In Enough Bull (see my review of the book), David Trahair refers to a systematic study of an investment fraud by Neil Boyd of Simon Fraser University. In the 1990s, Eron Mortgage raised more than $200 million from thousands of investors, purportedly to fund real estate investments in Western Canada and the United States. In reality, it was a classic Ponzi scheme and when the fraud was exposed, investors lost most of their capital.
Neil Boyd found that investors in Eron were primarily older males who wanted to fund their future retirement. Many of them invested their retirement savings but some borrowed funds or mortgaged their existing properties to raise capital to invest in Eron. They had an average household income, wealth and education. Eron was mostly an affinity fraud — most investors were attracted to it because family and friends were involved but some got involved through media reports, seminars and advertisements. Asked why they thought Eron appeared to be a reasonable risk, investors cited its appearance as a legitimate business, the “guaranteed” rate of return and involvement of friends and family as main factors. Surprisingly, earlier investors got burned the most because they made additional investment at later dates.
Investors who lost more than $50,000 reported considerable harm to their retirement security, current financial situation, emotional well-being, physical health, friendships and marriage. Noting the widespread harm caused by the crime, the author calls for stiffer penalties for securities crime. Unfortunately, no amount of deterrence will prevent crime and caveat emptor applies to investment products.
One regulator contrasted the decision to invest in a security with the decision to buy a new car. In the latter case we go to the car lot, we test drive the vehicle to make sure that it fits us, we consider the warranty, we know the brand name and the comparable choices within a similar realm; we even bargain over the price, and whether we will lease or purchase. We are skeptical and typically very knowledgeable purchasers. In contrast, decisions to invest often take place without a corresponding base of knowledge and, most important, without a correspondingly critical analysis. We can make improvements to regulatory law so that it better protects investors, but it will ultimately be a well-informed and skeptical investor who is least likely to be victimized by the fraudulent dishonesty of men like Brian Slobogian and Frank Biller.