Rise in Ponzi Scam Exposures Presents Credit Unions With Opportunities
Since Madoff was charged in December 2008, the SEC has tracked more than a dozen investment fraud cases. Among the latest are a $75 million affinity fraud targeting members of the Chinese-American community and a scam involving Edward T. Stein, who preyed upon friends and acquaintances to move more than $55 million through the accounts of his investment funds and then selling interests in those entities to more than 80 investors, the SEC discovered. In March, the commission charged John H. Min of Tacoma, Wash., and his company Dime Financial Group LLC for raising more than $6 million in a fraudulent investment scheme that targeted churches, church members and senior citizens.
Like many who become victims of Ponzi and other scams, credit union members, particularly elderly persons, may be too ashamed to admit that they have been had and are reluctant to report their losses to family or authorities.
"Typically, Ponzi schemes are very shrouded until they are exposed," said Scott Knapp, vice president of retirement services and strategy at CUNA Mutual Group. "There are certain telltale signs a credit union can educate its membership to look for in the early stages."
Madoff created an environment of exclusivity, making investors feel special that only a certain type was allowed to be involved, Knapp said. The perception plays on psychological elements of falsely being better than the rest of the public. Credit unions may want to alert members that if it looks like something the average person can't get involved in, red flags should go up right away, Knapp advised.
Some schemes prey on fear, Knapp said. And, with the economy being what it is, unscrupulous people will use job losses and foreclosures to their advantage.
"Because of this horrible situation, there's an exclusive opportunity to get away from the negativity," Knapp explained on the scammers' motives. "This is the time when the gold bugs tend to come out of the wood work. 'For a limited time only, you can get in on this gold deal.'"
By taking a proactive approach to addressing characteristics like gold deals early, credit unions can give members a heads up on what to be wary of, Knapp said.
Indeed, Ponzi schemes are an active black-market activity with much of its movement centered on timing and catching people in a vulnerable state, said Neil Archibald, general counsel at MEMBERS Trust Co. This is especially true with senior citizens, he noted, adding that each year they lose $2.6 billion through investment fraud.
"The elderly have attrition. They become isolated but it's not that age is really the issue. It's their emotional state," Archibald said. "A lot people suffer in silence so [investment fraud] is a much bigger problem than we realize."
The best thing credit unions can do is have a formalized program and training that helps employees and members identify signs of potential fraud and identity theft, Archibald said. Members want and need a comfortable setting to be able to report abuse. MEMBERS Trust has a senior protection program that provides credit unions with resources. The AARP and state Web site are also good sources to tap, he suggested. The goal is to have something in place.
"It's a real shame when you have people like Madoff and others who work in anonymity and destroy people's lives," Archibald said. "Credit unions are more than financial institutions; they are arbiters of financial transactions. They are placeholders of people's hopes."
Knapp said another way credit unions can be proactive is ensuring that their broker-dealers have a due diligence program showing that their investment centers have been screened. Madoff purportedly operated a hedge fund, which is "highly unregulated," Knapp pointed out. The danger here is there are no prospectuses to check and "no looking behind the scenes through a regulator."
"Most broker-dealers, if they can't offer due diligence, can't sign on or sell investments. The key question credit unions should ask is, 'what does the due diligence program look for,'" Knapp said.
Back on the member protection side, Knapp also believes senior citizens are the most vulnerable group for investment fraud. Because they've accumulated assets, on any given day, they receive a barrage of information that may be hard to digest. Archibald is hopeful that the Madoff scandal will make it more acceptable to report Ponzi schemes and other fraudulent activity.
"I think the more that fraud is reported and more sophisticated people are being swindled, normal people don't feel so stupid," Archibald said. "They say misery loves company. Misery loves news so we're seeing greater reporting of [investment fraud]."