What Is Fictitious Investments?
Very generally, fictitious investments come in corporate and individual types. They can be part of a corporation's attempt to fraudulently inflate its worth, or to provide a front for siphoning off money from legitimate investments. The individual type is when stockbrokers and financial advisers obtain money from investors and use it for their own personal purposes, while sending out phony account statements.
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Corporate Fraud
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When a company creates fictitious investments, auditing accountants might notice missing documentation or missing brokerage statements. Red flags also include investments in remote locations or held by third parties. The corporation may be trying to over-represent its worth, along with other maneuvers such as overstating inventory or overvaluing assets. Corporate representatives might also be taking money from legitimate funds and pretending to move them to another investment, while actually using the money for other purposes. When these fraudulent activities are uncovered, it can turn into a maze of work for forensic accountants trying to locate millions or even billions of missing dollars.
Stockbroker Fraud
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A troubling and common occurrence in the world of personal finance is stockbrokers and financial consultants who steal money from clients by creating fictitious investments and sending out fraudulent statements. One notorious example is former Indiana stockbroker Phillip Ferguson, who fled in 2000 after it was discovered he had stolen millions of dollars from clients. Ferguson told these clients their money was invested in financial instruments such as certificates of deposit and mutual funds. As of 2009, Ferguson was still on the United Sates Federal Bureau of Investigation's most wanted list for securities fraud.
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Identification
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Fraudsters often target the elderly. For instance, felony criminal charges were filed in 2008 against Pennsylvania insurance agent Scott Michael Powell, charged with stealing over $80,000 from elderly people by selling them fictitious investments. He sold fake certificates of deposit and mutual fund investments to at least 11 people. This group included a 97-year-old woman whose son is a private detective, as well as a former deputy inspector general. This man was immediately skeptical about his mother's $24,000 investment.
Warning
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The U.S. Securities and Exchange Commission in 2006 and 2007 studied 110 free lunch seminars in Florida and six other states, which were mainly attended by senior citizens. The SEC found 14 of them appeared to be fraudulent, misrepresenting levels of risk and return, and some including fictitious investments. In addition, all 110 seminars turned out to be sales pitches, though many of their ads stated the seminars were educational only, and nothing would be offered for sale.
Size
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In December 2008, an enormous fictitious investment scheme was uncovered on Wall Street. Former NASDAQ chairman and financier Bernard Madoff had apparently had been operating a $50 million dollar scam by taking money from new clients to pay dividends to previous investors. Madoff's original clients were receiving 10 to 12 percent a year even when the markets performed poorly, without SEC regulators ever investigating. He was finally undone when numerous participants nervous about the economy began trying to redeem their investments at the same time. Madoff did not have the money necessary to pay them.
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