‘I never thought; that could happen to me ‘: How to avoid business fraud

Pyramids, Ponzis and more: Be aware of the things we don't think about but that can harm us.

15+ min read

The opinions expressed by employees are personal.

‘I never thought; that could happen to me ‘: How to avoid business fraud
‘I never thought; that could happen to me ‘: How to avoid business fraud

It all started with a private note from a dear friend who is over 70 years old and was recovering in the hospital from her most recent intervention. I asked how he was doing, something I usually do often. When he replied, he gave me impressive news that I would never have suspected. He had invested $ 300,000 dollars in a program to create authoritative websites, and he had done so through a friend we both knew and had worked with in various ways since 2014.

“It's horrible,” he told me. “Fast growth, lack of communication. He invested $ 300,000 and could lose everything. ”

He suggested that I write an article, not about the person or the company (this is already quite talked about in the press). I wanted him to give people information about how to protect their investments, especially when you invest with someone you know and trust. This is that article, along with what I have thought about how to protect yourself as an entrepreneur so as not to fall into a similar situation.

On December 27, 2019, the United States National Stock Market Commission issued a complaint to the aforementioned company. All of its assets are now frozen, the doors are locked, its 100 employees were laid off without notice and their assets are bankrupt. What went wrong?

The company had assisted investors (some of the 500, almost $ 75 million, according to the Commission) to buy or create profitable websites, which the company would build, maintain and host. The company would take over the advertising and grow the authority on Google, as well as the profits of each site, and apart from the $ 1,000 monthly fee charged to the investor, promised to return or 50 percent of the profits, or if these were insufficient, it guaranteed the investor an annual return of 13-20 percent of the initial investment, paid month by month.

Who would not want to invest in such a program? Even if you had to borrow money, exchanging the interest cost of 8 percent for a guaranteed return of 13-20 percent is “a math so easy it is simply stupid,” the founder proclaimed from the stage at multiple events.

I will openly say that I believe, for several reasons, that this founder started the company with good intentions. I think he intended to build a company that would exceed expectations and that would help hundreds of friends and thousands of followers, all entrepreneurs who work tirelessly, to succeed.

It was especially sweet that, like him, many of the friends and investors he brought had developed their experiences in the face of previous defeats. Plumbers Pizzerias The founder's own family had been affected by the failure of a video store that ran out of options when the world of video moved to digital. His wife had served as a public official. The company assured everyone who attended its conferences that it was in a solid and debt-free financial situation (which it was).

But the most attractive of all was the atmosphere of genuine added value and friendship that permeated each event. At the speed of light, he outlined strategies and stories about how to build authority on Google, strategies for professional progress and specific ideas for business success. The stories were true, and he spoke freely about his ideas and experience. I even talked about some of his proposals in my business columns, although I instinct stopped me from covering the program itself. Instead, I shared my impressions of the marketing ideas I heard at the events. In fact, I spoke in two of them myself. They were meetings in which there was no talk of a program to make you rich overnight, but focused on adding value to the attendees (although at the bottom there were tables to close the business, and they were always active). The founder spoke of philanthropy freely and openly, as one of his highest business goals.

Who was a victim and why?

First, let's analyze the extensive list and the nature of the victims in this and other similar situations. It is much worse than you imagine:

1. The 500 investors who paid an estimated $ 75 million for the program . The outcome of the judicial administration is unknown. The Commission estimates that $ 9 million of profits had been generated, but even with delays in the launch of some of the sites and the start of payments, the company managed to pay investors about $ 30 million in returns. The problem is understood.

2. The 100 employees who no longer have a job.

3. Secondary victims . This includes contractors, consultants and advocates who worked with the company and spoke on behalf of the founder and who therefore became complicit in lending their reputation to this story, and in many cases, end up without paying for their services. And they have less protection than investors. (Another important note: In some cases, there is a precedent of prosecution and even imprisonment of individuals who have testified to programs they used and believed in, if they received compensation for their recommendations and it turns out that the program ended up being fraudulent. This may be the result, even if these people did not know that the program was a fraud. So before recommending anything, always be very careful.)

4. Couples and families of employees, and even of the same founder. To what degree does the founder's partner have problems and become guilty? They are difficult questions.

5. Many friends and affiliates who were not directly involved . These are people who did not lose money, but who invited the founder to conferences and who spoke well of him as an individual and who now feel guilty about what happened.

How do we avoid being victims of these scenarios?

Here I tell you what I think, and I am sure that readers will offer others:

  • Stay alert for unregistered investments. In this case, the company's lawyer said that the investment was not something safe. The Commission does not agree. An investment that involves the purchase of a registered security may be more complex to implement. It may not protect you from risk and may require you to be an accredited investor in order to participate, but the outlook and the reports that reinforce it offer a higher level of protection against fraud.
  • Be careful to invest more than 10 percent of your value. For example, this criterion in itself could prevent the investment of 100 percent of the withdrawal of a family in a vehicle that creates undue risk and provides insufficient regulatory protection.
  • Be careful with any investment that guarantees a return above the prevailing norm. According to experts, this would be a return above 7-8 percent.
  • Thoroughly review the legality of any investment . In order not to appear presumed about this, I will reveal that once I invested in a project that promised a minimum return of 13-14 percent in income on income for investing in a department in restoration to be rented to travelers. I later discovered that this type of deal was illegal, and worse, the banks that financed the mortgages for this project included the so-called “instant memo” process of an important bank whose internal memorandum on how to accelerate a loan resulted in massively bad consequences. during the real estate collapse. At the end of this project, we realized, too late, that our loan application, which had been sent through questions and answers over the phone, had inflated our income to $ 100,000 annually and recorded our retirement savings as if It was liquidity. And we didn't realize why the documents arrived overnight, with the instruction to sign 30-40 sheets in a few hours and send them back to invest. Fortunately, a class action lawsuit by the 261 investors who entered through the same bank and process led to an eventual resolution. But how we reached the agreement takes us to the next point …
  • Never enter a program in a hurry. Do not accept any treatment that does not give you the opportunity to think well about the decision you are going to make or to do the necessary research.
  • Beware of direct selling programs with compensation models that promise high income possibilities through multi-level sales models . Many of the companies that traditionally operated with this model are changing, both in response to the current market and to avoid the risk of a legal analysis that determines that an illegal pyramid structure exists. Even so, when the model to sell or receive legal or Internet services or weight loss products or nutrition follows a recruitment model and requires monthly purchases, be careful. (And something else: Although it is essential to check the authenticity and expiration dates, many of the products you may want from a direct sales company are usually available for less money on Amazon or eBay , offered by people who need to settle the excess of inventory they have in the garage).
  • Be careful when investing with friends . Membership can be a deadly factor in many of the businesses that go wrong. If you know the goodness and the heart and even the families of a founder, and if many of your friends are investing, you are at greater risk of making mistakes.

As an entrepreneur, how to stay away from problems?

Now, the most important thing may be, how do you as an entrepreneur avoid a situation that ends up being illegal? I firmly maintain that very few people get into these types of problems with knowledge of the cause or in a premeditated manner.

Here some of my ideas:

  • Avoid the assumption that a concept that has been tested even in multiple implementations will be equally effective on a large scale. In this situation, the strategies that made the first websites successful can cause rupture or even large-scale disasters. For example, when Google sees a massive increase in traffic, it will usually close the situation fearing a fraud, or a change in its algorithm will make the strategy no longer effective. This is just an example. International rates, the supply and demand of preferred resources or even the number of publications indexed by Google that exist to transport the massive amount of added value and educational materials necessary for a system to be successful, can make a system fail. The number of participants that the market can support in a given category or the total potential market of people who require a certain type of vitamins or supplements can influence the way a business model works at scale.
  • Avoid the temptations and risks that come with accelerated growth . Suffer communication with employees and customers. Even the brightest employees will not be able to train new hires fast enough to handle growth. The inevitable need to direct the current operation on the earnings you insured 30-90 days ago leaves a growing delta that, in a large-scale situation, accelerates the need to borrow or sell faster. If someone believes that this is a phenomenon that only affects websites with authority, I can assure you that it is not. Solar companies or online advertising sites for recruitment or education are other examples of situations that I have witnessed in which vendors are encouraged to sell faster than the organization can obtain supplies or perform integration. Although they are not illegal or pyramidal, these scenarios create collapsing bubbles, leaving investors without their money and customers without the service.
  • Learn the self-awareness of the traits that make entrepreneurs particularly vulnerable . Inevitably, the best entrepreneurs are people who succeed against all obstacles. They do not think of impossible and are exceptionally talented to think big and innovatively. They are not overcome by obstacles. In general, they think more, investigate more and look for ways to solve a problem in the short term by finding the most creative solution. For example, the first major technology company I worked for was joking openly about the filling party they did at the end of the quarter. Under pressure to meet Wall Street's sales and revenue expectations, teams would find every creative opportunity to get additional sales and put them in the books. To some extent, this is legal, but under pressure certain lines can be crossed … with cause knowledge, or without. These scenarios require checks and balances and an unwavering approach to compliance to keep founders, investors and customers safe.
  • Beware of the ease that comes with membership . The human tendency to first trust the people you know most leads us to be lax everywhere. It is one of the most pernicious challenges of multilevel marketing and affiliate sales, because it tends to sell more directly to people that are known and close. You should be doubly aware of your marketing and your investments and sales when dealing with people you know.
  • What happens when a line is crossed? In retrospect, many of the worst situations we encounter involve a person who faced a short-term problem, perhaps a mixture of funds believing that it would be quickly rectified, or used current sales or loans to pay previous investors while trying to accelerate production or find alternative income lines to compensate for gaps. For example, did Theranos CEO Elizabeth Holmes make an intentional decision to issue falsified results of her company's blood tests? Probably not. At first, he most likely thought of the effort as an emergency measure to maintain investor confidence until the company could find out what was happening. Most of us know how that story ended. Under constant observation, the company may have corrected its false assumptions and made the solution valid, albeit more slowly, or could have migrated the technology to an alternative use. But without these revisions and balances, the bubble burst so that it proved to be something horrifying for everyone involved.

In general, an investment that goes wrong (unless it opens the way for a bright alternative) is rarely a good thing. Fraudulent behavior, either by you or by someone with whom you have done business, is a disaster that can result in sanctions and even jail. It destroys careers and reputations, in addition to imposing extremely high and sometimes unrecoverable costs. If bad business is the result of fraudulent behavior or an honest mistake, it is an experience that every entrepreneur should strive to avoid.

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