By: Roger J. Buffington
Investment fraud is a serious problem in California in common with many other states. It is a fact of life that for various reasons Southern California in particular has long been a hotbed of investment fraud. Buffington Law Firm’s business litigation attorneys have handled many cases concerning this type of lawsuit. In this brief Blog article we will discuss some basic facts about investment fraud.
As cynical as it may sound, all investment fraud schemes share a couple of basic features. Essentially, the fraud perpetrator takes the investor’s money on a pretext, and then eventually refuses to return it. That is the basic simple formula of almost all investment fraud schemes. Sometimes the fraud is immediately apparent to the victim after he or she has parted with the money; the investor quickly sees that the perpetrator is dishonoring whatever agreement he or she made with the investor. More commonly, for a time the investor believes (or wants to believe) that all is well. Sometimes the illusion that all is going as promised is supported by a pattern whereby the fraudulent scheme returns small amounts back to the investor which the investor believes represents legitimate returns on his or her investment. In reality it will turn out that either the fraud perpetrator is simply giving back small, de minimus amounts of the investor’s own money to the investor, or in the classic Ponzi Scheme the perpetrator pays earlier investors with money that he or she obtained from newer investors. In one case that our Firm was involved in the investors had walked around for years or longer believing that they owned million-dollar sized investment accounts. In reality, no one owned anything and the perpetrator was enjoying the money by splurging on a fleet of cars, luxury condominiums in Aspen, luxury ocean liner cruises, and the like. Eventually the system comes crashing down when someone demands their investment be returned and the perpetrator does not (and often cannot) make good on the demand. In all of these cases the perpetrator is not actually creating actual profits that go to pay back the investor — the investment is a house of cards not supported by an actual successful venture by the perpetrator.
Many investment fraudulent schemes share certain characteristics. Often, an experienced attorney can confirm that a client’s suspected investment is fraudulent in a matter of minutes. Here are some of the almost sure-fire red flags that an investment scheme typically possesses:
- An unrealistic rate of return. Buffington Law Firm has worked cases involving investment schemes that promised annual returns in the double-digits; one well-known case promised over 50% per year. No investment can consistently yield such results or promise such. It is an impossibility.
- A guaranteed high rate of return. It is a basic principle of investments that greater returns must entail greater risk. If an investment promises a high guaranteed rate of return this is invariably a danger signal.
- The actual nature of the investment is hard to understand or doesn’t make sense. If the investment is convoluted to the point where a high school student cannot understand it, it is probably not authentic.
- The investment is promising that the investor is participating in some kind of unethical or improper “inside” advantage. Some of the famous Madoff investment victims are an example of this. Some of Madoff’s victims believed that Madoff was able to consistently return very high returns because he was involved in “front running” whereby he would find out where the smart money was investing, and invest his fund money ahead of the smart money that was investing with him or in ways known confidentially to him. This practice is usually illegal. If an investment scheme is promising to allow an investor to participate in an improper scheme, it is a certainty that the investment scheme will not end well for the investor. Why should the investors believe that the unethical investment scheme will be ethical with respect to the investor? The question is its own answer.
Unfortunately, many investors who are victimized by these fraudulent schemes start to live on hope. No one ever likes to face up to the evident fact that he or she has been the victim of fraud. But without doubt, if this has happened the best thing that the victim can do is to contact an experienced investment litigation attorney to get an opinion. Fast action can sometimes salvage or remedy this kind of situation. If you believe that you may be a victim of an illegal fraudulent investment scheme, Buffington Law Firm invites you to contact us for a free legal consultation. All consultations are with an actual, experienced business litigation trial attorney and are completely confidential and protected by the attorney-client privilege. And there is never any obligation.