Investor Fraud - Anatomy of a Con - Identifying a Ponzi Scheme and Scam Artists - Part I of III

This series of three articles is a how-to-guide in identifying and avoiding con men, Ponzi schemes and some basic steps that may be taken in helping clients and family members that are victims of financial fraud.

I'm in intellectual property and transactional attorney based in Seattle, Washington. In my representation of both corporate clients and individuals, I've encountered and debunked more than a few con men. Modern day snake oil salesmen pedaling get rich quick schemes. Some were successful CEO's swindling their own shareholders through elaborate Ponzi schemes; others were amoral individuals acting alone running less complex and ambitious scams.

This first of three articles will address how to help victims realize that they are victims: reconnecting them with reality so that they may become participants in their own financial recovery, and in bringing the con man that wronged them to justice. The second of three articles will focus upon identifying a con and its architect -- the confidence man behind the investor fraud. The third in this tripartite series of articles exploring the subject of con men, Ponzi schemes and their victims will be a real world case study of a present day financial fraud in action with its victims and their attorneys speaking out. You will be given a ringside seat to an active, ongoing con, its analysis and exposure, and the debunking and caging of the con man behind it. This truly is the best way to provide you, the reader, with insight into how a con is structured and executed. The topic is timely, given the contemporaneous, Wall Street Ponzi schemes of an epic magnitude as authored by Bernard Madoff, Allen Stanford and their ilk.

Let's begin, then, with an overview of how to throw a lifeline to clients, family members or friends that are currently caught up in the vortex of an ongoing financial scam. The current world recession is the perfect breeding ground for con men and financial fraud. Economic hard times always result in an increase in Ponzi schemes. People, desperate for a quick fix, are more susceptible to the con men that prey upon that vulnerability, offering false, get rich quick schemes. With the epidemic number of financial cons now in play in our society, it's important that we first focus on helping the victims of ongoing Ponzi schemes.

Here is the greatest challenge: simply getting the victim of a Ponzi scheme to acknowledge and accept that he is a victim. It would seem counterintuitive that this would be a challenge, but believe me it is. To understand why this is at the core of effectively helping the victim of financial fraud, you must understand the basic psychology that comes into play. This is the mindset you are up against: no one wants to believe they have been duped or outsmarted, particularly where money is involved. It's embarrassing. Ours is a culture, however unfair and superficial, where personal and professional success is monetarized. Winners and losers are often distinguished by the size of their respective bank accounts. This holds particularly true in business, the arena where Ponzi schemes occur. Another psychological barrier in getting one to acknowledge that they've been taken: accepting that one is the victim of investor fraud necessarily entails acceptance of monetary loss in a time when that is especially bitter medicine. The agony of coming to terms with this form of monetary loss transcends the pain of seeing the reflection of one outsmarted, duped and robbed in the mirror: this hapless person is confronted with the prospect of seeing that same reflection in the eyes of those they love most.

The core challenge, then, is how to compel the victim of financial fraud to acknowledge that they are a victim and participant in an ongoing Ponzi scheme, with all the personal and professional consequences that may entail. Sitting a victim down across from his attorney and telling him to cut ties with a con man is seldom sufficient or effective if not substantiated with exhaustive research and documentation on both the Ponzi scheme and the con man.

If the con man is accomplished in his dark arts, there has often been a literal brainwashing that occurs with his "mark". Rationale does not enter into the formula, so it's near impossible to appeal to the victim's sense of logic, as that has long since been fatally compromised . . . along with the victim's bank account. Con men are masters of social engineering, deceit, psychological and emotional manipulation. Depending upon how deep the victim has been drawn into the con, their perception of the relationship differs markedly from that of an objective person external to the con that has not been manipulated.

Compounding their detachment from reality, the investor is also victim of his own self-delusion. After parting with his money, the victim now has a vested interested in the success of the Ponzi scheme and works hard -- to his own detriment -- to convince himself of the venture's legitimacy and the legitimacy of its architect.

The formidable challenge of undoing this damage is very similar to the rigorous deprogramming administered to former cult members in helping them reconnect with family and reality. In order to successfully extract a victim from the deluded mindset and Svengali clutches of the confidence man, a sort of intervention is typically required, not unlike that technique used in confronting those with alcohol and drug abuse problems. Here, the intervention is more objective, impersonal and methodical but often just as messy as forcing an addict to acknowledge his demons.

Typically what is required for the deprogramming is thorough research and detailed documentation of the con man and his history defrauding past and present investors, as well as a meticulous and exacting dissection of the financial scam on paper. Armed with hard facts and extensive documentation, only then can the mark effectively be confronted and forced to acknowledge the existence of the Ponzi scheme and to accept that he is a victim: that continued involvement will only result in further entanglement and injury to himself, dependents and business associates.

If the con man is accomplished, there will not necessarily be a criminal history -- or even a history of civil suits by bilked investors. This makes it that much more imperative to perform an exhaustive background check of the con man and all known associates principal to the financial scam. Also necessary is a systematic breakdown and outline of the business model employed -- the bogus investment venture used to entrap unwitting marks. Depending upon the complexity of the con, this preparatory work can often take months by trained professionals: forensic accountants, transactional attorneys and skilled financial analysts.

An apt analogy would be the prosecution of a man for murder. It's rare that the prosecuting attorney is able to present a smoking gun to the jury of twelve men and women. Just as most murders are solved and convictions obtained through the careful collection, presentation and prosecution of circumstantial evidence to persuade a jury of a defendant's guilt, circumstantial evidence is more often than not the only way to prove a financial con.

This evidence is then best presented in a formal setting outside the mark's comfort zone. An accountant, lawyer or financial planner's office can serve this purpose. The material must then be laid out calmly but aggressively to the victim in order to peel away the distorted thought processes, impaired reasoning and altered reality instilled and nurtured by the con man to perpetuate the fraud. In short, the objective is to reconnect the victim with facts and logic. To restore his capacity for critical thought. To give the mark the tool kit he needs to attain a self-awareness of his predicament and the con man's exploitation.

Financial fraud takes many different forms, from Bernard Madoff Wall Street heists to the more innocuous multilevel marketing scams. Regardless of stripe, there are more common denominators than differences shared by these get rich quick schemes. In future articles, I will explore both.