Many Hedge Funds Are Just Pyramid Schemes -- Arthur Nadal's Valhalla Just the Latest

How many hedge funds are actually just pyramid schemes? How many hedge funds that aren't hedge funds are seriously cooking their books?

Nobody knows, but as the financial bust continues the shakeout among hedge funds continues. The investors in Valhalla Investment Partners woke up this weekend to discover that their high-return hedge fund was just another pyramid scheme. Arthur Nadel, the owner of Scoop Management has disappeared and apparently taken investors' remaining moneys with him according to various news reports. The FBI is investigating.

The Valhalla fund reported annual returns of 32 percent from 2000 through 2006 -- yeah, right. But as Warren Buffet says, when the tide goes out you can see who is swimming naked, and it is pretty clear that Valhalla's returns were bogus all along.

Another philanthropist (it's easy to be a philanthropist when you are giving away somebody else's money), Arthur G. Nadel did not let being disbarred for fraud, dishonesty, and misrepresentation keep him from becoming a high-flying hedge fund manager. Even minimal due diligence by investors would have picked up this enormous red flag, but apparently no investors took the time to do so and now they've lost their money.

The problem with hedge funds is that they are opaque, nobody knows what is going on with them in any given moment, and probably many of them are just pyramid schemes. If you have money in a hedge fund, now is a good time to think about taking it out, as the hedge fund shakeout may last some years.

Source: Bloomberg click here

Quatloos!

A Schande for the Goyim

The Yiddish expression in the title -- "A shame in front of the gentiles" -- describes the general reaction of those in the Jewish community and/or Israel to the whole affair. The Jerusalem Post, for example, had an editorial noting that Madoff being a Jew will surely increase antisemitism; and, indeed, the usual gang of idiots on the Internet already sees Madoff as "proof" of the evil nature of the money-grubbing Jews, out to cheat the gentiles. 

The truth is a bit different, to say the least, and more interesting. Madoff actually scammed many more Jews (proportionally, at least) than gentiles. The Israeli papers in the last two months or so since the scam was exposed are full of reports of one Jewish bank owner, fund manager, or investor after another, both in Israel and in Jewish communities abroad, being "burned" by Madoff.

Why did Madoff scam Jews? Trust. Like all scam artists, he built on the natural level of trust that exists between members of a community -- religious, national, or other. You are less likely to believe a Zulu is out to scam you if you are another Zulu; especially if both of you live in the USA and therefore are a small minority among a large number of non-Zulus.

In the Israeli papers, this is seen in detail. Repeatedly, people said with a sigh: "Oy, that one Jew will do that to another Jew..." -- and one who is known as a supporter of Israel, to boot. Surely someone like that won't deliberately set out to scam other Jews?  

Guess again.

P.S.

Speaking of the naive belief that people of one's own group will tend not to hurt you, Isaac Asimov tells the following story (in "Asimov Laughs Again"): once, he asked Ben Bova, the science writer, to give a lecture in his stead, since he was sick. Bova told him he could not do it -- his Catholic upbringing does not allow him to profit from another person's misfortune. 

--"What are you talking about, Ben?" asked Asimov. "The Mafia--"

--"If you cause the misfortune, things are different." 

National Heritage Foundation (NHF) it with $6.5 million civil jury award for abusive charitable split-dollar plan

According to this News Update dated October 15, 2008, in The Chronicle of Philanthropy, a jury in Texas awarded $6.5 million against The National Heritage Foundation (NHF) for a charitable tax shelter gone astray.

The NHF allegedly talked a Texas family into establishing a charitable split-dollar plan and funding it with life insurance to benefit the family's private charitable foundation. Later, the lawsuit alleges, the NHF changed itself to the beneficiary and allowed one of the policies to lapse. The NHF claimed that it later changed the beneficiaries to a convent, and claimed that the lawsuit and award was attributable to actions of the plaintiff's other advisors.

The IRS had ruled that charitable split-dollar plans such as were involved here are abusive tax shelters.

To go to the new update please Click Here

Quatloos!

Land Patent Scam Returns

An oldie but a goodie from the late 1980s is the so-called "land patent" fraud. This is where scam artists concoct a theory that the land under the house was never covered by the mortgage, and thus it can somehow be protected by purchasing (from the scam artists, of course) a totally bogus "land patent" that claims that the house is owned by some sovereign, such as an indian tribe or something.

The land patent scam went around in the late 1980s where farmers were desperate to try any theory to save the family farm. Scam artists took the opportunity to lighten the farmer's wallet of their final bucks before foreclosure.

New scams are actually rare: Most scams have been around at least once before, if not many times over the last half-dozen or so generations. The land patent scam is one of these, perpetually re-cycling itself with each real estate bust.

Read more about the latest version in this
Article.

Texas Attorney General Fighting Foreclosure Fraud

The Texas Attorney General is also going after foreclosure fraud, see Article.

Calfornia Takes Action Against Foreclosure Consultants

There are few things lower than taking advantage of somebody going through financially hard times, but scam artists have been known to prey upon desperation to fleece new victims. With foreclosures at epidemic levels, the State of California has acted against some of the worst of such slime, known as a "foreclosure consultant". These scammers take money from people who are being foreclosed on while providing nothing of value to the debtors.

California Civil Code Section 2945 provides:

(a) The Legislature finds and declares that homeowners whose residences are in foreclosure are subject to fraud, deception, harassment, and unfair dealing by foreclosure consultants from the time a Notice of Default is recorded …until [the property is foreclosed]. Foreclosure consultants represent that they can assist homeowners who have defaulted on obligations secured by their residences. These foreclosure consultants, however, often charge high fees, the payment of which is often secured by a deed of trust on the residence to be saved, and perform no service or essentially a worthless service. Homeowners, relying on the foreclosure consultants’ promises of help, take no other action, are diverted from lawful businesses which could render beneficial services, and often lose their homes, sometimes to the foreclosure consultants who purchase homes at a fraction of their value before the sale. Vulnerable homeowners are increasingly relying on the services of foreclosure consultants who advise the homeowner that the foreclosure consultant can obtain the remaining funds from the foreclosure sale if the homeowner executes an assignment of the surplus, a deed, or a power of attorney in favor of the foreclosure consultant. This results in the homeowner paying an exorbitant fee for a service when the homeowner could have obtained the remaining funds from the trustee’s sale from the trustee directly for minimal cost if the homeowner had consulted legal counsel or had sufficient time to receive notices from the trustee pursuant to
Section 2924j regarding how and where to make a claim for excess proceeds.

(b) The Legislature further finds and declares that foreclosure consultants have a significant impact on the economy of this state and on the welfare of its citizens.

(c) The intent and purposes of this article are the following:

(1) To require that foreclosure consultant service agreements be expressed in writing; to safeguard the public against deceit and financial hardship; to permit rescission of foreclosure consultation contracts; to prohibit representations that tend to mislead; and to encourage fair dealing in the rendition of foreclosure services.

(2) The provisions of this article shall be liberally construed to effectuate this intent and to achieve these purposes.

Why do People Fall for Ponzi Schemes?

Why do people fall for Ponzi schemes? Michael Shermer, editor of "Skeptic" magazine (well worth reading in its own right -- http://www.skeptic.com -- but not usually dealing with financial scams) explains in the following link:

http://www.skeptic.com/eskeptic/08-12-23.html

(Scroll down a bit in that web page to get to the relevant article).

Shermer notes that there are four major factors -- situation, emotion, gullibility, and personality -- that effect who is likely to be scammed in what manner by whom. Yes, gullibility -- which is not exactly stupidity -- is to blame, as is greed; but the social and emotional "trappings" of the scam are very important.

Shermer agrees that the big mistake people made was not that they invested in Madoff's scheme: "the lie perpetrated by Madoff was not all that obvious or easy to recognize (in fact, it is very likely that Madoff's operation was legitimate initially but took the Ponzi route when he began to suffer losses that he was too proud to acknowledge)."

The real problem, as quatloos! warns over and over again, was "throwing all caution to the wind, as in the stories of many people (some quite elderly) who invested every last dollar with Madoff or one of his feeder funds". Such blind fate, notes Shermer, has an almost "religious quality" to it.

Read the whole thing.

The Unlucky Lucky Madoff Investors

So you were lucky enough to receive money back from Bernie Madoff before his pyramid scheme collapsed? Think again.

The usual process in pyramid scheme recoveries is for the court-appointed Receiver to obtain all the financial records of the scamster, including bank accounts. Then, disbursements are traced to each recipient, who receive a friendly letter telling that they must send all the money they received back to the Receiver, so that the Receiver can pool the moneys together for distribution to all victims. Oh, and by the way, if the moneys are not returned then the Receiver will either sue the victim or obtain an order to hold the victim in contempt of court.

Upon receiving such a letter, the scam victim yells "Bloody Murder!" and immediately complains that they put more money into the scheme than they ever got back, and are still in the hole.

The Receiver just doesn't care. The money is not that of the victim, the money is that of ALL victims. The Receiver's job is to husband all the remaining assets of the scheme into the pool, and the assets include those that were paid out of the "lucky" victims before the scheme collapsed.

But what if the victim who received money doesn't have any ready cash on hand? Tough. The receiver can bring a lawsuit against the victim, obtain a judgment, and then liquidate the victim's other assets, such as houses, IRAs, etc., until the Receiver gets back all the money received from Madoff.

Brutal? Yes, but necessary to protect all victims. It doesn't make any sense than an investor who received money from Madoff a month ago should be in a better position than one who didn't. The strong powers of the Receiver to claw money out of "lucky" investors is also why there is actually the possibility of some recovery by all victims. In the Reed Slatkin scam, for instance, victims received upwards of 40% of their original investments back. In the Cash-For-Titles scam of the late 1990s, victims received over 70% of their money back.

Quatloos!

Some Good Books...

Hello folks!

For those of you who want something to read about con games in general and MLMs in particular, I can heartily recommend the following (all of whom I've read myself):

Carter's account of her trip in and out of the Amway cult is probably the best no-nonsense financial analysis on how MLMs are just a way to go broke slowly. What's more, even the "top" folks in Amway, faced with a constant need to show their "wealth and success" with all kinds of expensive knickknacks, are often in worse financial shape than the suckers they fleece. You thought Amway (Quixtar) "diamonds" are wealthy? Guess again.

 

Nash's work is history, not financial advice, but -- quite apart from being inherently fascinating and containing many rare photos and documents -- shows how there's nothing new under the sun. The same scams that worked 100 years ago (and more) work now. There's a sucker born every minute, after all.

Fitzpartick's book is more philosophical in nature. It concentrates on how MLMs, their promises to the contrary notwithstanding, are ruinous to friendships, spirituality, and religion. MLMs, a "business opportunity for Christians"? Not really.

Scammers, con men, and MLMers (is there a difference?) do not come with a business card saying, "Hello, if you want to be scammed, call...". They try to hide their illegitimacy in many ways. Like Quatloos!, Henderson's book -- written with verve -- is extremely helpful for those who would like to recognize the warning signs that say "SCAM!" ahead of time. The chapter on MLMs is especially interesting.

Cash Value Life Insurance -vs- Term Life Insurance

Question: PLEASE tell me your opinion about Whole Life / CV Life Insurance. I have seen [some idiot on TV] call cv policies ' terrible wastes of Money ' along with other Economic authorities. Of course there are the Career Life agents that say buy Whole Life as a ' Best Buy ' because the CV can become the foundation of a Retirement Plan , plus the death benefit . I am sooo Lost ,...and have been searching for the ' Truth ' for years !

Many thanks in advance !

-----------------------------------------

Whole life is "the insurance agent's best friend" because whole life policies usually have a "commissionable premium" in the 70% range, as opposed to universal life policies that pay the agents in the 30% range. With a big policy, it can be a huge difference for the agent.

For the owner, it can be a bid deal too. The problem with whole life is that it requires level funding. While sometimes this makes sense -- when the life insurance policy is part of some benefit plan requiring levelized funding, for instance -- it often doesn't make any sense at all for ordinary insurance purchases, where the owner doesn't know if he will really have the cash flow to fund the policy for whatever required period of time. So, universal life will almost always beat Whole in the "what is best for the client" competition.

Having said that, both Whole and universal life usually makes more long-term sense than just buying Term, which gets more expensive as you get older and doesn't build up any cash value to cover future payments. Usually, the critics of cash value life insurance and pundits of term insurance can only point to the current-year premium advantage of Term, as opposed to the total long-term cost which favors universal life and Whole.

But the bigger question is whether to buy life insurance at all. If your survivors will need life insurance, then buy it. If your estate will need life insurance to cover estate taxes, then buy it. Otherwise, you probably don't want to buy it.

While life insurance is certainly an "investment" in the same sense that buying a piece of property is an investment, it has to be measured in the long-term against other investments, including the fact that the CV grows basically tax-free against the death-benefit cost that other investments do not have.

Most of the time, the "other investments" will make more sense depending on a gazillion factors. There are a lot of really happy investors in equity-indexed annuities and life insurance right now, who have watched their friends and colleagues lose 30%+ while they will simply credit 0% for 2008. But equity-indexed strategies can be replicated outside of the life insurance or annuity context.

So, the answer is -- which will NOT clear up your confusion -- that it "depends" on the gazillion circumstances. Those who use a shallow analysis and say never buy cash value life insurance are wrong, and those who say buy nothing but cash value life insurance are wrong. In other words, the sound-bite extremists on both sides are wrong. What will make sense for YOU will depend on YOUR particular circumstances and needs. Maybe you need it, maybe you don't. Maybe it will make sense for you, and maybe it will not. But this is why good financial planners are worth their weight in gold.

Closed End Managed Buy/Sell Program Is A Scam

Question: Are closed end managed buy/sell programs legitimate? I've made introductions to parties claiming they can produce 30% gains per trade as the buyer is under contract to perform. I think it could be a scam.

----------------------

It is a scam of the type known as a pyramid scheme. The term buy/sell programs is a term often used by scam artists to try to impress investors into thinking they are putting money into a sophisticated hedge fund (many and possibly most hedge funds are scams in our opinion, but that's another matter entirely), where the fund can generate big returns without any risk of loss.

In fact, the risk-reward correlation is as absolute as the earth-gravity correlation: You just can't get away from it. You cannot have big returns without big risks. Nobody can promise 30% gains per trade without extraordinary risk. But this is just a pyramid scheme where old investors are being paid with new investors' money, but no traders are actually occurring. Like the Bernie Madoff scam, they are just making up statements showing trades out of thin air. Run!

Rent Scam Where Check Covers Rent In Full

Question: I have recently posted a home for rent on Craigslist and have received several requests from emails claiming to be out of the country and they are ready to rent sight unseen. When I insist they fill out an application they do not respond. Initially they were offering to mail me a check to cover rent in full. How does this scam work. I cannot figure out how they can be scamming when they are only asking for my name and address to mail me a check? Have you heard of this?

------------------------------

This is a variation of the Nigerian 4-1-9 scam. Here is what will happen: The renters will send you a cashier's check for the full amount, and may even overpay. Then, they will want you to wire-transfer some of the money back or remit their overpayment. You will wire them money, and only 30 days later find out that the cashier's check is bogus. You will then go to your bank to try to get the wire-transfer reversed, only to find out (1) the bank cannot do it and you, and not the bank, are responsible for your loss; and (2) authorities outside the U.S. don't care that you've been scammed.

This is a very common scam, often run with the sale of automobiles. Same thing: Scammers send a cashier's check that overpays for your clunker, you wire the difference back, and then find out that the cashier's check is bogus.

Anytime somebody outside the country offers you a payment for something, be very suspicious because it is more likely a scam than anything real.

Nigerian Date Wants Travel Money

Question: I sent a girl money to fly from logas to portland,and she told me that they wouldn't let her board the plane because she didn't have enough travel money,they told her she need 1200 doller's travel money to beable to board plane,is this true ??
-----------------------

This is another version of a dating scam a/k/a Nigerian dating scam a/k/a advance fee fraud. You are probably not even corresponding with a girl, but a 60-year old fat guy sitting in a cybercafe somewhere in Africa. If you send the $1,200 you'll be scammed instantly.

Reader Question About Dating Scam

READER QUESTION:

Have you ever heard of a scam involving a dating site. Guy looking for lady. Story when contact is made that he in Africa prospecting diamonds. After a couple of week's diamonds found, guy coming home but has problem paying royalties on diamonds. Can lady send him money as he doesn't have enough with him?

I am experiencing something like this now. Could be legit and I certainly am not sending anyone any money but if it's a scam I sure would like to know and that others are warned.

Thanks

-------------------------

This is a common scam, known variously as a "dating scam" or a "Nigerian dating scam". It is a version of the Nigerian 4-1-9 scheme, which is technically known as "advance fee fraud".

You've been corresponding with a scam artist, which might not even be a guy, but is very likely to be sitting in a warehouse in Nigeria spamming and scamming for people to fall for this scam. There are no diamonds, and no royalties to be paid on the diamonds -- they've just made this up to get your money.

Unfortunately, there will be a number of suckers every DAY who fall for this scam, which is why running scams is the third largest business in Nigeria. Stay safe, and just refuse to deal with anybody in Africa, or anybody who wants your money.