Outgoing Serious Fraud Office (SFO) boss Adam Feeley is cautioning investors against making investments purely on the basis of a personal relationship with the promoter of an investment scheme as B’On Financial Services director Jacqueline Bradley is found guilty of running a NZ$15 million Ponzi scheme.
A jury found Bradley guilty on all 75 Crimes Act charges she faced yesterday. She will be sentenced in the Auckland District Court on October 19.
The charges related to Bradley’s role as a director of B’On, which she ran with her late husband. B’On sought funds from clients on the pretext of investing in various funds they had established both in New Zealand and offshore, the SFO says.
An SFO investigation showed that between April 2003 and November 2009, 24 investors stumped up NZ$14.4 million and Australian investors A$840,000 to B'On for investment that wasn't used in accordance with the clients' desires.
"Instead it was used to make repayments to other investors, and to fund the personal lifestyle of the Bradleys through their Family Trust," Feeley, due to leave shortly to become chief executive of the Queenstown Lakes District Council, says.
"This is a classic Ponzi scheme where no genuine investments were made on behalf of investors. And like all Ponzi schemes, although they are doomed to ultimate failure, it operated to provide the Bradleys a luxury lifestyle while their victims suffered devastating consequences through, in many cases, the loss of their life savings. In one case, an investor lost their life insurance paid out in advance due to a terminal illness," says Feeley.
He said the case was the second affinity fraud conviction in the last two weeks, highlighting the risk to investors of investing solely based on a personal relationship with the promoter of an investment scheme.
The second case was that of Christopher John Collecutt who pleaded guilty in the Auckland District Court. A foreign exchange, or forex, trader operating under the name CFX Trading, he faced three charges under the Crimes Act, including theft by person in special relationship, obtaining by deception or causing loss by deception, and false statement by promoter.
'The sad, simple fact is many people cannot be trusted'
The SFO said 59 investors, mostly family and friends, lost about NZ$1.5 million through investing with Collecutt. Feeley said Collecutt "cynically, and effectively," exploited his personal relationships with investors. His family and friends had learnt a difficult lesson that "great care is needed" before investing large sums with others, no matter what their connection is with the promoter.
"We cannot over-emphasise the dangers of basing investment decisions on the recommendation of a relative, friend or acquaintance rather than careful investment analysis. The sad, simple fact is many people cannot be trusted and a decision based on a moment of trust can lead to a lifetime of financial heartache," said Feeley today.
The SFO says an affinity fraud can take many forms but most commonly involves an investment scam where the fraudster is, or purports to be, a member of a particular identifiable group. This can include ethnic minorities, religious groups or individuals within a professional discipline.
"Key to the crime is that the fraudster will exploit the trust and common bond that exists within such a group to deceive members into an investment scheme or other business proposition that they might not otherwise have accepted but for their knowledge and trust of the individual promoting the investment,' the SFO says.
"Often the victims of such fraud are slow to report any anomalies to law enforcement authorities because of their reluctance to undermine social cohesion with the group. Commonly they will seek to come to some arrangement within the group, and the fraudster amongst them will continue to assure investors that their investments are secure but the subject of some technical or administrative problem in being repaid."
How to minimise risk
The SFO's advice on minimising the risk of being the subject of such a fraud includes:
Thoroughly checking every fact and figure, and don't believe anything simply because the person making the statements is known to you;
Be greatly suspicious of out-of-the-ordinary returns. Quick or very consistent returns on investment are classic signs of fraud;
Get things in writing. Fraudsters don’t like putting things in writing for fear of subsequent liability;
Be wary of people who claim to know you by way of a third party or via social media. A social connection, real or claimed, is no substitute for a relevant professional qualification to provide financial advice.
Today's comments come after the SFO issued a public warning of the growing risk of affinity fraud in a post-global financial crisis era last Friday. Feeley warned then that although the finance company collapse had eroded public trust in some investment opportunities, it had also created a niche market in affinity fraud for those wanting to criminally exploit the trust of their family; friends; work colleagues; or other associates.
The SFO had seen a growing trend in affinity frauds consistent with experiences overseas.
“The FBI highlighted affinity fraud as a growing problem in its last Annual Report, and there appears to be a widespread sentiment in the US that because the financiers of Wall Street, and elsewhere, have proven they can’t be trusted, the public are better off investing with those they know. Nothing could be further from the truth,” said Feeley.
He said over the past year the SFO had investigated a variety of cases where there was a common link between the parties involved, including family, iwi and religious affiliations.
“Social media exacerbates the risk in this area as relationships established through Facebook, LinkedIn and other sites give victims a level of trust and confidence in people proposing investments that is completely disproportionate to their knowledge of that individual.”