The sad reality of modern American society is that on an almost daily basis, we hear stories of retirees who have lost a portion of their entire savings or their entire life savings through the fraud of a third party, often a person that will never be identified. There seems to be a common understanding, however, that after the fraud has occurred, the money is lost and will never be seen again. While this may be true in some instances, the reality is that there is a lot that can be done to recover these losses if the victim, or those assisting the victim, act promptly and seek out the resources that will be necessary to recover the loss.

Fraudsters can be anyone. They may be a “friend” or family member who takes advantage of their relationship with the victim. They may be foreign actors hiding behind the anonymity of the internet. They may be financial professionals with supposed expertise in investments. They may be elders in churches or leaders in other religious organizations. Often times, the fraudsters do not start out as fraudsters but rather, become one as their own financial condition changes. Each fraud is different, however, and the first step in the recovery of a fraud loss is understanding how the loss occurred and then understanding what can be done to recover the loss.

 

Why are Frauds Successful?

Simply put, fraud is a false statement of material fact which is intended to mislead a victim into giving money or something else of value to a fraudster and which in fact leads to the victim providing money or something else of value to the fraudster. Frauds are successful because they prey upon the victim, often relying upon emotion appeals that overcome the victim’s normal wariness in parting with money. The term “con man” actually comes for the mid-nineteenth century when a variety of scams became common. It refers to the ability of the perpetrator to gain the “confidence” of the victim through lies or deceit.[1]

[1] Although in the case of Bernie Madoff, the scam—in that case a Ponzi Scheme—continued for at least 16 years. During that time, Madoff served as the Chair of NACDAQ.

Frauds are successful because the victim believes they are real. In a financial fraud, the victim believes that the investment will return a huge profit. In a romance scam, the victim believes that the perpetrator is actually in love with the victim. It is the personality of the fraudster, however, that is the key to the successful fraud. They must be friendly, engaging, and appear to have superior knowledge. Sometimes the perpetrator will focus on securing information—like many online social engineering scams—and then later use the information they obtained to hack an account. Other times, the perpetrator will attempt to form an emotional bond with the victim during the scam. The scam only needs to last long enough for the scammer to be successful.

Remarkably, I have had cases where the victims of a fraud actually believed the fraudster after they had been indicted by the Department of Justice. The bonds fraudsters form with the victims can be so strong that they overcome common sense and render victims immune from what should be normal caution.

In one memorable case, an individual who worked as a carpenter thought he had discovered a secret form of investment offered by some European banks that would pay seventy percent or more per year in returns. This gentleman then solicited several million dollars from people he knew to purchase these securities. After significant delays, the people he was working with in Europe disappeared, the perpetrator of the investment scheme ended up being charged with wire fraud. Despite overwhelming evidence, including the indictment of the Europeans he was working with, the perpetrator never questioned the legitimacy of the fraudulent scheme he had discovered.

The point to remember is that it is often difficult to convince victims of fraud that they were defrauded, even when overwhelming evidence proves that they have.

 

It is Difficult to Identify a Fraudster.

Most people, it seems, believe that they can discern whether an individual they meet is telling the truth, and, extending this logic, believe they can tell whether someone is a fraud. They suspect that fraudsters will feel some level of shame or discomfort that will become apparent to them when they meet. In my thirty-five years as a prosecutor and a defense attorney, however, I have come across hundreds of fraudsters, and the one thing I can say for certain is that the best fraudsters leave no doubt as to their sincerity.

Fraudsters speak authoritatively.  Sometimes, even after an arrest, they will continue defrauding victims, often relying upon religion and vilification of the government to maintain the fraud. In many cases, they will point to the FBI, the Department of Justice, or the SEC as corrupt. If money has been lost, they will blame the government entity, and often, their victims will believe them. The thing about fraudsters is that they “know” the investment they are selling. There is no scenario they haven’t considered before, and they always have an explanation ready when the fraud begins to fall apart.

So, how can you tell if someone is a fraudster? You can’t. The best defenses against a fraudster are time and research. If the investment is only open for a few hours or a few days leaving insufficient time to carefully study it, it may very well be a fraud, and the investor should be prepared to walk away. If it sounds too good to be true, it almost always is. It is the scheme or investment or opportunity that must be examined, not the individual pushing it. Even if the “facts” are contained in multipage brochures or sophisticated videos, it is the facts that must be examined, and they must be examined by one or more independent experts.

 

Understanding Who is Responsible for the Fraud.

In an ideal world, the fraudster would be responsible for the fraud loss. It would simply be a matter of finding the fraudster, filing suit, and collecting a judgment. Sadly, it is never that easy. Sometimes fraudsters may be family members, “friends”, neighbors, or someone else who takes advantage of a vulnerable elderly person, and it may be possible to go after the fraudster directly. The fraudster may be a niece who convinces an elderly aunt to buy her a swimming pool or pay her bills. In cases like these, it may be possible to obtain a recovery directly from the fraudster.[2]

[2] A common approach to the discovery of this type of fraud is often to call the police or an elder abuse agency. While these agencies can provide some relief, they are not in the business of collecting money for the victims. If the case is not handled properly, the police may decline to make an arrest, or the police and prosecutorial authorities might instead seek a prison sentence from the defendant. If the defendant spends money defending themselves, there may be no money left for the victim in the end. While going to the authorities is often the advisable course of action, victims of fraud should understand that these authorities do not exist to “get their money back”.

If the fraudster is an investment advisor of some type employed by a broker-dealer, it may be possible to recover the loss from the broker-dealer. Brokerage Agreements, or Investor Services Agreements, normally require any dispute to be arbitrated through the Financial Industry Regulatory Authority (FINRA). FINRA arbitrations do provide a means for the aggrieved person to recover their loss, but it is a specialized practice and should not be attempted without an attorney.[3]

[3] The author is a FINRA arbitrator and a member of the Public Investors Arbitration Bar Association (PIABA). PIABA is a specialized bar association that focuses on the representation of investors who have lost money as a result of fraud or other misconduct committed by investment advisors.

Another group of potentially responsible parties are banks and financial institutions. Every fraud loss involves a financial transaction—usually an electronic transfer—sent from one bank or financial institution, on behalf of a victim, to another bank or financial institution, on behalf of the fraudster. Banks and financial institutions, however, are governed by a variety of federal laws, including the Bank Secrecy Act (BSA), 31 U.S.C. 5311 et seq. The BSA and other federal laws tightly regulate where and how funds can be sent and impose upon banks and financial institutions a variety of obligations when transferring funds. These financial institutions also advertise “sophisticated algorithms” designed to thwart fraudsters. Who is better able to detect fraud, an individual or a financial institution with a bureaucracy designed to prevent fraud?

Unfortunately, it is not as easy as it sounds. Financial institutions spend a lot of time and money in their efforts to thwart crime victims from recovering any funds—sometimes even threatening litigation against the fraud victim. But in some instances, it is possible to recover the loss from these entities. The recovery is based upon the presence of “red flags”—standard criteria used to examine a transaction to see if it contains signs of fraud.

Whenever a potential victim of fraud initiates a transfer of funds, that transaction is reviewed by the financial institution to determine if it is problematic in any way. Some of the factors that are reviewed involve the location where the funds are to be sent, the amount of the funds, have funds ever been sent to the location before, etc. If substantially all of an account is being transferred, that too can be a red flag. The important thing to remember is that transactions are monitored using “sophisticated algorithms” to detect fraud or other illegal activity. These algorithms are sometimes kept secret, however, to prevent fraudsters from discovering weaknesses in the system.

In a recent case, for example, an elderly gentleman received an email from “PayPal” indicating that his account was going to be charged several hundred dollars. Panicked, he quickly called the telephone number on the email to inform PayPal that the charge was not authorized. After speaking to a “receptionist”, he was eventually called by a “manager” with authority to assist him. Over the course of the next hour, these fraudsters were able to enter the elderly gentlemen’s investment account and transfer a significant amount of money to his checking account. They then convinced the gentleman that they, the fraudsters, had made a mistake. They then convinced the victim to transfer over $90,000 to them by wire transfer.

The victim then filled out an online form and submitted it to his investment company, and, within two minutes, they transferred the funds to a bank in Hong Kong on behalf of the fraudsters. Subsequent attempts to undo the wire failed, and despite the presence of “sophisticated algorithms” designed to detect fraud, the investment company denied the victim’s claim for reimbursement. In fact, the company suggested that the funds were lost due to the conduct of the fraudster and that there was nothing that could be done to recover the funds. Their immediate reaction was to blame the victim and neglect their own failure to prevent the fraud.

The problem for the investment company, however, was the presence of multiple red flags, they transferred the funds anyhow. The victim had never sent a wire to Hong Kong, a known haven for fraudsters, and he sent (mistakenly) nearly all his retirement to that location. Fortunately, we were able to recover a substantial amount of his loss for his widow after an arbitration hearing[4]—the client had unfortunately died during the pendency of the case.

[4] During the course of the arbitration, the investment company raised a clause in the wire instructions wherein the client had purportedly agreed to hold the investment company “harmless” for any errors in sending the wire. We argued, successfully, that the clause violated FINRA Rule 2268(d) and should therefore not be enforced.

 

What Should be done to Recover the Fraud Loss?

 There may be a lot that can be done to recover all or at least part of the fraud loss, but prompt action by the victim can be a key in recovery. Once the fraud loss has been discovered, the victim should contact an attorney who is familiar with fraud and the responsibilities of financial institutions and others to prevent fraud to develop a course of action to be implemented. Fraudsters are cunning and often hide behind international borders, but they can sometimes be found and held accountable. If they cannot be located, there may be other entities that are responsible for the loss because of their failure to take adequate safeguards. These entities include banks, financial institutions, and other companies and individuals involved in a transaction.

Fraudsters are rarely successful without the assistance of other entities. We know how to identify those entities, and we understand their liabilities. If you believe that a loved one has been the victim of fraud, contact us immediately. We may be able to help.

Dennis Boyle
Founder / Partner

Mr. Dennis Boyle is an accomplished white-collar criminal defense and complex civil litigation attorney who practices throughout the United States and internationally.

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