By James Marasco, CPA, CIA, CFE Fraud Matters, Fall 2010 As someone who frequents South Florida, I’m constantly in awe of the mansions, yachts, luxury automobiles and well-dressed individuals. As we continue to read newspaper headlines about fraud schemes, one has to wonder – how much of what we see is genuine?

Snake Oil Salesmen 

Movies set in the Old West have depicted traveling “snake oil salesmen” as doctors, selling their medicines and tonics to an audience of townsfolk using chicanery, hype and empty promises. People were duped into thinking they were buying remedies for their ailments. In actuality, they were padding the pocketbooks of a traveling hoax that would leave town soon afterward. The products being peddled today may differ, but people are still falling prey. Today, the perpetrators are so bold they aren’t even leaving town.

The Perpetrators 

Bernard Madoff used his fraudulently obtained wealth to purchase exclusive property in places like Manhattan, South Florida and the Hamptons. His neighbors were impressed with the façade he had created and begged him to invest their money. Tens of billions of dollars later, we know how this chapter ended. Six years ago, Scott Rothstein came out of nowhere to the South Florida scene. An attorney, he partnered up with another individual and quickly built his firm to become a dominant player in Fort Lauderdale. He not only lured attorneys from competing firms, but investors threw their money at him as well. He claimed to operate an investment fund which invested in lawsuit settlement annuities. Much like Madoff, people were impressed by his collection of exotic automobiles and homes in posh neighborhoods. He even purchased Versace’s former South Beach mansion in Miami. Rothstein’s story reads much like Madoff. When his house of cards folded this past August, he had robbed investors of over $70 million. The politicians that took his contributions in the past couldn’t give them back fast enough and his law practice of over 70 attorneys collapsed overnight. His lucrative career and lifestyle were propped up by the fraud he had created. Last month he was sentenced to 50 years in federal prison. The investors stand to lose almost everything. When it comes to investment schemes, South Florida’s been awash of them in recent years. Two more popped up recently involving tens of millions of dollars of investor money.  

Illusory Promises 

In 2009, foreclosure filings were reported on more than 2.8 million U.S. properties according to realtytrac.com. As the housing bubble burst, the stories of false representation took front and center. No income verification mortgages, incentivized brokers pushing variable rate mortgages and aggressive agents helped place homes in the hands of people who could have never afforded them using guidelines in place 15 years ago. Families all over the U.S. were living the illusion that they could afford the homes they purchased, which were well beyond their means. As we’re now aware, the savvier financial institutions were taking advantage of a weak regulatory and oversight environment by repackaging these risky (and ultimately worthless) loans as legitimate investment vehicles. It was only a matter of time until this scheme collapsed. With relationships formed over the internet (or even reality television), a person needs to do their homework before making a long-term commitment. While traveling through the South, a local newscast detailed the story of a woman who made a career of marrying men in the armed forces. Apparently, the scam artist hangs around US Military bases, finds a soldier, and either lies or coerces the soldier into marriage. When her “husband” has been deployed, she cleans out the bank account and skips town. According to military investigators, they can verify that she has scammed and married at least 11 servicemen. However, they have indicated that it is possible that dozens more have been scammed throughout her twenty-year career.

Closer to Home 

I was recently asked to assist a friend with a new client of their firm. They thought I could offer some strategic advice about his industry to compliment the services that they were offering. We were introduced to an out-of-town business consultant that the client retained to help them expand their business. After one telephone call and observing his operating mannerisms, we decided to perform our due diligence on this individual. We quickly learned he was a white-collar felon in the 90’s. He served four years in prison and was fined seven figures for securities fraud. No wonder he didn’t advertise his services via website or published telephone numbers. It has become tough to discern whether e-mails received are fact or fiction. Phishing schemes have become increasingly sophisticated, and more people are falling victim. Emails have become personalized to mimic those from your bank, Amazon, or even the IRS. Even the most skeptical minds have to do a double-take on the emails showing up in your in-box. 

Due Diligence

Before making critical decisions, do your research. Before retaining professionals, verify whether they have any complaints or infractions lodged against them by checking their credentials. Perform background checks on potential employees or before starting a serious relationship with someone you know little about. Today, more than ever, due diligence has become a critical component of any decision-making process. Whether it involves investing your retirement, retaining a consultant or even finding a spouse – things aren’t always what they appear to be. The old adage, “an ounce of prevention is worth a pound of cure” certainly rings true. James I. Marasco, CPA/CFF, CFE, CIA Jim is a partner at EFPR Group. He brings more than 18 years of public accounting and auditing experience. He is a full-time management consultant and travels extensively throughout the country while leading StoneBridge Business Partners (an EFPR Group affiliate company).