Two days ago, the Associated Press reported on a federal civil fraud case against two suburban financial firms and their managers in Detroit. Federal regulators say a $53 million Ponzi scheme was being run at BBC Equities and Bravata Financial Group in Southfield, Michigan. U.S. District Judge David Lawson is being asked to appoint a receiver to look at the books. The Securities and Exchange Commission claims John Bravata of Brighton recycled investors’ money to pay other investors who were promised 8% returns, although he denies wrongdoing. The SEC says millions were spent on homes, boats, cars and opulent lifestyles.
Here we have yet another Ponzi scheme being brought to light by the recession and we will certainly see more. Cases like this one underscore the need for individual investors to do adequate due diligence before placing their money with a financial firm. Simply googling the firm and its principals, or asking for recommendations or studying the financials provided by the firm is not enough. A thorough background investigation of all principals should be done prior to investing which should include a nationwide screening of civil and criminal courts, regulatory agencies, and a check for liens or judgments against the subjects. The background investigation should also include a media survey, a reputation check with sources not provided by the subject and a look into the subject’s financial situation. Deep background investigations can turn up red flags like lawsuits, criminal charges in other states or evidence that the subject is living beyond their means which can help you avoid being taken in by a fraudster.