Tuesday, July 13, 2010

How to lose your life savings

Bernie Madoff Ponzi Scheme (Bernard L Madoff Investment Securities LLC): $65 billion with losses to investors of $18 billion
Roger Munro Ponzi Scheme (RG Munro Futures): $100 million with the money missing, either lost or spread around the world

We all think we are indomitable and are too smart to be victims of fraudsters and ponzi schemes. But if we're all so smart then how come ponzi schemes continue to flourish and every time there's a downturn in the economy, another bunch of folks have lost thousands, millions or their life savings due to these ponzi schemes? It's not just your typical neighbour next door that gets caught by these sophisticated swindlers but also multi-millionaires. Don't they have a swag of accountants and lawyers working for them? Is that just blatant greed or blatant stupidity?

I mean, how can you entrust anyone or any single investment firm with your life savings?! Haven't they heard of the term diversification? Or being responsible for your own funds? Don't they realise that if it's too good to be true then it usually is or the greater the returns, the higher the risks. So if someone approached you with an investment opportunity that returned yields of 20% -40% annually with minimal risks, kick them out. Even 15% return year on year with minimal risk is asking a lot...especially in these uncertain times with the stock market behaving like a moody teenager.

Ponzi schemes
and Nigerian schemes are usually everywhere...from the investments where you're required to outlay a few hundred bucks to a few thousand dollars upfront to beable to become 'privy' to rort your friends and relatives. Or the emails telling you that they require your bank account to hide or deposit some money. If people became a lot smarter and stopped falling for these scams then I wouldn't have to spend so much time cleaning the spam out of my inboxes.

Beside the most recent frauster Bernie Madoff, Australia has it's own fraudster in Roger Munro. Reading about how he managed to scam his victims made me feel as if I was living in the twilight zone. Munro is crazy enough to even try blackmailing his victims to support him in getting ASIC to return his passport (don't do it guys, he will just jet off to some country like Christopher Skase), pay his legal costs and drop all allegations against him.

Madoff is quoted saying "People just kept throwing money at me."
Susan Chenery's article on Munro examined their similar attitude and 'exclusive' style of investing. If it's too exclusive to join...you shouldn't join, if any investment adviser or investment firm can't or won't answer your questions, then you won't like the answers - moral of the story.

Tim Swallow, one of Munro's victim says:
"I observed everybody for about four years and everybody
seemed to be making a lot of money. It was easy money. If you make money quickly and easily, you think it is going to go on forever... All people like Munro do is play to people's greed, which is the root of it all."

Trevor King supposedly lost $31 million and an American Oil Consortium lost $23 million. Other investors (about 68 of them) lost varying amounts. Don't they have accountants and lawyers who help draft documents and audit figures before they allow their clients to invest? It's amazing that Jim Thompson, one of Munro's victim even decided to invest after being quoted as stating:

"We asked for some confirming documents regarding the results
he was claiming to achieve consistently and his reaction gave the impression that we were casting doubts on his assertions- no way to behave if we wanted the privilege of being allowed to join his circle of investors...He also told us he traded using a secret system he himself had devised, in currencies, securities, options and indices in international markets; he had live feeds set up which told him what
was going on...We had to leave it entirely up to him to decide what to do. He didn't want to be questioned or asked to prove anything. He demanded unquestioning respect."

So Munro was rather secretive, rude and provided no evidence or supporting documents of his success yet Thompson invested $1,005,000 with RG Munro Futures? Some investors need to get their heads checked. Why on earth would anyone entrust their life savings or a few million to an 'investment' where they don't get any reports or investment break down of how the fund returned 20% plus for several years.

Not only that, but for someone to amass a few millions, you would think they would be more thorough about where they invest their funds. It also raises the question of Munro's supposed expertise across several investment categories (currencies, securities and options) when most specialised traders find it hard to even master and predict what is going to happen in a single category such as currencies.

Also, the reliance on a 'trading system' that he had devised... the problems with most trading systems are that they neglect or cannot account for human fear nor greed. They can't program human pyschology and behaviour with accuracy. Human behaviour and how we all react collectively as a group determines the direction in which the market moves.

Greed allows fraudsters to flourish and unfortunately, the inability or poor ability of the SEC, ASIC and ACCC means that we, as the investor, have to watch out for our own bacon and ensure we don't get fleeced.

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