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No Cure for Investment Crime

The professional criminal is at the heart of the fraud and convinces the bunglers that the investment is legitimate.

Science has made amazing breakthroughs in the treatment of disease. Penicillin and the polio vaccine jump to mind. But there is no cure for the disease that leads to investment crime. There will never be a vaccine that cures our human tendency to put ourselves first — often to the detriment of other humans — which plays out with such devastating results in those who follow that impulse into investment fraud.

When I worked at the SEC, I used to think that our enforcement actions could have the same effect as a vaccine; that the penalties we imposed would be enough to deter those so inclined from seeing investment fraud as a path to riches. As I think back now on my eager, optimistic young self, I shake my head at the naivete.

Among the scams that I thought we could “cure” is the prime bank scam, which targets wealthy individuals, charitable organizations, and other institutional investors. Last week, the Superior Telegram of Minnesota covered news of an alleged prime bank scamster who was seized in Honduras after five years on the run.  According to the Superior Telegram:

MADISON — When his alleged partner, Daniel TePoel, began serving an 11-year sentence for defrauding investors of out of $2.5 million, indicted co-conspirator Gary Milosevich already was a fugitive believed to be hiding in Panama.

That ended last year when Milosevich, formerly of Duluth, walked into an American embassy in Honduras to renew his passport. Instead, authorities arrested him on an outstanding warrant, and deported him to the U.S.

According to the indictment:

Between Dec. 3, 1977 and March 2007, TePoel was a mortgage broker in Duluth when he teamed up with Milosevich to solicit investors in what they called an international trading program between prime banks. The men said their unique access allowed them to purchase bank securities at a discount and re-sell them at higher prices earning millions of dollars.

TePoel and Milosevich characterized the investments as no risk and high yield with some returning a guaranteed 120 percent annually.

Investors began writing checks to TePoel who deposited them in his Rainbow Management Trust account at Republic Bank in Duluth. In January 2000, Milosevich opened an account at a bank in Grenada and investors began wiring funds directly to the bank.

Instead of investing their clients’ funds, the defendants use the money for personal living expenses and travel, and to buy a home in Barnes and equipment for a resort in Grenada that failed.

By 2002, federal authorities were investigating TePoel and Milosevich and their clients began demanding their money back. TePoel stalled them by asking them to fill out paperwork but he didn’t return their money.

As the investigation continued, TePoel warned his clients not to cooperate with authorities or they would risk losing their money. Some clients continue to defend TePoel at his trial in February 2008, believing it was their best chance to get their money back, Vaudreuil said Friday.

I am resolved that prime banks scams will always be with us. They are run by two of the five types of fraudsters that we identify in The Vigilant Investor: Professional criminals and bunglers. The professional criminal is at the heart of the fraud and convinces the bunglers that the investment is legitimate. The bunglers then enthusiastically raise money from unsuspecting individuals. Whether Milosevich is a pro or a bungler – if the allegations against him are true (he is presumed innocent) – I’ll let you decide. But remember, with a warrant out for his arrest, the man walked into a U.S. consulate to renew his U.S. passport.

Notice the allegations that the defendants warned investors not to cooperate with the criminal authorities. This is among the most dastardly acts committed by any investment fraudster. It takes advantage of the very natural denial that arises in anyone who finds out that they’ve been taken in by a con. It often hampers the progress of investigations and allows the scamster to dig deeper into hiding before the authorities can make an arrest.

The scary thing about cases like this is how convincing the con men are. As much as you like to think otherwise, you won’t recognize them with only the tools that God gave you. Your B.S. detector is not as finely tuned as you think, and the hardwiring of your unconscious mind makes it almost impossible to avoid these characters unless you have at least a bit of training. That’s what The Vigilant Investor is all about, teaching you the mental approach to investigation that can not only protect you and yours, but also help clean up the investing landscape in a way that no regulator ever can on its own.

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