Thursday, July 1, 2010

How Not To Be Defrauded

American Greed is a highly entertaining series that profiles famous cases of investor defrauding, from publicly listed giant companies like Enron to small entrepreneurs claiming to have invented the next big thing.

Four things I noticed about the defrauded victims:

  1. Naivete about the process of investing
  2. Greed
  3. Lack of risk control (put all their eggs in one basket)
  4. Vulnerable to affinity fraud.

Affinity fraud is one of my favorite examples of how people get taken down. Affinity fraud means that the fraudster plays up similarities in ethnicity, politics, or religion in order to gain the trust of the investor. IMO, Bernie Madoff and Bernie Ebbers (of Worldcom infamy) both engaged in this strategy.

Or.....maybe don't invest with people named Bernie!

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