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Adding Insult to Injury

by Richard

nooseIt would be a comfort to think that when you’ve been wiped out as a result of fraud, that the meter would stop when it hits zero.

You wish.

You may have caught the scandal du jour when an alleged hedge fund manager named Kirk Wright ran a classic Ponzi type scam disguised as a hedge fund. See the Wall Street Journal’s article: “Scheme Victims Face Lawsuits”, by Alex Roth (6/7/08, page B3).

Then again, hedge funds are mostly compensation schemes disguised as an asset class, so its intrinsic structure has always been an opaque and dizzying hall of mirrors.

By all accounts, Wright was glib and charismatic, and it didn’t hurt that he signed up some NFL superstars to add cachet to the client roster.

Wright hanged himself in jail on May 24, just days after his conviction for securities fraud, money laundering, and other charges.

This is not what most brokers or hedge fund mangers are referring to when they brag about their “clean executions”. (i.e. buying and selling their stock positions to maximize value in both directions.

Ponzi Scheme Fallout

As these scams go, it was pretty much a garden variety shuffle. Money coming in from new investors was only partially repaid to earlier investors, with the major cut siphoned off for swag, bling, exotic cars…and even a few bad trades thrown in as a concession to the propriety of being an actual hedge fund…

Imagine the shock and awe when enterprising bankruptcy trustees filed lawsuits to recover the funds paid out to the founding investors, on the logical grounds that it was not investment profits or gains being distributed, but funds invested by latecomers.

One couple ran up net losses of nearly a cool million. This was after and despite receiving 30 earlier “comfort” distributions. The million is a realized loss. The trustee is going after the distributions.

And you thought Sub-Zero was just a designer refrigerator.

Since there were never any actual investment gains to divvy up, the only recovery is for the investors to turn on each other.

Think of it as a circular firing squad.

The bilked NFL players no doubt have excellent representation from sports agents and attorneys when they negotiate the terms of their professional service.

So, where is the expertise and oversight when they invest?

Lessons from the Movies

Add this flick to your NetFlix queue: “The Grifters”. Maybe the best movie ever in exposing the grim pathologies that underlie fraud and deception.

In a lighter vein, you might want to re-visit “The Sting”.

As an ongoing life skill, you simply must develop some kind of protective armor so that you become immune to the entreaties of these diabolical promoters. This is not an easy task.

As social creatures, we almost automatically trust too much and too soon.

Reagan said it best, when negotiating missile reductions with the decaying and crumbling Soviet Union.

“Trust…but verify.”

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