Words of warning based on bitter experience

Photo / Hawkes Bay Today

If someone offered you an investment with guaranteed returns of 7 per cent a month, what would your reaction be?

Vivian Fatupaito would like to think you would cock an eyebrow, or perhaps even roll your eyes. But sadly, she notes, there are still some people who would break out in a grin.

One wonders how such people have managed to avoid the plethora of stories about the plague of financial disasters that have infected the world's economy in the past few decades.

In New Zealand alone, we have had the contributory mortgage fiasco, the '87 sharemarket crash, the dotcom bust, the finance company meltdown, and tax minimisation schemes of every conceivable variety. There have also been viral outbreaks of all sorts of frauds, often involving financial products or technological marvels that simply don't exist - like "prime bank" instruments.

As an insolvency expert at accounting firm PricewaterhouseCoopers for the past 16 years, Fatupaito has become all too familiar with many of them.

In 2005 she helped send Rotorua couple Bill and Lee Papple, and their business partner Tina West, to jail for defrauding investors of around $15 million. A Tauranga man, Donald Rea, who was accused of conning another $29 million from some of the same investors, died before the courts could deal with him.

She has overseen several other cases involving even bigger sums. And she is about to give evidence in a case in Nelson involving businessman Philip Whitley, who is alleged by the Serious Fraud Office to have duped around 490 people into investing more than $5 million in a non-existent method of compressing data.

Fatupaito despairs that Kiwis continue to ignore the age-old aphorism that "if it's too good to be true, it probably is".

The sad truth, she sighs, is that there simply isn't any way to get rich quick if you're a passive investor, unless you happen to get lucky with a private equity fund, or pick a stellar stock on the sharemarket.

Despite what it says on the internet, there are no secret schemes involving World Bank "trading programs". In any case, the golden rule is that the higher the return, the higher the risk. And the chances are that if someone is offering you a short-term investment with spectacular rates of return, then it is probably a Ponzi - essentially a scheme where original investors are paid from money handed over by new investors. Ponzis almost always collapse within two or three years.

While fraudsters often target naive or vulnerable people - religious or community groups are often involved - that is not always the case. The Papples' victims included two high-profile businessmen who at the time were senior figures in the finance industry. And we all know about Bernie Madoff.

Fatupaito says investors need to know there are no genuine financial products that return anything like 7 per cent a month - otherwise the whole world would be investing in them. It should also ring alarm bells if you are told that the scheme is secret, or somehow exclusive, she says.

In her experience, it can take a long time for some investors to realise they have been duped. Some never seem to accept the ghastliness of the situation - preferring to blame authorities, or the media.

In the case of the Papples, some investors continued to stand by them even when investigators were able to show the couple spent a fair chunk of investors' money on luxuries for themselves, she says.

"I guess it's part of human nature to think you're getting these fantastic returns, and you know these people or know of these people, and they're really nice people and there's no way they could be dishonest. In my experience, they stick to their story right to the end, even when they know clearly what they have done is wrong. It's just the sort of personalities you're dealing with."

She often finds minor dishonesty or financial problems in their past. Sometimes they have been sucked in to other scams, and sometimes they have learned from others how to conduct the scams. More often than not, there is a link to the United States.

In a few weeks' time Fatupaito is off to Melbourne, for a new job with Australia's investment watchdog, the Australian Securities and Investment Commission. While she is looking forward to a change of scenery, some things, she acknowledges, will never change.

She has already witnessed a lot of tragedy, and has even seen fraudsters exploit people who are terminally ill.

"That's the worst part, when people realise they have been ripped off. That's the thing that upsets me the most - that people can continue to be so dishonest with the people they have ripped off."