From the August 01, 2011 issue of Futures Magazine • Subscribe!

Can you spot a fraud?

There are many ways to lose money in the financial markets. While some are more pernicious than others, when all is said and done, "A loss is still a loss." But lest we succumb to the truism and merely fade away, we want to discuss one of the most egregious forms of financial loss — fraud.

In the early years of the 21st century, fraud, an offshoot of the third deadliest sin, greed, is alive and thriving. In fact, Wikipedia lists two dozen types of criminal fraud.

Rooted in English Common Law and depending on the jurisdiction, modern jurisprudence requires that nine elements be present to prove that fraud has been committed (see "It is fraud if:"). Quite simply, a fraudster misrepresents a material fact with the intent that the defrauded relies upon that misrepresented fact. When the misrepresented fact is relied upon, damages are caused. Whether fraud is committed or not boils down to "intent." Large or small, all fraudulent financial schemes have one thing in common — there is a victim. Think of the Bernard Madoff Ponzi scheme.

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Large and small scale fraud

On June 9, 2009 Bernard Lawrence Madoff was sentenced to 150 years in prison, the maximum allowable after Madoff pleaded guilty in March 2009 to 11 federal felonies following his admission that he had turned his "wealth management" investment advisory firm into a giant Ponzi scheme. Investors ultimately were defrauded of $65 billion in paper assets, the largest fraud in history, with eventual losses estimated at $18 billion.

In early 2011, 12 investors discovered that they may have lost their physical gold and silver investments that were supposedly being held "in trust" by Lawrence Heim, the owner of U.S. Gold and Silver Investments, Inc. a firm located in Portland, Ore. Heim’s legal counsel at that time, Martin Meyers of Sussman Shank LLC, said in early March that "Mr. Heim is claiming business assets of $2000 and is close to bankruptcy."

Also In early March the Portland office of the FBI via a warrant executed a search and seizure at Heim’s residence after FBI representatives suspected "… probable cause that Lawrence Heim devised and executed a scheme to defraud individuals…." It remains to been seen how assets disappeared because the FBI’s investigation was not complete as of this writing and Heim has chosen to make no statements.

As with the Madoff case, some of the U.S. Gold and Silver Investments investors filed civil suits against Heim and his company hoping to retrieve assets.

Losses for the Heim investors to date total several million dollars, hardly on the scale of the Madoff fraud, but still painful for those affected.

While it’s now evident how Madoff was caught and how his investors lost money, some folks would like to know how Heim, supposedly a seasoned gold and silver dealer, could have failed in a bull market in which gold and silver rallied 500% to 700% over a decade. Madoff admitted to fraud. It remains to be seen if Heim committed fraud, but regardless of the intent, the result for investors was the same.

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