Insights & Reports > Kroll Global Fraud Report

Move over Bernie Madoff and Marc Dreier: that was December; this is a new year. Since January 1, investors have been treated to numerous amazing headlines about investment frauds, particularly Ponzi schemes in which victims were promised lucrative, steady returns. Instead, their money was used to pay out early investors, ultimately leaving newer ones high and dry when the cash ran out. More scams are out there, as yet undiscovered.

The news this year has been rough for investors:

• Marcus Schrenker, an Indiana financial advisor, was arrested in mid-January after a two-day manhunt which began when he bailed out of his airplane to fake his own death. As authorities closed in, he tried to commit suicide;
• Arthur Nadell, a Florida-based hedge fund manager, finally turned himself in to the FBI in late January, nearly three weeks after disappearing when his years of fraudulent activity started to come to light;
• Nicholas Cosmo, a Long Island financier, was arrested by federal investigators when it was discovered that he had apparently bilked investors of some US$380 million;
• Michael Riolo, a Boca Raton foreign currency trader, was sued by investors for stealing over US$1 million. Riolo’s attorney says the money is gone and he expects that Riolo will be charged with mail fraud.

The signs were there for all to see:

• Schrenker had two previous bankruptcy filings, and reportedly a criminal conviction for receipt of stolen goods;
• Nadell was disbarred as an attorney in New York City for taking money from escrow funds to pay off a loan shark. The disciplinary committee cited him for “dishonesty, fraud, deceit, and misrepresentation;”
• Cosmo pleaded guilty in 1999 to mail fraud and was sentenced to a 21-month prison term, three years of supervised release, and restitution payments. He reportedly used new investor money to pay some of the latter;
• Riolo was arrested in 2002 for illegal Internet trafficking of the “date rape” drug GHB. The charges were ultimately not pursued by prosecutors.

These are just the stories that have made the headlines. Numerous fraudsters are still actively seeking new targets. The good news is that some potential investors, appropriately frightened by what they are hearing, are taking due diligence seriously. Just in the last few months, we have had numerous requests to investigate proposed investment opportunities. The bad news is that not enough potential investors are doing their homework.

One common fraud currently is the high yield investment program. It has many variations including prime bank note, investor pooling for onward investment, bank guarantees or debentures and investment “roll programs,” to name a few. Traditionally, the con man offers investors spectacular, rapid returns through access to “secret trading programs” among the world’s “prime” banks. The latest twist seems to be that part of the profits from the program will go towards humanitarian efforts.

On a recent new business call, we didn’t even get to the proposal stage with the potential client. As he started describing the investment opportunity that would pool his money with other investors for a trading scheme, the warning flags were snapping in a gale force wind: the “established” attorney that would hold the money in escrow worked out of his house on a golf course; the principal of the fund was a former artist with no known investment management skill, much less in a high yield program; the fund’s website was an English teacher’s worst nightmare of run-on sentences, completely obfuscatory language, and not one coherent fact; to top it all off, the people pitching the opportunity were affiliated with a U.S. fund that had its own problems with regulators.

Here’s hoping the potential client fled the “opportunity!”

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Peter J. Turecek is a senior managing director in New York. He specializes in hedge fund related intelligence, corporate contests and securities fraud.

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