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Another Drop in the New Wave of Fraud?

This new wave of scams is harder to detect and threatens, one day, to make us think of Bernie Madoff as small time.

Last week, the U.S. Commodity Futures Trading Commission (CFTC) filed an enforcement action charging Juvenal Eduardo Machado and his company, Invers Forex LLC with defrauding at least 28 investors out of $786,000. The CFTC will file hundreds of such actions this year. Two factors earn this relatively small case a mention on this blog: (1) the timing of the alleged scheme, and (2) the method of the alleged fraud. According to the CFTC:

From December 2008 to at least October 2010, Machado and Invers Forex solicited customers to open managed accounts to trade forex and promised to pay monthly “interest” (i.e., profits) of five percent or more. Machado told prospective customers, many of whom attended prayer services in his home, that he had been very successful trading forex contracts, making consistent profits, and that he could give them “financial freedom and security” by trading their money in forex contracts, according to the complaint. He allegedly told at least one prospective customer that he never lost money trading forex. This statement was false, the complaint alleges.

Instead of opening trading accounts in the customers’ names and depositing their funds into those accounts as promised, defendants allegedly opened a single trading account in Machado’s name and pooled less than $135,000 of the customers’ funds in this account, almost 90 percent of which was lost in trading. Defendants allegedly never told the customers about these losses. Instead, they allegedly sent checks and cash to customers representing purported “interest” or profits and provided customers with tax statements reflecting these false profits. Customer funds not returned to the customers or lost in trading were misappropriated by defendants to pay Machado’s personal expenses and/or the business expenses of Invers Forex, according to the complaint.

Beginning at least as early as March 2010, some customers allegedly asked the defendants to return part or all of their funds. After responding to these requests with excuses and delay, Machado allegedly moved to Canada. Despite repeated demands from customers, defendants have not returned the balance of customers’ funds, according to the complaint.

First, notice the timing. The alleged scam began in December 2008, after the beginning of the financial crisis which flushed many Ponzi schemes into the open and after Bernie Madoff turned himself in. We have begun to see the first drops in post-Madoff wave of investment fraud. The next wave will continue preying upon institutional investors, but will also take advantage of the fact that the baby boom generation has begun turning 65 at the rate of 10,000 per day. This new wave of scams is harder to detect and threatens, one day, to make us think of Bernie Madoff as small time.

Finally, notice that  Machado used his professed Christian faith to lure investors into his investment. Many of the people who invested with him had attended prayer services in his home. Machado’s pious image no doubt convinced his investors that he was trustworthy. This scenario will play out hundreds of times this year. Investing through someone you trust because of their professed faith is so dangerous that a vigilant investor refuses to do so unless he or she has conducted the kind of thorough investigation that due diligence experts conduct. And, make no mistake, that kind of investigation requires far more than what will come naturally. You can do it, but you need some training first. The primer for that training will be released in bricks and mortar book stores in October. Entitled The Vigilant Investor, it is available for pre-order now through Amazon and Barnes and Noble.

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