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Fraud and the Financial Crisis

The 2008 financial crisis of brought a lot of fraud out of the woodwork, and there will be more. Are there more frauds today than ever before?  Probably not. Dire economic circumstances are simply flushing them out.

One surefire way of uncovering fraud is to ask for your money back.  Many people redeemed their investments with the economic downturn, forcing the fraudster's hand. Most ponzi schemes collapse for the simple reason that redemption requests exceed the money on hand in the investment fund.  The fraudster is confronted, but of course has spent or diverted the money, and is unable to give it back. 

When times are good, people are unlikely to need their money, so it just sits in the investment fund.  At least that's where the investor thinks it is. In addition, the fraudster promises much higher (fictitious) returns than anywhere else, making for happy investors. Happy investors don't ask as many questions. And they don't move their money out either.

The reason the fraudster's investment is able to pay such good returns is that he or she is simply paying the outgoing investors with the new investors' funds.  No problem, unless more people want out than in. In an economic downturn, not only do some people need their money out, but there are also fewer new investors.

I'm guessing there are still more massive frauds to be uncovered in the next few years.  In the meantime, remember these tips:

If something seems to good to be true, it probably is.
  1. If you don't understand, don't invest. Period.
  2. Beware of time-sensitive investments. A sense of urgency is a major red-flag
  3. Read everything before investing your hard-earned cash.
  4. Ensure there are audited financial statements from a well-known, reputable accountant.
Read Colleen Cross's financial thriller, Exit Strategy, available on Amazon: and other online book retailers