How to pick a scam and save your money

Yet again, a big financial scam is in the news. A trusted adviser from a highly credible firm has lost his clients and friends millions. He’s also not the only financial adviser in on the scheme, with ASIC indicating that there are others involved and this scam has affected investors across Australia, the United States, United Kingdom, New Zealand, China and the Middle-East.

It’s a horrifying tale and far from the first time we’ve seen investors see their trust misplaced. How do investors protect themselves from sophisticated schemes, particularly when those they pay to help them behave unethically?

It’s a complicated question and there are no easy answers.

The long and the short of it - the Ridgeway confession

As a quick recap for those unfamiliar with the recent case.

Kris Ridgeway, then a Senior Financial Adviser with Shaw & Partners, encouraged his clients to invest in unlisted global schemes, including Steppes Alternative Asset Management, Trinus Impact Capital, ASAF Critical Minerals and Aus Streaming Limited, where he received a 17% commission and did so off the record. 

He encouraged clients to invest on the basis that the companies in the scheme were due to IPO and the clients would then receive large cash windfalls from this. The companies never went public and in fact, PwC can’t find any assets said to belong to one of the companies Aus Streaming Ltd. Investors have been left with company shares that are effectively worthless.

The investment scheme was never endorsed or authorised by Shaw & Partners and Ridgeway circumvented their compliance system to sell it to his clients. In his recent media confession, Ridgeway claimed he originally believed it was a legitimate investment but realised it was a fraud a few years ago. Rather than notifying ASIC or trying to help his clients, he continued with the scheme.

The scheme was allegedly run by David Sutton and Andrew Turner. They were directors for ALT Financial Group which has been recently charged for failing to submit annual financial reports with ASIC. ALT Financial Group operated Steppes, and Sutton also promoted it through his business, McFadden Securities.

Separately, both were investigated for links to a North Korean mining deal in 2016. The UN has placed sanctions on doing business with North Korea.

While there were around 90 clients affected at Shaw & Partners, the full extent of Australian investors affected is yet to be known. The Age, SMH and 60 Minutes investigation notes that some of the advisers ASIC is investigating are still practising so their clients are likely to be unaware they are affected.

ASIC announced a permanent suspension on Kris Ridgeway last week. His involvement in the scheme was uncovered in February 2022 and he was immediately sacked from his role at Shaw & Partners, with ASIC notified at the time.

And Liar, Liar - the Caddick case

An older (but still recent) story of scams and losses totalling in the millions is that of Melissa Caddick.

Caddick masqueraded as a financial adviser with her own business - Maliver - and used another adviser’s AFSL without that adviser’s permission or knowledge. She then convinced her clients to invest their life savings with her and faked extensive documentation showing portfolio performance while pocketing their money instead to fund her lavish lifestyle. She effectively managed a Ponzi scheme where any client returns or redemptions were paid by bringing in new clients.

Her clients were largely family and friends.

It all came undone when a prospective client took the time to look into her supposed license, realised it didn’t match and reported her. She vanished after an ASIC raid and is presumed dead, with her victims now awaiting any form of fund recovery from the proceeds of sales of Caddick’s assets.

Some things to note from the outset…

It is illegal for advisers to be paid commissions to recommend products in Australia so this should be a red flag.

Unfortunately, Ridgeway was careful to hide the commissions he received and his clients were completely unaware he was making commissions from them. Financial advisers are also required to disclose any form of benefit they may receive from recommending a product or service, such as receiving reports or subscriptions that would otherwise not be available.

Caddick on the other hand wasn’t receiving product commissions… because none of the money went to products but rather into her pockets.

If it sounds too good to be true…

Ridgeway promised his clients large windfalls once the companies became public. Given his use of Shaw & Partners branding, his clients assumed it was legitimate and suitable for them, ignoring any inner concerns.

To be clear, this is not the fault of the victims. There was significant effort and detail taken to deceive clients. The best tip to take is that it can’t hurt to ask the extra questions and get a second opinion from someone independent.

Like most things in life, if it’s too good to be true, it’s probably not true. Unfortunately, this was definitely the case for these particular companies.

That’s not to say private companies aren’t worth investing in, but it’s a sophisticated activity and often comes with high levels of risk. Many investors who are interested in such investments could be better off considering managed funds from reputable and long-experienced investment management firms that specialise in this sort of work.

In the Caddick case, she was producing reports suggesting unbelievable returns compared to market and top stock pickers. It was indeed too good to be true - the returns were faked, unlike the labels Caddick was spending up big on.

Diversification and that saying about eggs in one basket

Some of Ridgeway’s clients have lost their entire life savings. What stands out here is that Ridgeway was actively encouraging clients to invest in one concentrated investment rather than spread their money across assets, risk types, countries, etc… It’s not only unusual behaviour for a financial adviser, it counters typical wisdom about investing. After all, diversification is often termed the only free lunch in finance.

If your financial adviser pushes you to do that, it might be time for a second opinion.

In fact, any pushy behaviour from a financial adviser to invest quickly or invest more might warrant a closer look - and that’s not talking pushy in terms of getting you to clarify your goals and finances.

Caddick pushed her clients to sign paperwork and told clients she would drop them if they hadn’t done things by certain dates. She also made her service seem like an exclusive club whereby she only occasionally took on clients so they felt privileged and afraid to ask the important questions that might have saved their money.

This is also a common approach used by other investment scams, where you might be bombarded with phone calls. For example, architect Tony Camilleri lost his entire superannuation to a sophisticated international scheme that started with a cold call and included multiple calls from others claiming to be part of a Chicago-based firm. This was outlined in the podcast 'Anatomy of Scam'.

How to avoid Ponzi schemes and other scams in investing

Investment scams are getting more sophisticated all the time and while it would be pleasant to think it will never happen to you, it might. Intelligent people get scammed by intelligent scams all the time.

MoneySmart has some tips to help investors avoid them - though it’s not a guarantee given tactics evolve.

1. Ask questions and check paperwork and licensing

2. Do your own research into the company and also use regulator sites to check legitimacy and registrations.

3. Be sceptical, even when it’s someone you know and trust. Many scammers have taken advantage of family and friends.

4. Protect your identity - don’t hand out sensitive personal details like passport and license or banking details too quickly and if you do make a mistake, report it to your bank and other relevant parties.

5. Report it as soon as you think you’ve been scammed to the police, your bank, regulators and other parties.

If you receive an offer that sounds too good to be true, you can also take advantage of ASIC’s registers to check it.

These include:

• OFFERlist database to see if a managed investment scheme has been lodged with ASIC

• ASIC Connect to check for company and financial adviser AFSLs and that these match with what you have been told.

• MoneySmart’s list of companies you should not deal with

• MoneySmart’s list of fake regulators and exchanges

• International Organization of Securities Commisions investor alerts

At the end of the day, don’t be afraid to ask questions and find a second independent opinion. Scams can still happen, but taking a skeptical approach to investments may still save you.

Have you been scammed before or has someone tried to scam you? Please share your experiences and what you'd recommend for others below.