Bernie Madoff was not alone

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Bernie Madoff was not alone

Bernie Madoff, perpetrator of the most staggering case of investment fraud in U.S. history, is apparently not alone – and neither are his victims. According to a new FINRA Investor Education Foundation survey, fraud in America is on the rise and it’s estimated to be costing Americans over $50 billion a year!

The survey defined “fraud” as an occasion when “… someone intentionally gives you false information to encourage you to make an investment.” Email investment solicitations were the most common form – 67 percent of those surveyed had received an email solicitation, 3 percent of them actually placed money in the investment, and less than 1 percent lost money as a result.

The second-most popular investment fraud scheme was a free-lunch seminar that turned out to be a sales pitch. While 64 percent of the survey’s participants admitted they had attended an investment seminar, they were far more likely to invest. Half of the survey’s participants (32 percent) had invested after the seminar, and 4 percent lost money. In the survey, “engaging” in the email scam just meant that a response was sent to the solicitor and “engaging” in the free-lunch seminar simply meant attendance, and neither involved an investment of money to “engage.”

Type of Fraud Scheme (statement sentences)	Solicited	Engaged	Lost Money
Email Scam	67%	3%	<1%
Free Lunch Sales Pitch	64%	32%	4%
Lottery Scam	36%	2%	1%
Penny Stock	30%	5%	3%
Cold Call	24%	1%	1%
Multi-level Marketing	18%	2%	1%
Oil & Gas	14%	3%	2%
Pre-IPO	9%	3%	1%
High-Yield Investment Program (HYIP)	6%	1%	1%
Promissory Note Scam	4%	1%	1%
Digital Currency Purchase	3%	1%	1%
At least one potentially fraudulent offer	84%	39%	11%

The most interesting results in the survey discuss who is susceptible to these scams and why. The likelihood of being solicited with a fraudulent investment scheme is positively related with household income. Also, the more educated you are, the more likely you are to be solicited and fall prey to an investment scheme, according to the survey.

“Many Americans cannot identify the classic red flags of fraud” because they do not understand what to look for in an investment or what a reasonable return on investment is. For example, 42 percent found an annual return of 110 percent appealing “even though annual returns over 100 percent are highly improbable.” They also found statements such as the investment is “fully guaranteed” to be convincing. These are two of the most common statements used by the Bernie Madoff types.

Personality matters

The survey explored personality traits that were common among fraud victims. The top five traits were extraversion, agreeableness, conscientiousness, neuroticism, and openness. Of the respondents who had lost a significant amount of money in a fraudulent investment, more had higher openness scores.

The generation gap

“Older Americans are particularly vulnerable.” Respondents age 65 or over were 93 percent more likely to be solicited, 49 percent more likely to engage, and 16 percent more likely to have lost money than younger respondents. Older Americans scored higher in extraversion and agreeableness.

The gender gap

Male respondents were 87 percent more likely to be solicited, 42 percent more likely to engage, and 14 percent more likely to lose money than females. Women scored higher in extraversion, agreeableness, and neuroticism while men had higher openness scores.

Affinity fraud

Of those that indicated they had participated in a fraudulent investment, 34 percent were introduced to the seller through a friend. “Victims of affinity fraud tended to have higher neuroticism … and openness scores than non-victims.”

Reporting fraud

“Under-reporting is a concern,” according to the survey. Of the respondents who admitted they had been defrauded, only 45 percent reported the fraud to someone. The most common reason people didn’t report the fraud was that it wouldn’t have made a difference (53 percent) and they didn’t know where to turn (40 percent). When they decided to report the fraud, 30 percent or more sought help from the FTC, an attorney, the BBB, or the firm that sold the investment; 25 percent or more sought out a law enforcement official, a state regulatory agency, or the SEC. Less than 15 percent sought the help of a friend or family member, a state or local consumer affairs office, the NASD or FINRA.

Are you, or a family member, susceptible to fraud? Have you been the victim of fraud or do you know someone who has?  If so, what did you do about it and how are you preventing fraud now?