Financial Literacy

Investment Fraud: What To Do To Protect Yourself and Your Money

Investment Fraud: What To Do To Protect Yourself and Your Money
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
Monday, September 29, 2003: Issue #227
(Lessons Learned from the Cases of David Mobley and Michael de Guzman)

Jumping from a helicopter from 800 feet over the Indonesian jungle, Michael de Guzman took his own life on March 19, 1997. He was about to be exposed…

His company, Bre-X, claimed to have discovered an amount of gold so large, it was the equivalent of 4% of all the gold ever mined in history. Shares of his company had made many millionaires, as shares went from pennies in 1993 to the equivalent of $280 a share in less than four years.

So why did de Guzman jump?

A few weeks after de Guzman’s suicide, the word came out that there was no gold there. Some $6 billion of investors’ money disappeared basically overnight. Because nobody had bothered to check.

Well, it’s not that nobody really bothered to check. When $6 billion dollars is on the line, as in the case of Bre-X, folks like Michael de Guzman make it difficult to check.

In this issue, I’ll discuss the today’s investment fraud, citing the cases of de Guzman and David Mobley, and give 4 ways to protect yourself from falling victim to this crime.

An Alarming Example of Investment Fraud and Unvalidated Claims

“Our systems are so simple and so powerful that I simply must protect them to keep them for my family.” – David Mobley in Barron’s, February 2002, when asked why he wouldn’t let someone audit his Maricopa fund’s 50%-plus annual returns…

But that didn’t help out investors, who he’d bilked… some of whom may have been wiped out entirely.

Yes, Mobley’s system was simple – he was a liar. The 50%-plus returns a year he generated were unvalidated claims. In over seven years of impossibly high investment returns reported to shareholders, nobody had bothered to check. Ten days after the Barron’s interview, David Mobley was taken away in handcuffs.

And here’s the rub on investment fraud: Before you invest a penny in anything – stocks, mutual funds, commodities, etc. – do your best to make sure that all the pertinent facts about that investment have been independently verified. Do your best to evaluate any results… any products… any returns… before you send any money. It’s amazing how a simple phone call or a trip to a store to check out a product can send up some red flags… red flags that will keep you from investing in a company like his or de Guzman’s.

The Moral of de Guzman and Mobley: Don’t be Blinded by the Gains

The stories of these two men share similar red flags. But the biggest factor may have been that people wanted to believe so badly…

“‘Perhaps the most fascinating feature of the [Mobley] saga is the fierce loyalty of its investors,” Barron’s said.

The lid should have been blown off Bre-X with the article in Canada’s Financial Post in early 1996, titled, Skepticism Over Its Test Methods Could Delay Bre-X’s Development. Paul Kennedy, who wrote the article, described Bre-X’s methods as unorthodox at best, and ripe for fraud at worst, as it destroyed its gold samples after testing. Instead, the article was just a blip halfway up the rise to $280. (It fell $4 to $144 on the article.)

The more exciting the returns, it seems, the more people are willing to suspend their disbelief. Bre-X, it turns out, was a $6 billion scam.

What To Do To Protect Yourself and Your Money from Investment Fraud…

Even doing all your due diligence, you may not be able to prevent fraud. However, you should be able to come up with a few red flags if you consider these things:

  • Are the investment claims “‘too good to be true?” This is the first and most important red flag, to me. When I see “5% a month guaranteed!,” for example, this triggers a fraud alert in my mind… I don’t even read whatever it is.
  • Are the claims independently verified? In Mobley’s case and in Bre-X’s, the answer was no.
  • Consider the source of the claims. Are they reputable? Do they have something to gain by spinning the investment one way or another?
  • If it’s a stock, read the company’s 10-K filing with the SEC. It’s available for free at www.sec.gov… click on “Edgar.” The company is legally forced to spell out all its potential risks in this document.

We can’t protect ourselves 100%. Investing, by nature, involves risk. But by following these steps, hopefully we can avoid the fate of the Bre-X shareholders, who went from millionaires to flat broke practically overnight as a result of this deceit. Avoiding that is worth a little effort.

Good investing,


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