Friday Insider – The Ponzi Schemer Next Door

I was fortunate to be looking at the Charlotte news this week because I got to see this headline:

Investors likely won’t get all their money back in complex Charlotte fraud case

This guy is now on the long list of those that have attempted a form of a Ponzi scheme and of course failed in spectacular fashion.  I know Charlotte’s news better than other places, having lived there for so long, but each community has its own names just like these.  Bernie Madoff is now a household name, his crime measured in the tens of billions, but thousands of these enterprises are busted up each year on a much smaller scale.  It’s so frequent there’s a website where you can track them all!

I’ve had the pleasure to call several professional athletes clients over the years, and it was in that capacity that I was on the sideline of an NFL practice one sweltering August day.  My partner and I were there watching and catching up with clients, one of only a few ‘non-team’ people allowed on the field.  It’s always easy to notice the other folks who don’t seem to fit on an NFL sideline.  We were doing our best to stand off to the side (partly because we didn’t really belong, and partly because we were close enough to get injured by any wayward 300lb human projectile), but you couldn’t help but notice this one guy.  He was right there in the mix, trying to introduce himself to players, butting into groups of guys getting water breaks.  I’ll never forget his Prada sunglasses.  He was all flash – clearly very proud of himself for being there, and had no shame in pretending he belonged.

The guy in the Prada sunglasses was none other than Richard Davis, Jr, the same one from the article above.  I know this because he pitched me too.

As he was working his way around the sideline, we eventually met.  He introduced himself and told us a bit about his business there, that his firm Davis Capital Group worked with several players and coaches.  When he found out that we worked with some as well, he was interested in hearing more and we exchanged business cards.

In the week after, I reached out to him, hoping to hear more about his business (all he mentioned on the sidelines was ‘real estate’).  I don’t recall all the details, but I remember it was difficult to get him on the phone, he had some handlers and other people answering his calls.  I also remember being invited to one his well known events, where no expense would be spared on a lavish party, all to show his clients a great time while discussing his investments.  As much as he didn’t have time for small timers like me, he also knew that we represented players, and I’m sure his greed forced him into a phone call.  I asked a simple question:  what’s your investment strategy?  It’s been too long to remember what exactly was said, but I know he mentioned facilitating some sort of bridge financing, essentially funding real estate projects and other deals that typical lenders wouldn’t touch.  He took money from clients, became a lender of last resort on deals, and was able to turn out spectacular returns.

No specific projects were ever mentioned or terms discussed, but I knew all I needed to know.  All the warning signs were there:

Vague description of a strategy?  check

Lavish spending on clients/prospects?  check

Promises of amazing returns?  check

Ostentatious clothes and lifestyle?  check

Arrogance at wasting time talking to peers?  check

In one phone call this guy knocked it out of the Ponzi cliche park!  I remember getting off the phone and telling my partner that the guy was bullshit and we’d tell our clients to beware.  I also know for certain that one of my clients did indeed go to one of his events, even after I warned him the guy was at best shady, and at worst, a criminal.

I’m glad he was caught, but I’m sad for those that won’t get their money back.  If you’re in the business and deal with investments, those warning signs leap out of the conversation.  If you’re an owner of a plumbing company?  All you hear are high returns, name-dropping, and a chance to go to one helluva party!

At the end of the day, trust is trust.  You hand over your money to someone because of many reasons, but at the core, it’s because you trust them.  Trust is intangible; you can’t measure it, you can’t put it on paper, trust has no historical returns.  The supply of these people is never ending, they’re usually highly intelligent and charismatic, and they’ll often hang out in groups where bonds are strong and trust follows.  Churches, civic groups, alumni, family and friends, etc.  This guy was roving NFL sidelines in Prada, talking about huge returns, then he would switch to groups of “preppers,…targeting victim-investors who feared the stock market and the banking system.”  The irony.

So how can you protect yourself from someone like this?  Here are some quick guidelines to avoid becoming a victim:

First, ask questions about the back story and listen carefully.  Most of these stories follow a similar pattern, someone starts out working like the rest of us, then at some point they break off, start their own enterprise, and they make a massive leap into a new stratosphere.  Look at the background here, and here.  One guy started out selling life insurance, another’s “early business ventures ended in failure.”  Local man rises up, works a few years at a ‘normal’ job, then somehow transitions quickly into private jets and Ferraris.  Sometimes it’s a really great story, but most of the time it’s simply make-believe.

Second, ask what exactly they do and do some digging.  If you’re suspicious at all, ask for references and vet it with someone who might be more knowledgeable about the industry.  Most of the schemers have to come up with some sort of fancy strategy or unique product, otherwise they’ll have difficulty standing out and collecting your money.  The truth is, there’s no secret sauce out there, returns are hard to find and everything involves risk.  But that doesn’t stop human nature from pursuing easy riches and falling directly into the hands of a snake oil salesman.

Third, if the transaction seems to involve many moving parts, companies, accounts, etc, it’s probably trouble.  There’s no reason to transfer money nine times or for a guy to do business under six different names.  I’ve read on multiple occasions that these schemes start to unwind when checks show up with a different company name each time.  The only way someone can spend your money is to take it and put it under an account in their control…this should always raise some flags.

Finally…and most importantly…if it seems too good to be true, it probably is.  Everyone knows this, but just can’t control themselves, the emotions get in the way.  Allen Stanford was selling ‘guaranteed’ CDs with double digit returns at a time when the local bank CD was 4%, sometimes common sense is all you need to stay safe.  People get rich because they save tons of money, they grind out returns year after year, they invest in sound businesses and compound earnings over time.  They don’t get rich because they uncover some secret product that no one in the investing world has heard of before.  If you’re promised sky-high returns, or the word guarantee is dropped all over the place…trust yourself to know when something doesn’t feel right and investigate.

And watch out for those Prada sunglasses…

Disclaimer: All written content on this site is for information purposes only. Opinions are solely those of Innovate Wealth unless otherwise specified. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.  

Don't miss these stories: