Lessons from the Petters Disaster – and Five Ways to Avoid Fraud

The Tom Petters story is a tragedy - for himself, his family, his investors and the public.  Here's a smart, personable and charismatic guy who threw it all away through utterly immoral choices, wreaking a $3.6 billion injury on the public.  That’s the nature of fraud – it’s the crime of the wise guy, the confidence man, the swindler, the embezzler – and others who use wits and trickery to move money from the honest to the dishonest.  There’s a reason these games work – they dwell in complex corporate constructs, funny paper, arcane financial accounting and smokescreens – which makes it easier to tell BIG lies.

Let’s talk about the players in this Ponzi scheme: (a) the leader – Petters, the apparent mastermind; (b) the confederates - Petters’ ex-friends now testifying against him - like the shills in 3 Card Monte; (c) the victims – such as Petters’ later investors; and (d) the public – surrogate victims, like Petters’ employees and others affected by the fraud.  The only players missing above are the earlier (unwitting?) investors who cashed out before the machine stopped.  And that money may be coming back.

So how to avoid becoming an accomplice or victim of a fraud, big or small?  Here are a few basic rules:

(1) Ask lots of questions.  This sounds obvious.  But this should happen before you put your money in.  Even when you’re investing in a blue chip stock, you should read a lot about the company and its performance and goals before putting in dime one. Much less offshore real estate deals or electronics re-selling!  This is common sense.

(2) Put your money in real deals.  What are you investing in?  Do you know?  What’s the business model?  How’s the enterprise going to make money?  Has it made money already?  Does it seem realistic?  If you don’t know and can’t explain to your lawyer or grandmother (or she would laugh), walk.

(3) Know the leadership.  People invest in people.  So invest in people you know and trust.  While Petters didn’t have a criminal record, another of his business associates did.  There’s so much information out on the internet, there’s little excuse not to dig deep.  Get referrals and background checks.  Would you have your parents invest with this person?  If the answer’s no or you don’t know, walk.

(4) Is the deal too good?  Think of a cake that has too much sugar – you might get sick eating it.  If the guarantees of income are a little too perfect (unless it’s a CD or annuity!), run the other way.

(5) Watch for the stall.  If you’re getting a wall of silence or runaround when you ask for basic information, take your money and go elsewhere.  For example, if the guy you gave money to gets mad when you want to see the goods or the books, or when you want to cross-check terms with another party to the deal, figure something’s up.  And beware the endless promises of future payment – often a red flag.

Now, none of the foregoing rules will guarantee you won’t lose money or that you won’t get defrauded (if the fraudster’s really good).  But then if I guaranteed you’d never get defrauded, well… you know the answer.