Avoiding investing scams in the Age of Fraud – with Pat Huddleston

Announcer: You’re listening to Tradestreaming Radio, with your host Zack Miller. Expand your mind. Become a better investor with tools, tips and technology from the smartest investors on the planet.Zack: And welcome to Tradestreaming Radio. I’m your host, Zack Miller, and this is the place where investors learn directly from experts. We’ve got an interesting program today. We’re going to be talking about investment fraud.

Today’s expert is Pat Huddleston. He’s the author of a new book, “The Vigilance Investor: A Former SEC Enforcer How To Fraud- Proof Your Investments.” It sounds kind of spooky. Investment scams and fraud are spooky. Pat is a former SEC enforcer. He also has his own consultancy in the area called Investor’s Watchdog. I’ll link to that in the show notes, so you guys can check that out.

The book is very interesting. Pat refers to our age as the Age of Fraud. We’ll discuss why. We’ll discuss some of the trends that are going out there. The book is actually a broader-based book. It tells you exactly how the industry, and how investment recommendations, are generated. Just to give investors a feel of what’s actually going on behind the closed doors, in terms of incentives, in terms of practice. It’s a very interesting book. Check it out.

Very interesting discussion; glad you decided to join us today. You can find this show, and the rest of our archives on my website, tradestreaming.com. I had a transcript up of all our programs. There’s a lot of good stuff to learn. We had some courses up there as well Come sign up for our free email list; I’ll alert you of all the new events. We’re glad you’re sharing your time with us. We hope you’re learning something as well.

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Thanks again for joining us. I’m Zack Miller, your host. This is tradestreaming radio. We’ll speak with you soon.

One thing I thought was interesting was, you called our age the Age of Fraud. Is there something different about the environment we’re in now? Or is there just more, are the tools better to bubble up the shucksters and the fraud people?

Pat: Yeah, I would say both. I mean, these days, technologically, it’s much easier to be in the scam game, if you will. A lot easier to create phony account statements, and to extend the life of a scam. But I think we really are in a unique period in history, Zack. It may be trite, but I think of it as the perfect storm. When you think about all the factors that go into creating a perfect meteorological storm, I think we’ve got a unique set of factors going on in the world today, and I will name them for you.

The first would be demographics. Not only are 10,000 Baby Boomers retiring every day, but you’ve got an explosion in the senior population. On top of that, you’ve got an awful lot of underfunded pension funds. And so the pool of victims is just exploding like never before.

And of course, Baby Boomers are significant because they’re going to move their 401k accounts into self-directed accounts, at which point they’ll be much more accessible to reckless advisors, or professional scam artists. So that’s one factor.

On top of that, you’ve got the volatility in the market. Which makes people prone to want investments that are stable, but also promise some return. They want safety of principal and return, and scam artists are in the business of giving people what they want. I mean, the fraud game never, ever slumps, no matter what’s happening. It’s recession-proof, it’s depression-proof. All that changes is whether my pitch to you is, “You don’t want to rely on the market anymore, look what the stock market’s returning! Come into this!” Versus, “Well, you really don’t want to lose your nest egg. Let’s get you something that’s safe and stable.”

So they just change their pitch, so people are open and frightened, quite frankly, of the market. So they’re going to be sitting ducks for things that promise safety and income.

Plus you’ve got the down economy, that’s another factor. People have got this number in their minds, whether they’re institutional investors or they’re individual investors. They’ve got this number in mind, where their assets ought to be. For an institutional investor, here’s how much we need to be in the black, given our obligations. For individual investors, it’s that magic number that I need to retire on. And across the board, everybody is far behind where they need to be to achieve that number.

So they’re particularly susceptible to anybody, they will listen to anybody who says, “You know what? I can get to your number.”

And the final factor, I would say, is the regulatory environment. You had all these changes enacted under Dodd-Frank, we have no idea how many of them are actually going to be instituted because of the budget crisis. The SEC is under- funded, as it typically has been, and the CFTC alike, and the state regulators now, which have to examine a lot more registered advisors, have been laying off staff. So that the very time where you need the regulators most, they’re going to be able to do less, just because they lack the resources.

But having said that, that’s what I think are the elements that are creating a perfect storm. What does that mean for the financial advisor? It means that he needs to sell transparency; he needs to sell effective due diligence. Because I think with the unprecedented change, whatever’s going to happen with a fiduciary standard or anything like that, the people who are going to succeed are those who can set themselves apart in this age by saying, “Look, full transparency and more effective due diligence than what people have had before.”

Zack: You talk a lot in the book about affinity scams, where people are targeting a particular cultural base or demographic, or a geographic base. Do you think the internet and distribution technologies have made it easier to attract new suckers into the game?

Pat: Yep, most definitely. Most definitely. I mean, communication is easier than ever before. I grew up in the age of Star Trek communicators. Everybody thought, wow! If we ever get there, we’ll . . .

We’re there. You can talk to anybody any time you want to. So it’s easier to reach a potential pool of victims. But affinity frauds oftentimes grow mouth to mouth. So it’s also easier for somebody who’s invested in this thing, and thinks that it’s legitimate, to get in touch with friends and family and say, “Hey, you need to check this out,” or to forward email addresses and put the scamster in touch with additional victims, are much easier.

So yeah, you’re right about that.

Zack: But I have one question. I’ve seen up front, I thankfully have not been involved in any scams, but I’ve seen people get caught up in them. And you mentioned WexTrust, and that’s one that I know some people that were involved with as well.

And it seemed to me, and again I really don’t know the details of that case, but it seemed to me like it started out legit.

And a couple things went wrong, and they had to bring in new money to pay off the old investor. I sort of get the feeling that a lot of these things don’t necessarily start out as outright frauds, and they sort of take on a life of their own. How do you protect yourself as an investor, like that? You do your due diligence, but . . .

Pat: Well yeah, you’re very, that’s an astute observation. I would say well over 50% start out as legitimate. And what I tell people when I speak to them is, it’s like just about everybody can remember back when you were in middle school, and you had a report card that you know was going to get you into trouble, and you didn’t want to hand it over to the parents.

So everybody can appreciate, understand that temptation. What can I do? The dog ate it, I can change that D to a B. Everybody understands that. Well, that’s the very same temptation that arises in the mind of a financial advisor who lacked what he has led people to believe he’s going to be able to deliver. And he or she rationalizes. They say, “Look, things are going to be better next quarter. No need to get everybody upset. I’ll just send out these phony numbers, and next quarter I’ll be able to make it all right.”

So, how do you protect yourself? Your question was, how do you protect against somebody who hasn’t yet done anything unethical, right? How do you know?

Zack: And in fact, you did your due diligence up front. And the guy checked out.

Pat: Yeah, sure. It’s important to know what you’re looking for. If you want to protect yourself from fraud, you have to look for fraud. Too often, due diligence winds up in being an exercise in trying to confirm what you’ve been told, and no scam artist worth his salt is going to tell you something that he doesn’t have somebody in the background prepared to confirm for you. But assuming that you’ve looked for fraud, you’ve found in the background of this person nothing to cause you any concern, there’s still a few things that I mention in the book that you can do.

You can find out just how many investors are in this thing. Is there a big investor? Is there somebody who represents more than 5% of all the investments? Those are factors that make it more likely that somebody will engage in a cover up. If a single investor is a big part of the total fund, then the loss of that investor would do serious damage to the RIA’s income, yes?

You create a situation where the advisor is more likely to fudge the reports, to try to keep that big investor in the tent. But even then, the best that you can do is stay on top of things after you invest it. Because sometimes, like you say, it transforms.

So what I tell people is, you need to compare your statements against independent third-party reporting services. That is, if your statements said that Apple traded, closed at a certain price on this date, that’s what the advisor is telling you, go check it out, and just cherry-pick a few and see. So if you find something on your statement that doesn’t comport with what Yahoo! Finance or somebody else is telling you the closing price was, then you know you’ve got a problem. And you can protect yourself much earlier. You can get out while the getting is good.

So it’s not just pre-investment investigation that’s important. It’s also a continuing checking into things. Understanding that more than half of these things turn bad later on, after you’ve invested, you’ve got to check every now and then. Open those statements. I know you’ve seen people who never open their statements.

They’re just busy people. If there’s an impressive name on the letterhead, they assume everything is right. But if you’re going to protect yourself from the thing that sort of evolves into a Ponzi scheme, you’ve got to a couple things we recommend in the book.

Zack: There are lesser forms of scamming, also, where you can have an advisor who’s also buying and selling the stuff that he’s telling you he is, but maybe he’s churning you. If he’s as stockbroker, maybe you haven’t given him the go-ahead to trade your account, and he sneaks in a trade here and there. Those things are hard to pick up.

Pat: They are hard to pick up. But we tell folks how to do it. I’m really glad that when I wrote this book, I didn’t have it clear in mind how much of this was going to deal with the securities industry, everyday stockbrokers, versus how much it was going to be Ponzi schemes. And we ended up dividing it into two. Part one is the wide world of fraud, part two is the investment industry, the securities industry in America.

So we talk about, we educate people, I think in a very accessible way, about what the reality is of compliance departments, and what happens to those account opening documents after you turn them in. They go into a compliance computer, and whatever is there determines how sensitive the compliance computer is to movements in your account.

We try to let people in on things that have not been secrets, but just have been too technical for them to appreciate until now. So we do give a few tools that can help you monitor things. An example is, you may have heard the term “happiness letter.” If your account pops up on a branch manager’s report, that compliance has kicked out the account for excessive trading, well, you need to know that sometimes what the manager will do is, he’ll just write a letter saying, “Hey, to let you know, I’m the manager. If you ever have any problems with your account, give me a call.”

It’s so innocuous that you think it’s just some marketing effort. Some customer care effort. But it’s not. It’s an attempt by the manager to be able to say later on, in the event of a dispute, that he invited you to call if you had any concerns. We call that a happiness letter.

So we review for people, if you get a letter out of the blue from a branch manager, what does that mean? It means that your account has been flagged by the compliance department for possible misconduct.

Zack: Right, and I think people who haven’t been through it, or who haven’t worked intimately with the system, don’t understand how much of the current infrastructure’s just there to protect itself. To protect its own. That happiness letter is not a service technique. That’s actually just checking off a box, to say hey, we did that, and the client never called us. We’re clean from any misconduct.

Pat: Yep. You’re exactly right. And you will see that happiness letter again when you go to an arbitration hearing, and you’ll have to answer as to why you didn’t pick up the phone and call. So we let people know some of the behind the scenes facts that they can use to protect themselves. At the very least, they’ll be able to know, when they get a letter like that from now on, that it isn’t innocuous. It means something very significant. You need to take it very seriously, and follow up.

Zack: Have you ever helped bust open any big name frauds, scams, personally?

Pat: Have we helped uncover any?

Zack: Yeah.

Pat: Well, we’ll know about that very soon. We get calls, just because of the nature of what we do, we get calls all the time. We refer them to the SEC. So while they’re not popping into mind right now, and I’ll let the SEC run with them for a while, I believe we’re going to be able to answer yes to that very shortly. Because people call me and they say, “Let me describe this to you.” And I say, “I can tell you, I won’t charge you, I can tell you just with that explanation.” And we’re talking about a very dangerous fraud. Do I have your permission to pass your name and phone number on to the enforcement division? And they say yes, and we put them in contact. And of course, SEC work takes a little while.

But yeah, I think we have become a valuable resource for that.

Zack: So given your background and working for the regulators. I have a question, from a structural point of view, is the regulatory regime, and the centralization of that, even if we beef it up and give them more money and resources, is that really the best way to police this whole thing? Because they can’t be everywhere at all times.

Pat: They cannot, and that’s such an important point, Zach. Even if you gave them ten times the resources they had, they wouldn’t be the place where I would advise any advisor to start. People are always chagrined, and they say, ‘Why aren’t the regulators taking care of me?’

Well, the SEC and the CFTC does important work. I mean, the scam that they shut down today is not going to be able to collect any new victims tomorrow. So it’s important to know that, with more resource, they can stop more scams sooner. But they really don’t have jurisdiction until somebody’s ripped somebody off.

The question is, if you sit back and rely on the regulators, you might be one of those people who gets ripped off early, and if you expected them to protect you from investing in that thing in the first instance, you just misunderstand how the regulatory system works. The SEC in enforcement cases doesn’t have jurisdiction until there’s a violation.

So the best way to go about this is to understand that you, as an investor, have the tools, and we try to give you some more of them, to uncover a fraud. If you start with the right mental approach to your investigation, and you look in the right places, you can uncover frauds and report them and shut them down. That’s the power of individual investors.

And part of what I try to do towards the end is empower people to do that. Individual investors, and institutional investors too, can be a tremendous force for good in helping to clean up the investment landscape. If they understand the power that they have, they can help.

But in answer to your question, if your goal is to protect your nest egg, it’s very unwise to just assume that somebody else is doing it for you. You’ve got to do your own investigation.

Zack: Well, I’ll add another piece to that, and I sort of think that, and I’d love to hear your opinion on this. I’d like to, near the end of this call, talk about trends in fraud. But I sort of feel like, given the internet and some of the models that are at least in other industries, we’ve seen decentralization of a lot of markets.

With peer-to-peer lending, and stuff like that, it’s just a matter of time, I think, before that gets to the financial sphere. Which makes a centralized organization trying to place a decentralized marketplace much, much harder.

Pat: Yeah.

Zack: And plus, there’s this whole unregulated field, which is the newsletters and those guys are as irresponsible as anybody.

Pat: Yeah.

Zack: It seems like a very big task for an investor, because this is just the first stage of working with an advisor. The next is, well how do I pick an advisor who’s going to provide me with the return set that I need?

Pat: Right, yeah. I think you’re right, I think you have hit upon a trend, and I think that is going to be a problem. So if you’re counting on the regulators to keep you safe, it’s misplaced trust.

Now you say it is a big job for an investor, but what I really try to encourage people is to focus on how many scams we could shut down on day one, if people would only do just a very few things. I mean, there are scams that are sort of well-hidden. You investigate for fraud, and there’s no indication, nothing to worry about. But that’s rare.

At the very least, if people would find out if the person selling them an investment is licensed to do so, we could chop off maybe a billion dollars in losses, maybe more than that, every year. If people would just do a very simple thing. But the problem is, because of the cognitive biases that we’re all born with, we tend to be sort of over-awed or convinced by the personal interaction of somebody who’s a very good people person. We’re just pre-wired to give people our trust.

And what I try to impress upon people is, you have to choose an advisor in a very different way than you choose a plumber, or a house painter. If a plumber or the house painter messes up, yeah, they can cause some damage. They can cause you a lot of inconvenience. But they’re not going to lose your life savings, right? The risk of choosing an investment advisor is much bigger. The potential consequences are huge.

So what I encourage people to do is, if you can do one or two simple things, you can keep yourself safe from the vast majority of these things.

Zack: So, it’s interesting to me, really smart people and people with millions of dollars under management, that they’ve built or that they’ve inherited or whatever, college educated people, you mentioned these cognitive biases, these are the same types of biases that lend investors also to get involved in some of these lottery scams.

We had an instance of a client who got on a plane to go to Africa because he was told that he won some type of lottery. And he had never bought a ticket. And he called us from the plane, his wife called us from the plane saying here’s what’s happening. And we’re like, did you ever buy a ticket? No, they’ve never bought a ticket. So how could you possibly have won the lottery? It just seems like we want to believe, like you said, we want our cake and eat it too.

We want those returns without the risk, and we’re willing to go along with these things. And that plays right into these guys.

Pat: It does, yeah. And maybe you saw that. Imagine how frustrated the honest advisor is to see people take their hard-earned savings and lose it that way. It’s bad for the advisor, because assets leave the firm. But you just grieve for the people who are doing it. And I hope there’s a happy ending to the lottery case, but if so, you can see how important it is just to get somebody else’s opinion. To get an independent brain working on this.

I told a story, when I give speeches, about how the airline industry has been able to drastically improve the percentage of plane crashes caused by pilot error. Part of that was that they now use simulators to train, and so they train their unconscious brain to respond in particular crises. But the other part of it is what they call cognitive resource management. They get more brains on the problem.

Before 1990, the model in the industry was, if we’re in a cockpit emergency, everybody else shut your face and let the pilot concentrate. Let him put us on the ground. And of course, they realized that that was cutting off the experience in the head of the co-pilot, and in the head of the navigator; shoot, even in the head of the flight attendant, right? They may have seen something yesterday that could’ve helped, if they were allowed to throw it in.

Well, they do throw it in now. They’re trained to speak up. We need the benefit of your experience. So that’s what an independent brain can help investors do. So it’s really important. Find a good advisor, learn how to do this investigation yourself, but just bounce it off of somebody who can give you an objective opinion about this.

Because as much as we like to think otherwise, if we get the promise of a great return in our head, we can no longer be objective. That chance colors every other decision we make. It colors what facts we accept, what facts we look for, what facts we reject. And so you really do have to be humble enough to pull somebody else in on it.

What was the result in the lottery thing?

Zack: They actually got off the plane.

Pat: Terrific.

Zack: They’d given the fraudster their Social Security number, and I think he attempted to try to withdraw some money from the bank or something. But thankfully, it ended well.

Pat: Fantastic. See, that’s a success story.

Zack: Yeah!

Pat: That is an illustration of what getting an objective opinion can do for you.

Zack: So can we talk about the future of fraud? I mean, there’s a lot of new investments going on.

Pat: Yes.

Zack: There’s always new investments popping up, whether it’s alternative energy, you mentioned some CD scams that you’ve had on your website. Can we talk about trends in that area?

Pat: We can, yeah. One broad trend is, people can keep up without listening to anything but the news. Because investment criminals play off the headlines. Why is that? Because it gives them a source of credibility.

So, when Al Gore was accepting the Peace Prize for his environmental work, the rockets started going off in the brains of scam artists worldwide: Hey, people are going to know that we need alternative energy sources. A great scam. And if they need some evidence that this is going to be a big deal, and there’s going to be a lot of money poured into it, and somebody’s going to clean up, take a look at Al Gore. He’s in the news.

Well, when we have the stock market on this roller coaster ride, what happens? You’re going to get scam artists who say, have you seen the volatility in the market? You don’t want that, do you? You don’t want to lose everything you’ve saved. You’ve got to get something that’s stable, principal protected, but provides a good return. And so that’s what they sell.

Health care scams. Pharmaceutical developments. All that with the aging population, that’s going to be in the news. So headlines, broadly, are always going to drive scams. So if anything seems just a little too timely, understand that, yeah, it might be the next Microsoft. It might be the next Apple. You can’t assume that. Most people who aspire to that are going to crash and burn, right? A very small percentage of the startups out there are going to become the next Microsoft. So you really have to examine them critically.

Another trend that we’re seeing, promissory notes. Promissory note scams. So if you are considering an investment, and what you get back in return for your money is a promise to pay, a promissory note, usually within nine months or less at a particular interest rate, beware. In most cases, those things are required to registered, and if they’re not registered, you stay away. Because whoever’s offering them is either intentionally misleading you about what the law requires, or they just don’t know any better, which means they’re inept.

But they use promissory notes for a very practical reason: they look safe. They’re a written contract, with somebody’s name at the bottom. They purport to pay interest, which from the time we’re kids we tend to associate with a passbook savings account.

So stay away from promissory notes. Other trends, we’re seeing an awful lot, just a continued trend of pump and dump scams, where people are in control of millions of shares of a blank check company, or just a startup company, with really no assets and no business. And then they make it look substantial, with phony press releases and with fraudulent trading.

They will put several million shares in the hands of broker dealers, who just trade it back and forth in exchange for bribes. And of course that makes the market data look attractive. It makes it look like the volume’s increasing, along with the positive developments of the company. And of course, when they convince you to go hey, this is going up and it’s got great technology, I’m going to jump in, well the person you’re buying it from is the scam artist. He’s decided that he’s going to drive the price up, sell it to suckers, and then abandon it and go on to the next one.

So you’re going to continue to see that, and that’s particularly dangerous. You find organized crime heavily involved in that kind of fraud.

Zack: I was going to ask, how do you even begin to root that out? I mean, if it’s so behind the scenes?

Pat: Yeah, and it is very behind the scenes. I mean, they’re terrific at protecting themselves.

How you root it out? First of all, you have to be very wary of investing in penny stocks. So that you don’t lose your entire nest egg. If you want to do something like that, do it with a very, very, very small percentage of your assets. And that way, you’re protected from the nightmare scenario where you lose everything. So diversification has been, and always will be, a terrific way to protect yourself.

Now the question, how do you root that out? You have to look for a fraud. Again, if you’re looking for confirmation, you look at the press release. Well, they created the press release. Well look at the volume. Well, understand that volume can be manipulated, right? Look at the, if you can’t find the people, you need to look at the people who are behind the investment. At the very least, check the federal court dockets, which you can do through pacer.gov, to see if that person has ever been named in a lawsuit, maybe by former investors in a former deal, or maybe has a criminal record. Something like that.

So take a look at the people behind it. But if it’s well-hidden, it can do an awful lot of damage. You may know about the YBM MagNex scam, up in Pennsylvania? We talk about that in the book, but . . .

Zack: Can you talk about it for a second?

Pat: Yeah. It’s run by a Russian mobster, Semion Mogilevich, without ever leaving his home in Russia. Or he may have lived in the Czech Republic at that time. But he provides $2,500,000 worth of seed money to pay his lawyers, pay his accountants, gets a big building in, I think it was Bucks County, Pennsylvania, a nice little quaint place, and sets up, supposedly, an industrial magnet factory. He recruits, and all this through intermediaries, very impressive people in the board of directors. Former Prime Minister of Canada, other high profile people. And of course, he has the money to spread around to pay his directors well, and to pay very impressive attorneys and accountants.

They set up this pump and dump scheme, and I can’t remember what the totals are right offhand, but over hundreds of millions of dollars. This was on the Toronto Stock Exchange. This stock was the darling of the Toronto Stock Exchange, and it went up, I think, $22 is what I have in mind.

And, of course, Mogilevich and his cohorts sell out to the suckers, the stock collapses, and while there was some recovery, I think from an accountant here or an attorney there, people just wind up taking a bath. And if you can imagine investing more, if you invest more than a small percentage of your assets in something like that, you’re wiped out.

Completely wiped out. And so, we do continue to see a lot of pump and dump scams, and you always will. It’s interesting that when the FBI gets involved in securities fraud, it’s often in these kinds of things. They run sting operations, looking for these kinds of things.

And those people who are old enough, or as old as me, will remember the show ‘CHiPs.’

Zack: Sure. Erik Estrada, yeah.

Pat: With Erik Estrada and Larry Wilcox, yeah. Well Larry Wilcox, one of the cops who rode the motorcycle, was actually convicted of being involved in a pump and dump scam recently. So it’s very easy for legitimate companies to sort of get hijacked. You got a startup, you need funding, right? You need services. You need attorneys, accountants, you need investor relations.

Well, in comes this guy who seems like he knows everything about that. And he says, I want to invest in your company. Just give me shares in return. And ultimately he winds up dominating you, manipulating you, and owns up most of the company. And all you want to do is grow your little startup.

We see a lot of those, what I call hijackings of legitimate startups.

Zack: How would you frame what just went down with all the Chinese reverse mergers? These were companies that backed into U.S. companies, had U.S. auditors, and the orders of magnitude of fraud that you said, where they had maybe $100 million in revenue, these companies had maybe $1 million in revenue.

They were really just completely inflated. If investors had believed the balance sheets and the audited results, I don’t see any way, other than people saying something’s fishy, I’ve got to go to China and investigate the factories, to see what kind of throughput these guys have. How do you weed those guys out?

Pat: And of course, that’s impractical, right? All you can do, I mean we don’t know what the resources are to investigate in China. Someday, God willing, I’ll have somebody working in China for me, but I don’t now, and who does? The best you can do in that case is say, okay, this thing became public through a reverse merger, I know that there were problems, or have been problems. I understand that these numbers can’t be verified in the same way that a U.S. auditor would be able to verify them.

Factor all those things in. Understand that the chances are very high, much higher than if you buy something in the U.S., that the thing is a scam.

That’s another thing that’s connected to the news. For the past several years, we’ve been focused on Asia as the place where profits are going to come from. The huge population, right? The emerging economy. That’s where you’re going to get your profits from. So people are sort of conditioned to believe that, and believe it uncritically.

But what you have to understand is that there are people prowling the investing landscape, telling you what you already know to be true to get credibility with you, for no other purpose than to take you money. People don’t realize how often it happens.

There are people who get up and go to work to do this every single day. Thousands, tens of thousands of them. Wherever people are listening to this, who’s out there, there’s somebody within five miles who’s doing this right now. It’s that prevalent. It’s that big a problem.

Unless you swim in the ocean of fraud like I do, you don’t think about it. You hear Bernie Madoff, you hear Alan Stanford, and you think, well how many scams do we have every year? A couple a year? I think I can stay safe from a couple a year. And we’re talking about hundreds, thousands a year, going on all the time, all around you.

Zack: So disheartening. So your website, Investor’s Watchdog, you’ve got a great repository of information there on learning about fraud, on current frauds, on trends in fraud, and I know you provide services to help investors to do this type of investigation. Are there other resources that you recommend for investors to sort of stay on top of their game? You know, to learn more about this, to help suss things out?

Pat: Yeah, terrific. Well that’s a, I don’t know whether you intended it, but it’s a great lead-in to my book, which comes out. It’s called “The Vigilant Investor,” and we’re very proud that we got Burton Malkiel, who wrote “A Random Walk Down Wall Street.”

Zack: Sure.

Pat: Gave us a very nice endorsement that will appear on the back cover, and Kiplinger’s, and Wealth Magazine, and a Princeton professor. So we were very blessed with that. But we really talk about it. I mean, I just have a heart for these folks ever since I’ve been at the SEC, and have seen it up close also as a court appointed receiver.

So what we do is, through the stories of actual scams, we give people the tools that they need. And I’ll mention specifically, one terrific tool that people never use is, and I think I’ve referred to it before, pacer.gov. The federal dockets. You can check criminal, civil, bankruptcy cases nationwide. If you wanted to now go see the sentencing report on Bernie Madoff, you could log on to pacer.gov and go take a look at it. What an incredible resource, because oftentimes . . .

Zack: That’s a public database?

Pat: Public database, yeah. Now you have to sign up, get an account, and it charges nickels for every document that you print out or that you pull off of the docket. But I’m serious, cheap. It’s the way lawyers file pleas these days, rather than take a hard copy to the courthouse, in the Federal system, you file them electronically.

So the dockets are maintained there, and anybody can see them. So pacer.gov, remember to check not only under the names of the people behind the investment, but also the names of any companies that they may have operated through. Because maybe the company was sued and the individual was not.

Zack: A lot of times, there are a lot different entities involved, right?

Pat: Yes, that’s exactly right. But understand the cognitive biases that you’re saddled with. The CIA, the Center for the Study of Intelligence at the CIA, actually has a great primer on cognitive biases. And one thing they say is really striking: it says they’re like optical illusions, in that even when you know that it’s an illusion, it’s awfully hard to see them accurately, to understand. It still looks real to you, even though you know it’s an illusion. And cognitive biases are that way.

The reason we tend to blame the victims in these scams, universally, anybody who reads a story thinks, “Wow, how gullible, stupid or greedy must those people have been,” is operating under the optimism bias. It’s the thing that allows us to get out the door every day, into a world of germs and crime and teenage drivers. It’s a level of optimism that even the most pessimistic person has. And what it says to you, over and over again, is you’re going to be okay. Nothing too bad is going to happen to you today.

So you carry that into your meeting with a financial advisor. And if you don’t know about it, you can’t possibly overcome it. Which is why we talk about those in chapter one of the book.

Zack: Pat, thanks so much. Good luck with “The Vigilant Investor,” and thanks for your participation.

Pat: It’s my pleasure, Zack. Look forward to talking to you again.