Posted by Patrick Edwards on 26 July 2012
These days, everywhere I turn, I hear about a new investment scam. One day, Bernie Madoff, a prominent investment manager, pleads guilty to 11 federal crimes and admits to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of billions of dollars.
The next day I hear about Allen Stanford, a prominent financier, philanthropist, and sponsor of professional sports, who on on February 17, 2009, was charged by the U.S. Securities and Exchange Commission ("SEC") with fraud and multiple violations of U.S. securities laws for alleged "massive ongoing fraud" involving $8 billion in certificates of deposits.
The SEC later described the alleged Stanford fraud as a "massive Ponzi scheme." Although the Madoff and Stanford cases involved massive frauds and infiltrated high society New York and the international communities in Antigua and Barbuda, the case of Kirk Wright hit even closer to home.
A Ponzi scheme is an investment fraud where an individual takes money from new investors to pay existing investors' returns, and was named after early 20th century con artist, Charles Ponzi. Ponzi's scheme was simple. He created an extremely attractive investment scheme in which he guaranteed investors a 50 percent return on their investment in postal coupons. Although Ponzi was able to pay off the initial investors, his scheme evaporated when he was unable to pay investors who came later to Ponzi's investment party. He had simply run out of funds.
Kirk Wright developed a special kind of investment fraud. Wright was the founder, CEO and portfolio manager of International Management Associates ("IMA"), which offered seven separate hedge funds from 1997 through early 2006. IMA maintained offices in New York, Los Angeles, and Las Vegas. By early 2006, IMA had thousands of client accounts, and had taken in more than $180 million in investments. Wright's own mother even invested with her son.
Wright's case is an all too familiar one. The Harvard-educated Wright told his clients he could bring them annual returns in the region of 27 percent by short selling certain stocks. Wright wooed various high net worth individuals by holding seminars in Las Vegas, at the hospitality suite at Atlanta Falcons football games and at parties at his extravagant suburban Atlanta home, which had a pool and three fountains. Among Wright's investors were prominent doctors, whom Wright used for introductions to several other rich and connected doctors. Wright's biggest coup of investors arrived, however, the day that Steve Atwater, a former NFL player, decided to invest $1.5 million with IMA. In all, several former NFL players invested (and lost) in excess of $20 million.
In what most people view as a tragedy in every sense of the word, it was discovered that nearly all of the money that Wright collected from investors over the years had been used for personal expenditures, including cash for himself and family members, jewelry, house renovations, a $500,000 wedding, up to six luxury vehicles, and multiple pieces of real estate, mainly in Atlanta and California. When IMA collapsed, Wright took out $500,000 in cash, which was almost all of the remaining money in IMA's accounts. Once Wright withdrew the funds, he abandoned IMA and fled Atlanta. After several months of hiding, the Federal Bureau of Investigation ("FBI") found Wright lounging by the pool with his wife, Kilssis, at the Ritz-Carlton hotel in Miami's South Beach neighborhood. In his room, the FBI agents discovered debit cards, an ID card with a different name - one of three aliases Wright used while in hiding, and ID-making equipment.
After his arrest and a two-week trial in May 2008, Wright was found guilty on 24 federal charges of mail and securities fraud. Wright was facing 710 years in prison and a $16 million fine after being found guilty. However, what only adds to the tragic financial circumstances of this case was the fact that on May 25, 2008, Wright committed suicide in jail. Despite the tragedy that is the Kirk Wright case, there are several valuable lessons to be gleaned from it.
- If It Sounds Too Good To Be True, It Is . When you hear about an investment opportunity that seems too good to be true, assume that it is. Wright told potential investors that his investment strategy was able to yield annualized 27 percent returns. Alleged returns of such a high figure should immediately raise red flags in your mind. No matter what statistics and figures you choose to rely on, average annual percentage returns, when tracked over years, are typically no higher than 8 percent. Even the smartest of individuals on Wall Street cannot consistently provide annual returns of 27 percent.
- Perform Considerable Due Diligence . Avoiding a Ponzi scheme can sometimes come down to doing your homework and maintaining a high level of skepticism. Always make sure that the individuals you entrust your money with are legitimate. Specifically, check their credentials as a financial planner, accountant, or investment adviser with the appropriate agency. Additionally, request that any investment adviser you are relying on provide you with his ADV Form. The ADV Form is required by the SEC and will inform you of the adviser's education, business, fees, investment strategies, and any disciplinary actions in the last ten years.
- If The Investment Strategy Looks Like Calculus, Avoid It . This is a fairly simple lesson. If you do not understand how the investment works or your money manager cannot adequately explain how it works, stay away from the investment.
Finally, when I think of the above investment cases of investment deceit, I think of the quote from Randall Jones book, "The Richest Man in Town," which says the following: "Life by the inch is a cinch, life by the yard is hard." What the above quote says to me is that, nothing lasting and worthwhile comes easy. If you are being sold on extreme riches overnight, be on high alert.
Long-term success and results in business requires hard work. As a general matter, a successful business, no matter what type, takes consistent effort and daily dedication. Never be fooled by the glitz and glamour of investment opportunities that you believe deserve "platinum" status. There is no mistaking the fact that platinum is an extremely rare metal that is only found in .0003 parts-per-billion in the Earth's crust. Platinum investments are equally rare.
