Venetis told some investors that the promissory notes were guaranteed by the Federal Deposit Insurance Corporation and would earn interest of approximately 6 to 11 percent per year that would be tax-free due to a loophole in the tax code. She also told investors that she would use their money to fund loans to doctors that would be backed by Medicare reimbursement payments to those doctors. Instead of making investments, Venetis looted investor funds to pay business debts and personal expenses accrued from international travel, gambling, and home mortgages and property taxes. She also funneled cash to her relatives.

The complaint alleges that the representations made by Venetis to investors were entirely false and the promissory notes and other offerings were unsupported by any investments, assets, or related revenues. Venetis simply fabricated the names and signatures of “doctors” or forged signatures of other people she claimed were recipients of the loans. Venetis concealed from investors that she used their funds to pay her home mortgage and property taxes, purchase a home for her daughter, finance improvements on a home owned by her brother, pay her own gambling debts, and pay for trips to such destinations as Alaska, Italy, France, India, and the Caribbean.

Notice two things about this case. First, notice that Venetis used promissory notes in her alleged scam. We have blogged many times on the surge in promissory note scams. The epidemic is so bad that you should seriously consider saying no to any investment involving promissory notes.

Second, notice that Venetis was a registered investment adviser.  Please remember that it is very easy to become registered as an investment adviser.  It is no mark of competence or trustworthiness.  An adviser who tells you otherwise is preparing to rip you off.

Return of investment is as important as return on investment.  Smart investors embrace their vulnerability and take sensible precautions to account for it.  Those who deny their vulnerability often fall for an investment fraud, learning the hard way that intelligence and sophistication actually make them easy to defraud.

Since at least 2004, Sachdeva – the former Principal Accounting Officer, Secretary and Vice-President of Finance at Koss – stole over $30 million from Koss. Sachdeva used the embezzled funds to finance an extravagant lifestyle, including lavish spending sprees at department stores, designer boutiques, jewelry stores, and other high-end retailers. Sachdeva and Mulvaney – Koss’s senior accountant – concealed and facilitated the theft from Koss by preparing materially false accounting records. Mulvaney, working in concert with Sachdeva, prepared false journal entries to disguise Sachdeva’s misappropriation of funds. Sachdeva and Mulvaney attempted to hide the embezzlement on Koss’s balance sheet and income statement by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. Based on the fraudulent records prepared by Sachdeva and Mulvaney, Koss prepared materially false financial statements and filed materially false current, quarterly, and annual reports with the Commission. After discovering the embezzlement, Koss amended and restated its financial statements for fiscal years 2008 and 2009 and the first three quarters of fiscal year 2010.

Notice the extravagant spending. Luxury living on a salary that would not seem to support it is the most reliable indicator of embezzlement. Unless corporations occasionally look for it, they are at risk for the kind of loss that Koss suffered.

Extravagant spending is also an indicator of an investment adviser who is spending clients’ money. Count on it: if your investment adviser spends like a trust fund baby on a weekend shopping bender, he is spending your money, not his. Do not chalk up ostentatious wealth to an adviser’s competence at managing money. You want your adviser to understand the value of a dollar better than the guy who blows hundreds of thousands of dollars on luxury cars and a collection of designer watches.

The Commission’s complaint alleges that, between June 2007 and September 2009, Jason Halek, Halek Energy and CBO Energy raised approximately $22 million from at least 300 investors nationwide by making materially false and misleading statements about the risks of the oil and gas projects, the use of investor funds, and potential returns from the investments. The complaint further alleges that Jason Halek knew these representations were false and that the vast majority of the oil or gas projects never provided the promised returns to investors. Finally, the complaint alleges that Wilbourn earned large commissions from promoting and selling unregistered oil and gas working interests and pre-IPO shares.

The SEC also charged one of Halek’s salesmen, Christopher Chad Wilbourn, with acting as an unregistered broker-dealer.

We’ve seen quite a few oil and gas frauds lately.  Be aware that they are on the rise.  And be aware that, without professional help, you won’t be able to recognize them.

Smart investors give credit where it is due; scam artists are good.  Smart investors therefore take sensible precautions before committing any part of their nest egg to an unregistered investment.  Those who think that they can evaluate such opportunities on their own — that a trip to see the supposedly working well is sufficient — often wind up losing everything they worked and saved for.

The case shows the audacity and ingenuity of investment frausters.  Although I have not met Schmitz, I would be surprised if he were not an extremely charismatic character.  In America, and possibly everywhere, we tend to associate charisma with character.  But there is no correlation.  It is best to think of charisma as a trait, like red hair.  Would you trust someone with your nest egg because he has red hair?  Then never entrust your nest egg to someone because he is a terrific “people person.”

More importantly, this case shows that even institutional investors can fall victim to fraudsters.  If six highly regulated financial institution fell for a multi-million dollar Ponzi scheme, explain to me again how you are too smart and sophisticated to fall for one.  The smart investor embraces his vulnerability to professional scamsters, and that admission protects him.  Those who think they are “too smart” to fall for a scam often fall for one, learning the hard way that intelligence and sophistication make them more susceptible to fraud, not less.

The vast majority of public pension funds are underfunded.  They simply do not have the money necessary to make good on the pension promises they made to public sector workers.  Each of those funds knows precisely how much it will have to grow in order to close that gap.  They are, therefore, willing to listen to any peddler of alternative investments who claims to be able to deliver those returns.  That puts pension funds at increased risk.

The list of institutional investors who have fallen victim to financial scams is too long to include here, but it includes Lehman Brothers, the City of Detroit, Carnegie Mellon University, and the New York Mets.  Believe it or not, it is not much more difficult for a scam artist to steal $100 million from an institution than it is to steal $100,000 from a retiree.  Smart investors, whether individual or institutional, understand their vulnerability and take sensible precautions.  Those who believe they are “too smart” or “too big” to be taken advantage off, often find out the hard way that avoiding a scam requires more than intelligence and size.

One investor had come across Streetwise at a booth in a local shopping mall – the company used to attract passing shoppers by offering “free” financial advice, often luring them in with a chocolate wheel offering a house-and-land package as a prize, cardboard cutouts of the company’s cricketer “ambassadors,” and attractive young saleswomen.

They met Bangaru and the “comprehensive investment strategy” turned out to be a joint venture with him to build a duplex in the northern suburb of Hornsby. A jointly owned company would be formed to own the land, the building already had council approval, costs would be shared and they would be “in and out” with a tasty profit in 12 months – with Bangaru’s personal guarantee.

According to the ASIC, Bangaru, who had immigrated to Sydney from South Africa shortly before he launched his scheme, cost more than 100 investors from in and around Sydney more than $30 million.  Bangaru lived the luxurious lifestyle common to financial scamsters, with multiple houses, luxury cars, and the best of everything. He convinced soccer and cricket stars to endorse his venture.

With regulators closing in and civil lawsuits piling up, Bangaru fled to the United States in July 2005. U.S. authorities, cooperating with their Australian counterparts, helped with the search.  They found him in Santa Ana, California.  U.S. Marshals arrested him there and held him until he could be extradited back to Sydney to stand trial.

While Bangaru’s conviction might bring his victims a sense of justice, it cannot give them back their hard-earned nest eggs. The resources they worked and saved for are gone, and won’t be coming back. That is the story with most financial scams. No matter how many account statements the scam artist sends you showing impressive returns, your money was gone forever on the day you turned it over to him.

Smart investors understand their vulnerability and take sensible precautions. Those who think they are “too smart” to fall for an investment scam often find out the hard way that avoiding a scam requires much more than intelligence.  Always remember, return of investment is as important as return on investment.

Because there is no parole in the federal system, Cook will spend 25 years in prison (less a few months if he behaves himself).  That is important because investment fraudsters have a high recidivism rate.  They construct scams that give them a veritable money tree. The luxurious lives they lead with other peoples’ money are habit forming.  They, therefore, tend to spend their prison time planning where and how they will plant another money tree when they walk out of prison.

Unfortunately, even if every judge handed out the maximum sentence to every convicted investment fraudster prosecuted in his or her court, there would still be enough operating fraudsters to cost every investor his or her life savings many times over.  There are that many of them out there, and always will be.  Smart investors understand their vulnerability and take sensible precautions.  Those who think they are “too smart” to fall for an investment fraud often fall for one, learning the hard way that it is not a lack of intelligence that leads people into a fraud.

According to a story by Salvador Hernandez and Peter Schelden of the Orange County Register:

The owner of Alliance Group Entertainment, with offices in Burbank, Karkehabadi has produced seven b-list action and horror films since 2005, according to imdb.com, including “Duel of Legends,” staring mixed martial arts fighter Quinton “Rampage” Jackson, which is expected to release in Feb. 2011. Karkehabadi is listed under his alias Mike Karkeh.

Before Karkehabadi became involved in movie production, the Laguna Niguel resident also dabbled in car sales and credit card financing – both of which landed him in trouble with state agencies but never behind bars.

Despite more than $11 million from investors, Karkehabadi’s company generated only $535,000 in revenue from movies, according to the Attorney General’s statement.

Notice two things about this case.  First, notice that Karkehabadi had been accused of fraud before.  At a bare minimum, investors must research the background of anyone offering an alternative investment.  A Google search is not enough, but it is free.  Smart investors understand that an investment of hundreds of thousands of dollars is not safe unless preceded by an investigation that costs a small fraction of that amount.  It might cut into the rate of return, but it will help ensure that the rate of return in not negative 100 percent.

Finally, notice that Karkehabadi allegedly accepted only “loans” from investors.  We have seen an upsurge in the number of scams that are structured this way.  There is a provision in the Securities Act of 1933 that exempts notes of not more than 9-months in duration from the registration requirement.  But, that provision applies only to investment grade commercial paper, not the type of loans that scam artists are selling.  Beware of any investment structured as a loan of less than nine months.

Smart investors know that return of investment is as important as return on investment.  They take sensible precautions to ensure that they keep what it took them so long to earn and save.  Investors who think they are too smart to fall for a scam often fall for one, learning the hard way that it isn’t a lack of intelligence that leads people to lose their money to an investment fraud.

Riddle has waived administrative hearings and has agreed, through consent orders, to actions sought by TDCI, as a result of his pleading guilty to three felonies related to a Ponzi scheme involving the late Robert McLean, who committed suicide in 2007, according to a news release.

Riddle, of Murfreesboro, was arrested April 2010 in Rutherford County, pursuant to a seven-count indictment that included allegations that he stole more than $668,000 from multiple investors whom he sold unregistered securities and that he acted as an unlicensed broker/dealer. Earlier this month, Riddle pleaded guilty to the sale of unregistered securities. He was sentenced to six years’ probation.

This case reminds us that Ponzi scamsters often work through accountants and insurance agents because those people often have a long list of clients who have trusted them for years. By establishing relationships with a local CPA or the friendly neighborhood insurance man, the Ponzi operator gains access to those investors.

This case also illustrates the importance of state regulators. The SEC does not have the resources to follow up its enforcement actions with actions to revoke professional licenses. It must move on to the next Ponzi scheme.  The Tennessee regulators in this case provided important follow through that will make it impossible for Riddle to lure in future victims with a CPA license.

It is impossible to fathom why CPAs, attorneys, and insurance agents risk their hard-earned licenses to become involved in investment fraud. Yet, it happens often. Never let a professional license dissuade you from getting a full investigation of anyone who has access to your nest egg.

I have been representing the interests of investors for more than twenty years now.  Every one of the investors I have represented was surprised to learn that they could not sue their stockbroker, no matter how egregious his or her conduct.  I had to explain that the account opening documents that they signed included a clause that took away their Constitutional right to present their case to a judge and jury and, instead, forced them into an arbitration forum run by the very industry responsible for their losses.  Advocates for investors litigated over those unfair clauses all the way to the Supreme Court, which sided with the securities industry.

Arbitration is unfair to investors for several reasons, not the least of which is that the only forum is owned and operated by an organization, the Financial Industry Regulatory Authority (FINRA), whose membership is made up exclusively of brokerage firms.  In addition, there is very little discovery allowed in arbitration.  Investors are prohibited from taking the deposition of the stockbroker and the managers who should have been supervising him.

Proponents of arbitration say that it is less expensive and faster than litigation.  I am not so sure about that.  Consider that every investor has been paying taxes for the length of their working life, some of which has gone to pay the local judges and maintain the courthouse.  God willing, the only time in their life that they need access to the civil justice system, they find that they cannot access the system they have helped pay for.  In addition, investors have to contribute several thousand dollars in filing fees and arbitration fees (arbitrators don’t work or free).  As far as speed of the process, I am not sure that waiting a few more months is such a bad trade-off for having access to an unbiased decision maker.

Please let the SEC know what you think of mandatory arbitration.  You have permission to use any of the language in this post.