You Can't Cheat an Honest Man - James Walsh [38]
The court didn’t find these evasions convincing. It concluded that the PRA programs constituted an investment contract. Sarcastically, it added:
The Court continues to be puzzled about why neither defense counsel nor any of defendants’ witnesses has been able to explain how the velocity of money creates wealth. The Court regrets that Melvin Ford did not take the stand to more fully explain his novel theory.
Most Ponzi perps are immune to judicial irony, though. In June 1996, Ford—who ended up serving no jail time for the ILN debacle—was offering get-rich-quick seminars at a resort hotel in Antigua. He invited investors to make a fortune using some vague off-shore banking techniques.
Things You Can Do to Avoid Being Cheated
Many people think of investments and the investment community as a secret society with a language and rules of its own. Of course, it’s not. Ponzi perps simply take advantage of investor hesitation—and sell their shady investments against better judgment.
There are a number of things any investor can do to avoid being taken by a Ponzi perp peddling worthless investments. Before you put any money in an investment, do the following:
1) Get a prospectus and read it. A prospectus should contain details on where the money is going, who will be responsible for it, and—most important—what the risks are.
2) Understand that all investments entail some degree of risk. Ponzi perps like to say investments are guaranteed or government backed. But, in most cases, these terms don’t really mean much.
3) Don’t invest because a promoter is a member of your church, country club or ethnic group. Affinity groups are a big mechanism for promoting Ponzi schemes and various other shady investments.
4) Investigate the salesperson or broker—and the firm. Get the salesperson’s disciplinary history from state attorney general’s office or National Association of Securities Dealers (NASD).
5) Don’t put all your eggs in one basket. Scammers try to get victims to cash in their savings or retirement money, saying it’d be easier to have it all in one place. That’s usually not the case.
6) If you’ve already invested and are having trouble cashing out, watch out. Beware of brokers who cajole you into “rolling over” your money into a larger position.
And, perhaps most importantly, law enforcement officials always remind investors not to let shame or fear stop them from reporting fraud or abuse.
Case Study: Hedged Investments
In terms of capitalizing on geek chic, James Donahue was 20 years ahead of his time. In terms of getting prosecuted for Ponzi scheme larceny, his timing was perfect.
In 1974, shortly after the Chicago Board of Trade opened its Options Exchange, Donahue set to applying statistical theory and computer techniques to tracking and measuring trends in options. He was on the cutting edge of mathematics and finance; he wrote Options Strategies, one of the first textbooks on the subject, as well as a related newsletter during the mid-1970s.
In 1977, Donahue formed Hedged-Investments Associates, Inc. for the purpose of operating an investment fund known generally as Hedged Investments. Donahue attracted investors to the fund by claiming he had developed a sophisticated, computer-based strategy for trading in hedged securities options. He boasted reliable, annual returns of between 15 percent and 22 percent.
Donahue appealed to wealthy investors in the Denver area. He had an advanced degree in mathematics from Stanford. And he looked like an academic—tall, overweight and owlish. He wore business suits awkwardly but spoke in a calm, deliberate voice. His lifestyle spoke to reliability. He was an elder in his Presbyterian Church. He’d been married for 33 years. He lived in a nice, but unassuming, house in an upper-middle-class neighborhood.
In the late 1970s and early 1980s, Donahue’s reputation spread quietly around the Rocky Mountain states.
However, there was a dark side to the professorial analyst. Some investors said they suspected Donahue because of his reluctance to share information