Monday, October 3, 2011

Huddleston, The Vigilant Investor

It could never happen to me. Don’t be so sure. Pat Huddleston’s The Vigilant Investor: A Former SEC Enforcer Reveals How to Fraud-Proof Your Investments (AMACOM, 2011) details more kinds of investment fraud than you could ever conjure up in your wildest imagination. The author, a former enforcement branch chief at the SEC, now exposes financial scams (and, according to the FBI, they amount to a whopping $40 billion annually) on

The point of Huddleston’s book is to educate investors to be more diligent when confronted with a seemingly legitimate but in fact fraudulent deal. He suggests steps the investor can take. The simplest is to be familiar with scams of the past; most future scams will either be repeats or variations.

Huddleston may be on a mission, but his book is no homily. Instead, for the most part it reads like a cheap thriller—except for the fact that nothing comes cheap in scams. The cases are real; they range from the “I’d never fall for that” to the “I might just be this guy’s next victim.”

Remember Raffaello Follieri, who claimed to be a representative of the Vatican, sent to help the Catholic Church sell properties so it could settle child abuse cases? The same Follieri who dated Anne Hathaway (among other credits, The Devil Wears Prada)? And who conned supermarket magnate Ron Burkle into putting up capital for his phony real estate venture and then fleeced him for more than a million dollars? He’s now serving time in a federal prison but gets out next May at the ripe old age of 33. Prepare for a second act, warns the author.

In general, the religious are prime targets. Affinity fraud flourishes in certain Christian settings: prosperity theology claims that God rewards the faithful (particularly those who couple faith with outsized generosity) with material wealth. “In scams targeting the faithful, the affinity relates to something more significant than common ancestry; at the very least, it relates to a code of conduct that frowns on fraud. When investors meet an investment promoter who shares their faith, they believe that they understand things about that individual’s character that they cannot know about someone who does not share their faith. When the promoter promises a certain return and gives a personal guarantee that the investment will deliver as promised, the mark is tempted to believe that she has received a sort of divine blessing on the venture.” (p. 103) The author concludes: “Fraud aimed at religious groups is so virulent and effective that the only safe course is to refuse to consider any investment pitched by even a subtle appeal to your faith. Make it your Eleventh Commandment.” (p. 104)

For sheer moxie one of the most notable scams was “the origami airline,” perpetrated by Lou Pearlman (who was the mastermind behind ‘N Sync and the Backstreet Boys). Pearlman created Trans Continental Airlines, a charter airline service. “Its operations were impressive enough to convince a large German bank, Deutschland Invest und Finanzberatung (DIF), to take a major stake. Trans Continental’s balance sheet, audited by Coral Gables, Florida, accounting firm Cohen & Siegel, was impressive enough to convince the likes of Bank of America and Washington Mutual to extend $150 million in credit.” (p. 88) Alas, the company was flying paper airplanes; it was utterly fictitious. Moreover, neither DIF nor Cohen & Siegel was real. The losses that the banks and mom-and-pop investors suffered—more than $400 million—were the sole, painful reality.

Huddleston’s book is both a compelling read and a cautionary tale. It’s well worth a look.

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