Unfortunately, South Florida has been nicknamed “The Fraud Capital of the World,” and perhaps with good reason. Ponzi schemes involving astonishingly bad conduct and massive financial loss have dominated the headlines here over the years, including those perpetrated by Scott Rothstein, Nevin Shapiro, Mutual Benefits, Premium Sales, U.S. Oil and Gas, and numerous others. During the recession, claims of bank fraud and general fraud in the course of business dealings were rampant.
Good economic times, such as in the past few years, open the door for fraudsters to victimize smart and sophisticated people in a wide range of business transactions, including in private investments. But frankly, not that many frauds have been reported as of late, meaning in all likelihood, somewhere, someone in South Florida has committed a yet to be revealed business fraud or Ponzi scheme. So, to protect yourself, here are some “red flag” tips to consider before doing business or investing with strangers.
1. Who are you doing business with? Investigate not just the promoter, but his underlings as well. Explore their past businesses and/or investment opportunities. Verify their alleged past successes and professional licenses, if any. Do Google searches. Conduct a civil litigation and criminal history background check.
2. What are the promoter’s offices like? Are they professional and in a good location? How long have they been at that address? Do they have a quality website and dedicated email domain, or, do they use Gmail, for example?
3. What is the quality of their business or investment documents? Who prepared them? Are these documents thorough, well written and grammatically correct? Beware of lack of detail, limited financial data, high financial projections, touting future success and, even, typographical errors.
4. Is the promoter cooperative in verifying information? Are you able to verify information contained in the documents or that the promoter orally described to you? Maybe it’s sales figures, bank account balances, ownership of intellectual property — whatever is germane to the transaction’s success — make sure it’s real.
5. Watch out for flash. Many fraudsters go on spending sprees buying high-end luxury goods such as sports cars, jewelry, boats, new homes, private air travel, etc. They show their flash as a means of proving their “success” to positively influence an individual’s business or investment decision.
6. Who are the promoter’s professionals? Are reputable lawyers and accountants known in the community engaged and available to confirm facts?
7. How much of a hard sell are you getting to do the deal or put your money in? That’s not a good sign. Neither are comments like, “This is closing next week. You don’t want to miss out.”
8. Are you being pushed to help find others for the business opportunity or investors? It is not your role to find partners or investors. This could be the sign of a Ponzi scheme because the promoter needs new money to pay off the earlier investors.
9. What is the return? Use common sense; almost always, if the deal is too good to be true, that’s because it probably is. Given your due diligence, if the deal doesn’t make sense, don’t proceed.
Now, should you determine that you are the victim of a fraud, here are suggestions as to what to do next.
First, immediately retain an attorney with expertise in fraud cases. Just like you would not go to a cardiologist for a broken foot, you should hire a lawyer with a proven track record in handling fraud cases, because these are specialized and complex matters. Since fraud lawsuits are expensive, make sure your attorney states a clear game plan, including likelihood of recovery and maybe even a budget to pursue a civil lawsuit.
Second, consult your attorney prior to reporting the fraud to authorities. Pressing criminal charges first may reduce your recovery because your money could be used for the promoter’s criminal defense and could slow your lawsuit. Work with your attorney to ensure you receive the appropriate compensation and determine at what point the authorities should be involved. Your attorney can advise the best actions to take, the best timing and any additional considerations.
Third, compile and preserve every document and email regarding the transaction from every source in your control. Read them to refresh your memory and prepare a written chronology of what happened and list anyone who has knowledge about any aspect of the fraud.
Finally, consult with your accountant before filing your next federal tax return, because you may be entitled to claim a fraud loss.
Charles A. ‘Chuck’ Lichtman is a partner at Berger Singerman law firm and member of the firm’s Dispute Resolution team. Lichtman’s national practice focuses on complex commercial litigation and trial practice.
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