My Brush with Charles Ponzi

Everyone has heard of Bernie Madoff by now.  His crime was the most heinous in the history of finance. The fact is there are still thousands of Ponzi schemes happening around us and most victims do not even know what to look for.

I was introduced to an "investment opportunity" back in 2010.  A man from Detroit, living in Italy married to a famous actress, got in touch with me through some mutual acquaintances. 

I took his call, partly because he was from Detroit and I like to connect with people from my hood, and partly because I like to look at all sorts of ideas. I admit I probably donate too much of my time listening to would-be entrepreneurs but occasionally I meet great people that way. Something felt off about this guy and his partners so I indicated the investment opportunity was going to have to set sail without me.

Last week, I found out that the man I spoke with was sentenced to jail for 10 years for wire fraud and stealing money from investors in a Ponzi scheme (article).  

It motivated me to look back at my interactions with him to see what clues made me uncomfortable. Maybe some of these observations will help other targets avoid future Madoff-wannabees.

I have made plenty of bad investments in my life and the list will surely not be comprehensive, nor does it guarantee to be able to detect a fraud. These are just a few smell tests any fool can use to avoid parting with their money too quickly.  

1) Returns are not guaranteed. Promising financial benefit is not something any professional investment manager will do.  Especially in writing. He sent me this in one of his emails:      

"...if we can raise more funds we can really see the financial benefits from the product.  Let me know what you think..."  

2.) Outsized returns are LESS guaranteed.  The best and brightest in the finance space have averaged mid-single digit returns for investors over the past few years. Anyone who purports 10% returns per month should immediately get the Larry David squinty-eyed stare. 

3.) Look for "intense domain expertise." This guy was raising money for investment vehicles that were going to purchase raw emeralds in Africa, invest in gold mines in Laos, trade foreign currency markets through a Swiss entity, and buy Hong Kong stocks on the cheap. Sounds exciting, right? Sounds like bullshit to me. You cannot be a jack-of-all-trades in this industry anymore. 

4.) Investment managers cannot court you. Regulations prohibit investment managers from excessive spending on prospective investors. These guys offered to fly me out on a private jet to meet them in Rome or Switzerland (whichever was easier for me, of course). Come on! Even if it were legal, the amount of money in fees they were hoping to generate on my piddly investment wouldn't cover the cost of a trip to Europe. 

5.) "WHY ME?"  This is the most important question of all. You have to ask yourself "why is this  opportunity being presented to me?"  "How did I get so lucky to have stumbled across this brilliant idea that no one thought of before this shiny salesman brought it to me?"  You might be hearing the pitch because you don't and won't understand the investment.  It's the old "if you don't know who the sucker is, it's probably you" test.  

Through all the dumb things I have done in my life, I could have saved myself a lot of dough had I simply asked "why me?"  I knew little about the business or the industry I was being asked to invest in, but got involved anyway. Every time the outcome was identical:  a big fat doughnut.      

 

From I.B.G.Y.B.G. to I.B.H.Y.B.H.

I was 22 years old. I had my first job on a Wall St. derivatives desk. A large client calls us to do a 5 year OTC trade (for the non-wall st folk, these were customized over-the-counter transactions that the bank had to underwrite itself). As the trader and salesperson bickered back and forth about the "right price," they finally agreed at a level after one of them joked: "I.B.G.Y.B.G.?" They shared a laughed, nodded at each other, and went back to their desks.

 

 

Being the young eager grasshopper on the team, and frequently confused by the barrage of acronyms used by my colleagues, I asked what it meant:  

I'll Be Gone, You'll Be Gone.

Its common to job jump on the Street so long-dated trades had a high probability of maturing well after the salespeople and traders moved onto bigger better jobs at competing firms. The thought was why not just dump a bunch of trades onto the bank's balance sheet, collect a boatload of commissions, and let someone else figure it out later. By the time the trade had significant risk, it would be the mess of some other sorry sap.

I get the feeling the days of I.B.G.Y.B.G. are behind us.  Couple reasons:

-People are just not able to jump around as they did pre-2008.  Less opportunity to move means taking better care to bring quality business that won't blow up the firm.

-Wall St. compensation has shifted from less upfront cash bonuses, to more deferred stock bonuses that vest over the following 3-5 years.  

-Clients are gravitating toward more transparent and liquid transactions that are NOT over-the-counter. The counterparty risk of facing a bank is higher than facing a central clearing house (like the OCC).  Products that trade on exchanges are in demand as customers want to rely less on banks for liquidity and pricing.  This means less room for the I.B.G.Y.B.G trades as volumes increase in the highly competitive listed products that do not require a bank.

Converting employees to think about transactions from start to finish is important to ensure long-term success of an organization.  This holds true for all industries.  Salespeople who just want to close crappy business to pad numbers and make the quarter have misaligned incentives with stakeholders.  Employee compensation should be tied to the long-term profitability of the business motivating them to stick around.   

Cheers to making business more about I.B.H.Y.B.H:  I'll Be Here, You'll Be Here.     

Bank of America and India's Multi-Billionaire Mobster

Today I woke up to the following headline and did a double take: “BofA Board Adds Billionaire Ambani, Boosting Access to India.”  Mukesh Ambani?  THE Mukesh-corrupt-billionaire-who-barely-escaped-jail-on-insider-trading-charges-Ambani?  Wow.  BofA has really stretched on this one.



Mukesh's crib



Most Americans do not know the back story on Mukesh Ambani.  His family is known as the most powerful in India.  The press loves to "ooh and aah" about his recently completed Mumbai home, worth an estimated $1 billion, boasting 27 stories, equipped with 3 helipads (1 is never enough) and a parking garage for 160 vehicles.  His family business, a super-conglomerate empire called Reliance, was started by Ambani’s father in the 1960’s and covers the gamut as far industries go – biotechnology, infrastructure, solar power, financial services, retail, communications, blah blah blah. 

The dark side of the Ambani legacy is littered with government bribes, black-money malfeasance, and a family feud that combines the tomfoolery of the Kardashians, the Sheens, the Spellings, and the Hiltons altogether (talk about a reality show).  If you seek more on the topic of "Mukesh Ambani corruption" I am happy to google that for you (LINK).  In Anand Giridharas' recently released book entitled "India Calling," he writes that friends of Ambani think of him as a "nonviolent Don Corleone" who trades in the currency of "tip-offs and information".  Sounds like a perfect fit for the BofA Board of Directors, no?  Seriously, who makes these decisions?   

When I saw the headline, I immediately walked over to a handful of business students at Shanti Bhavan, to get “the Indian youth” perspective.  I prompted them with the following question:  “what would you say if the biggest bank in the United States invited Mukesh Ambani to join their coveted Board of Directors?”  The response was...immediate laughter. One child yelled out “he is a criminal!”  Another chimed in “he paid hundreds of crore (1 crore = 10 million rupees = $220,000) to stay out of jail.”  They were shocked to hear that Bank of America (a firm I have shared many past experiences about) would even consider such a notion.

What ever happened to background checks and due diligence?  I guess when BofA is competing to finance those high margin Indian government infrastructure projects they will pull out all the stops.