Fraud Cons Warning

Our last message looked at why the Perfect Storm for fraud cons is here now and questioned what we can do to protect ourselves. This message shows several warnings and eleven fra cons tips (gleaned from the book, “Cleaning Up” by Barry Minkow) that can help you protect your current business and investing activity from fraud cons.

How does one get Fraud Cons Warnings when looking at a business or investing opportunity to see if it is a scam or real?

Fraud Cons Warnings About Size

How about checking out the history and size? This is not enough!

Minkow proves the fact in his first chapter. He works for the Fraud Discovery Institute and recently was asked to check out the Financial Advisory Consultant Mutual Fund. This fund had been around for 20 years, had over $800 million under management and had averaged 38.8% per annum growth over the two decades.

He did his due diligence and discovered the longest running Ponzi scheme in American history that is known. Due to a report filed in 2003 by Minkow to the State of California and the Federal government, both began investigating this fund. Eventually the fraud was shut down. Investors lost $400 million.

When he first looked at that fund it had history, size, a long list of satisfied investors one could refer to and some very slick brochures.

Yet Minkow saw three red flags that gave him fraud cons warnings:

Fraud Con Warning #1: Control by one person.

Fraud Cons Warnings #2: No audited financial statements to support the very high returns earned in a low return environment.

Fraud Cons Warnings #3: All the new investors relied upon current investors to decide to enter the fund.

Here are some of the points he immediately began to check.

Fraud Cons Warnings Check #1: He looked for independent proof of profitability. There were no proper nouns, no names in the brochures. The language was ambiguous like “In May of 2002 we bought a large laundry company and sold it for 2.9% profit for the month.” Never in any of these purported sales did the brochure name a company that was bought or sold so that these profits could be independently verified.

Fraud Cons Warnings Check #2: He looked to see if the owner of the fund had the licenses one would expect. In this case Series 7, Series 66, registration with NASD and California Department of Corporations. Nada. The company it turned out was only filed as a DBA. This 20 year old, $800 million mutual fund was not even incorporated!

Fraud Cons Warnings Check #3: The fund claimed to make its money in three ways- buying and reselling businesses, insurance premium financing and equipment leasing. Minkow called experts in these fields. In the insurance premium area he discovered that such high returns just were not possible plus any such lender would have to have a license to make such loans, called PfCs. He checked this as well and found again no record of any such license.

Fraud Cons Warnings Check #4: He visited the offices and discovered that it housed a staff of five people. This seemed quite small for a fund with three divisions managing $800 million.

The steps he took in unmasking this long running sham are a few we should know. Here is a due diligence checklist I starred in my copy of Cleaning Up.

When you look at any investment or business deal give the following fraud cons warnings tests.

Fraud Cons Warnings Test #1: Look for independent proof of profitability. Find out how the business claims to has been making profits and investigate the actual transactions that have been said to have taken place. Do not accept excuses for not letting the profits be seen. A scam artist will say the deals are confidential or something of this nature. Just say bull! No proof – no deal.

Fraud Cons Warnings Test #2: Do not let the fact that someone else has received big profits, even for years, suck you in.

Fraud Cons Warnings Test #3: Ignore the media or star studded cast that may be involved. Often the media and professional athletes, celebrities, politicians and church deacons etc. are innocent victims as well.

Fraud Cons Warnings Test #4: Look for signs of hidden debt. Regular payments to a person or company who is not performing a service is a clue.

Fraud Cons Warnings Test #5: Especially beware of special offers to get you act quickly. This can be a sign that the scam artist is in special need of quick cash.

Fraud Cons Warnings Test #6: Do not let outward appearances be your guide. The first rule of lying is, “never take your eyes off face. Do not break eye contact”. The best con artists are the nicest people on the surface. Expensive cars, big houses, yachts and even private planes are not a guarantee of success. Do not let the appearance of normalcy fool you. Realize that almost no white collar criminal who goes to jail ever plans on being there. Most start with good intentions, make an error and cheat to cover up. Almost all believe that there is a cure so if they can just hang on everything will be okay. Most frauds are not committed by criminals but by people just like you and me who get caught in an unexpected circumstance and are just trying to cover up and hang on.

Fraud Cons Warnings Test #7: Check out the use of funds carefully. The dishonest person will always have a reason why he needs the extra cash, but an in-depth review will show that the need does not make sense.

Fraud Cons Warnings Test #8: Do not trust even audited accounts. Minkow for example had an employee who created fake invoices from suppliers who did not exist, reconciled phony bank accounts and formed a false company to confirm to auditors that information was correct. Minkow now trains CPAs to spot fraud and warns them that during confirmations they should not just accept a letter from a company that confirms a certain sales figure, or balance etc. but to go the extra mile and make sure that the company that confirms the letter actually exists. Few auditors do this.

Fraud Cons Warnings Test #9: Beware of wealth claims based on the value of stock. The value of shares in a phony company can be very unreal.

Fraud Cons Warnings Test #10: Know that the Better Business Bureau does not audit accounts that are sent to them. They accept the data that a business sends them at face value. BBB, Dunn & Bradstreet nor bank references should be accepted as proof of anything.

Fraud Cons Warnings Test #11: Check with experts in the field that the profits claimed seem reasonable based on industry standards.

Fraud Cons Warnings Test Summary

Take these steps in each of your business dealings and you reduce your chances of losing and increase the potential for profit. There are no guarantees in life, business or investing, but prudence and diligence of this type assures that your losses will be honest and you chances of success greatly increased.


P.S.My novel, the 65th Octave, provides an enjoyable way to learn about fraud and scams. The hero is a scam catching expert working for big banks. The book outlines why scams work and why suckers always lose. I recommend you read the book. It has some in-depth economic information but is also a fast paced, fun read.

Order the 65th Octave at

Sometimes one picture is worth a thousand words


To avoid scams balance yourself in nature like this cabin at Gary and Merri Scott’s Merrily Farm where you are welcome to visit and stay Little Horse Creek.