's unethical dealings.) Ralph, however, was not successful. After he failed to report the condition of his company's finances, the SEC (Securities and Exchange Commission) forced Ralph to close his business. The couple's house also had a $13,000 tax lien that went unpaid from 1956 until 1965.
Excerpted from "The Madoffs Among Us"
Copyright © 2018 William M. Francavilla, CFP.
Excerpted by permission of Red Wheel/Weiser, LLC.
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.
Table of Contents
Foreword James W. Brinkley 11
Introduction: Subtlety and Naïveté: The Twin Towers of Deception 15
Chapter 1 Pay Attention or Pay Dearly 21
Chapter 2 The Infamous Five 31
Chapter 3 The Madoffs Next Door 57
Chapter 4 Why So Many People Fall Prey 71
Chapter 5 The Top Six Scams in America Today 85
Chapter 6 Five Most Important Questions to Ask Your Financial Advisor 103
Chapter 7 Three Financial Advisors to Avoid 117
Chapter 8 The Seven Financial Concepts You Must Understand 135
Chapter 9 The Three Faceless Madoffs 171
Chapter 10 Fifty Financial Terms 185
Final Note 201
Chapter Notes 205
About the Author 223