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  • Writer's pictureSteven Lee

Financial Advisor Magazine!!

I just learned today that Financial Advisor magazine, considered one of the top publications for FAs by Investopedia, wrote an article discussing our research on investment fraud victimization! Our theoretical framework--the five fraud languages--continues attracting widespread attention in the financial planning industry.

Briefly, our paper posits five fraud languages that swindlers use to con investors into parting with their hard-earned money:

1) Perceived success - projecting competence through false account statements. This is important for the confidence man to overcome the hurdle of "I don't know you, so why should I invest with you?" Never mind the fact that the adage, "Past performance is not indicative of future returns" (I will write a separate post about the irony and contradictions surrounding this statement within the financial services industry).

2) Air of familiarity - transitioning from an outsider to a member of the "in-group." Swindlers tend to target groups of people to raise capital for their schemes. Religious, ethnic, and even occupational communities are all likely targets. By becoming a member of said group, the fraudster lowers the defense barrier and elicits (at least temporary) trust.

3) Claim to authority - incorrectly citing clearance from a well-respected regulator. Bernie Madoff was notorious for this. When asked about his investment program, performance record, conduct history, etc., he would turn the conversation around by claiming that he'd been checked out by FINRA, the SEC, the exchange, et al. He would then press the prospect on his/her credentials, sophistication, and financial information in order to further gorge his scam.

4) Noble pursuits - drawing a misleading (or outright false) connection between a humanitarian or other non-profit entity and one's investment project. People tend to think that non-profits are completely altruistic. By aligning their efforts with NPOs, swindlers bypass the need for the victim to conduct due diligence.

5) Framed authenticity - similar to noble pursuits only that the scammer hides behind a legitimate business within the industry--usually a brokerage firm, insurance agency, or the like. By blurring the lines between a reputable investment and, say, a Ponzi scheme, it is difficult for a lay person to discern where one ends and the other begins.

That's the short version of our theoretical framework. In the first essay of my dissertation, I examine thousands of litigation releases from the Securities and Exchange Commission from 1995 through 2018 to sharpen the five-fraud-language construct. In a later post, I will delve deeper into this topic once the qualitative analysis is complete. Until then, you can always check out my paper, "Victim Characteristics of Investment Fraud," on SSRN.

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