BiggerPockets Money Podcast - 513: The “Red Flags” of Investment Fraud from a Former $3.8M Ponzi Scheme Manager

Episode Date: March 22, 2024

Please be advised: this podcast episode contains discussions about sensitive topics, including suicide, which may be distressing for some listeners. If you are experiencing thoughts of suicide or emotional distress, help is available. You can contact the National Suicide Prevention Lifeline by dialing 988 to connect directly with trained counselors who can provide support and assistance 24/7. ____ Could you be ensnared in an elaborate Ponzi scheme? According to today’s guest, cases of financial fraud are MUCH more common than the average investor suspects. Tune in to learn how to protect your nest egg rather than leave your financial future in the hands of untrustworthy people! Welcome back to the BiggerPockets Money podcast! Today, we’re sitting down with investment fraudster turned anti-fraud advocate, James Brandolino. In 2003, James set out to start his own hedge fund, pooling over three million dollars from friends and family. But one “down” month was the catalyst for eight years of fraudulent activity—a Ponzi scheme that included lying to investors, mailing false statements, and pulling money from the fund to keep the lights on. When the guilt became too much to bear, James turned himself in and has since committed his life to warning investors about the real threat of fraud. In this episode, James shares his whole story—from starting his fund to serving six years in prison. He talks about common “red flags” to look out for when investing and the importance of due diligence when something seems off. Of course, fraud is prevalent in the real estate investing space as well. Stick around for tips on avoiding real estate scams and how to vet a syndication partner before entrusting them with your money! In This Episode We Cover How this former fraudster built a $3.8 million Ponzi scheme How to prevent investment fraud from happening to YOU The most common fraud “red flags” to watch out for How to properly vet someone before entrusting them with your money Investment fraud in real estate syndications (and how to avoid scams!) Using your own network to help uncover fraudulent activity And So Much More! Links from the Show BiggerPockets Money Facebook Group Network with Other Investors on The Path to FIRE Through the BiggerPockets Forums Finance Review Guest Onboarding Join BiggerPockets for FREE Mindy on BiggerPockets Scott on BiggePockets Listen to All Your Favorite BiggerPockets Podcasts in One Place Apply to Be a Guest on The Money Show Podcast Talent Search! Find an Investor-Friendly Agent in Your Area Find Investor-Friendly Lenders Click here to check the full show notes: https://www.biggerpockets.com/blog/money-513   Interested in learning more about today's sponsors or becoming a BiggerPockets partner yourself? Email us: [e-mail] Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's episode is a bit different and we wanted to give a warning that this episode deals with potentially distressing material dealing with suicide. This conversation may activate distressing feelings for you. If that's the case, feel free to skip this one. Help is available at the suicide and crisis lifeline by calling or texting 988. Today's episode is about investment fraud and the steps you can take to ensure it doesn't happen to you. Yeah, we're going to talk to James Brandelini, convicted investment fraudster turned anti-fraud advocate. James is going to tell us about his own story, about how he found himself leading a fraud scheme, and about the warning signs of fraudulent investment activity that you should be looking out for. Hello, my dear listeners, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen, and with me as always is my anti-fraud advocate co-host, Scott Chutch. Thanks, Mindy. Great to be here with you. We're going to have a serious intro today, and we're going to tell everybody that we're here to make financial independence less scary,

less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting. And now let's bring in James Brandelini. James Brandelini, welcome to the Bigger Pockets Money podcast. I'm so excited to talk to you today. Very excited as well. Thanks for inviting me, Scott, Middy. James, on an early day in January 2011, you walked into the Chicago-Durksson Federal Building and turned yourself in. Why? So for eight years, I ran a Ponzi scheme as a trader at the Chicago Board of Trade running a hedge fund.

and during that period, there was never more than a day or two that went by that I didn't think I could make the money back. Well, after eight years and $3.8 million later, the realization came, I woke up one morning and said, you know, I'm not going to make it back. So I sold my condo and I gave all my possessions away and found an attorney and walked into the U.S. Attorney's Office, like you said, and said, this is William, this is what I did. Please arrest me. Can you define what a Ponzi scheme is just for those who, you know, I think most people know it's an inappropriate activity, but they don't know the actual definition of it. Okay. So technically a Ponzi scheme, as everybody knows it is, you know, robbing Peter to pay Paul. So where an operator will be running a seemingly legitimate business where the business plan is dictating profits that they're making. In a Ponzi scheme, there are no profits from legitimate trade. or legitimate sales or legitimate business, or maybe a small portion, the profits are coming from new investors who are investing money, and that money is used to either show a lavous lifestyle,

show success, and to pay investors dividends and returns on previous investments. Yep. So you're taking the new money from investors and using that to spend on either your lifestyle or pay back to people who had invested earlier. And that's illegal. And this has happened many times throughout history. It happens every day. Okay, great. So we've defined Ponzi scheme. Let's start from the beginning. How do we set the stage where we got either got on the path to being into a Ponzi scheme? So I would say from the very beginning, I always wanted to be a trader on one of Chicago's futures exchanges, the board of trader, the mercantile exchange. And it really started when I was at the end of my freshman year in high school with the release of the movie Trading Places,

Eddie Murphy and Dan Aykroyd. And just that wild trading scene at the end when they're trying to corner the frozen concentrated orange juice market, that really kind of got me excited about trading. And that's really all I ever wanted to do. I ended up running a trading desk at a now defunct firm called MF Global. And while I was there, I designed a trading program that traded treasury bonds, bond futures, mind you. And really, the end of 99, I had been trading this for a few years and I decided that I wanted

to go out on my own and basically started a fund and became a member of the Board of Trade. And I was going to, you know, trade money and do really, really well. So in my case, it was really simple. When I became a member of the Board of Trade, before I even started trading for the fund, I was in the floor waiting for the IT department at the Board of Trade. to come in and put in my phone line and all my internet stuff at the desk. And I'm kind of walking around and I had more than a few positions on the floor. So I knew how it worked. And although I'm trading bonds, which is slightly less volatile than say the Dow Jones or the

S&P indices, I was just mesmerized by how the orders coming in from big firms would move the Dow Jones futures market. And I'm thinking to myself, boy, if I can, could just make a few adjustments to my trading models. And I could raise my, you know, my six and a half, seven percent returns trading bonds to nine, ten, eleven percent, you know, trading S&Ps and Dow futures. I'll be a hero. And really in a matter of probably a couple hours, I decided to do that. I went to my models. I made some changes. I did some quick back testing. And within a week, I started trading. So my first week of actually trading for the new fund, I was down about 3%. Well, let's back up. Let's back up for just one second here in the story here. So you left your

job and set this fund up. This was in what year? So in June of 99, I left MF Global and I started a small independent futures brokerage firm called Lloyd Lewis, in which I would be able to solicit customers as a broker for this system, kind of like the intermediate step between leaving the brokerage firm and starting the fund. I wanted to be able to kind of test it with real customers as a broker, which means I would only be able to charge commissions. I did that until the beginning of 2003, and then in February of 2003, that's when I became a member of the Board of Trade and started the hedge fund. And during that three-year period, I had a positive track record, which gave me the confidence to go out and start the fund. Awesome. So that's super helpful here is you start a fund. Who are your

investors? And what is your incentive structure in this fund? The incentive structure is standard 2% 220. So 2% management fee of all the assets every year and then 20% of profits. And that's really why someone would start a hedge fund is because they want a piece of the action. Right. So the more profits that you make for clients, the more money that you can grab for yourself. My clients really were my brokerage firm clients that I had for three, four years, family, friends, friends of family. So everybody in my fund I knew personally. We're taking a quick break. And when we're back, we'll hear about how a career at a futures brokerage turned into a multimillion dollar fraud scheme. Tax season is one of the only times all year when most people actually look at

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pockets. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves in a needle. Achieve your financial goals for good with Monarch, the all in one tool that makes money management simple. Use the code pockets at Monarch.com for half off your first year. That's 50% off at Monarch.com code pockets. I love Matt, said no one ever. Nobody starts a business thinking, you know what would make this more fun? Calculating quarterly estimated taxes. But somehow every small business owner ends up doing it. Your dreams of creating, selling, and growing, get replaced by late nights chasing receipts, juggling invoices, and wondering if that bad sushi lunch with Scott counts as a right-off. Change all that with Found. Found is a business banking platform built to take the pain out of managing money. It automatically tracks expenses, organizes invoices, and even preps you for tax season without you doing the heavy lifting. You can set aside money for business goals, control spending with virtual cards and find tax write-offs you didn't even know exist it. It saves time, money, and probably a few years of life expectancy.

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Beyond audiobooks, you also get Audible Originals, podcasts, and a massive back catalog across business, health, parenting, and more, all accessible in one app. If you're looking to turn everyday moments into real progress, Audible has been indispensable for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP money. And we're back. We're talking to James Brandelini about the worst decision he made and how it led to him running an investment fraud. scheme for seven years. Awesome. And how much did you raise? Two million dollars. Two million dollars. Okay, so two percent of two million is $40,000 per year. That's kind of like a base salary, right? That's what a lot of these private equity or whatever, it's a very standard commission model two and 20 for incentivizing

folks who managed capital. And that would be, hey, that's your salary. And then you get 20% of the profit. So if you grow the two million to four million, you would get 20% of the two million in profits, which is really what motivates folks in this type of model. Is that right? Absolutely. The, you know, the management fees just kind of, you know, keep the lights on and maybe they'll pay the rent and a few of the expenses. But the, where the big bonuses come in is when, you know, is on the incentive side when you can make a profit and grab 20% of that profit. Awesome. This is super helpful context setting because, again, legitimate trading, making a good profit, track records established, or raising a fund. And not even, I would say, even in, in a, in a, in a,

2003, a particularly large fund. This is a very standard sized funds probably happens every day with folks here. And it's with folks you know who have grown to trust you over either a lifetime or over several years in the professional field. Is that all correct? Correct. Absolutely. Awesome. Well, let's keep going. So what happens next? After the first week of trading, I'm down about 3%. In my documents, I had a clause that if I was down 3% in any one in any point of the month, I would stop trading and begin trading the next month. So I had about two and a half weeks before the statements would be prepared and mailed out by a CPA firm that I had hired. And I'm thinking, you know, what am I going to do? And, you know,

yes, I know everybody and everybody likes me, but it's, you know, it's my first month. I'm down 3%. You know, a lot of people are going to pull their their money out. And then what am I going to do now, right? And I was just kind of thinking of ways of how I'm going to, you know, address my initial set of investors. And I'm sitting in an office with a colleague of mine, and he's on the phone, and I'm paging through maybe institutional investor magazine. And the light bulb goes off. I see an advertisement for hedge fund accounting software. And I'm thinking, here's the answer. Let me buy this software and put everybody's name into it. Send statements for a month or two. I'll get the money. I'll show a gain. I'll get the money back. I mean, I've been trading for a long time.

I mean, I had been trading since college. So I've been trading for a long time. I can make 3% back, no problem at all. And that's what I did. I sent false statements out that first month thinking that I could make funds back and I didn't. And so we're looking at minus 3%, minus 5%, minus 10%, minus 20%, and so on. So that was really stage one of the fraud. That lasted for about a year and a half.

Stage two comes in when I'm running a little bit low in money. And I'm thinking, well, I'm a sales industry. introvert. I didn't want to go to my clients and ask them for more money. So what do I do? I, you know, liquidate my 401k, my insurance policy, get a home equity line of credit, and throw my personal net worth into the fund. And that lasted probably almost another year and a half. So now we're at the three year mark. And up to this point, you know, it's civil crime. It's, you know, making false statements, sending false statements in the mail, but I've never, I've not taken a penny. All of the trading was legitimate and all the trading all the losses were legitimate and it just happened to be I'm really

thinking of how am I going to get in front of everybody and let everybody know and are they going to go to the authorities and they probably will and okay it is what it is and I get a you know a phone call from a random individual who is a friend of one of my bigger clients and who wants to invest and he decides to write a check for 500,000 dollars and I'm thinking well here here we go now you know I've got like no money to live on now I can at least you know take a small illegitimately, of course, I can take money from the fund and pay business expenses. And I can also, I can hire other people to help me fix my models and make this work. And really from year three is really where the criminal side of the fraud began from year three to

year eight. So let me just make sure I've got this right. So we start the fund in 2003. We immediately, first month, have a small loss, nothing that would have potentially. you know, set off any flags, although it's a point of pride and ego, right? I started this thing off and couldn't get there. And then that starts the first small lie, which compounds over the course of the next year, but the next three years, sorry, to this point where it's about we're about to hear the next stage in the story. And during that period, you know, what, looking back,

was it possible? Would it have been possible for you to just have a big month that it eliminated all of the problems? Like, would that have been, do you think a lot of that some portion of people who start down that path get saved by that, that miraculous month? Or was it never going to happen? Absolutely. I mean, if even, you know, I had losing months that were greater than 3% when I was managing the money as a broker, right? You know, we had, you know, four and five percent losing months, not many of them. And then the market would, you know, would turn around and we'd have, you know, a couple decent months and then back to kind of normal. And, you know, we'd stay on track. So to answer your question, yes, I could have made it back. I was just

so darn afraid, Scott, in terms of, you know, what's everybody going to say? Are they going to pull their money out? Am I going to have to close the fund? You know, I spent, you know, at that time, probably 15, 20 grand, just on legal expenses to get all the documents done, et cetera, et cetera. You know, what am I going to do? Well, let's, let's pick it up. What happens? in 2006 or thereabouts three years in. So that's really the point when I started to, you know, embezzle money to live on and to pay for business expenses. And that, you know, that's where the criminal side started.

And what's interesting and not just in my case, but in many cases of investment fraud, most cases of investment fraud don't begin as investment fraud, right? Most people don't wake up one day and say, you know what, I want to steal $5, $10, $20, $100 million. And they get paperwork and they start a website and they open up a bank account and they go and they raise all this money. And then as soon as that the phone rings or something knocks on the door, they've got the corporate jet ready to go to Brazil or wherever they're going to go to hide from the authorities. I think what's really interesting psychologically is, hey, the first 3% loss, it's not acceptable, but you can empathize with, oh, I want it. I can make it back and prove

that out. Right. And that lesson learned. here is never go down that first step ever because everything else is a derivative of that first month's decision really in the path that that puts you on here. But what, you know, that you said at some point there was a clear movement into criminal with embezzlement. What psychologically kind of went through your head or what was the moment at that point? Did you realize it and know that you're crossing that, you know, whatever the step was here, this was way beyond the line that anyone would would find acceptable. What was going on in your head to that point? Well, you know, at that point, I didn't, you know, understand probably the definition of civil and criminal, but I knew that after

I deposited that $500,000 check and probably took $10,000 and moved it over to my personal account that, you know, that was, that was changing the game because I was now, now there was a loss, not just with trading, but there was a loss that I was actually, you know, using client funds for business and personal expenses. How did you cope with it personally? I think myself personally, I compartmentalized what I was doing. And even though I absolutely knew what I was doing was wrong, I mean, there's no, there's no doubt about it at all.

I just really tried to focus on, you know, I'm making the money back. And that's what I just kept telling myself, you know, I can make this money back. I know I can make it back. And, you know, it never happened. but that was that was my mindset. Because we're going into 2008, 2008, 2009, 2010. That, I mean, I remember that time period in the market and the market just kept going down, down, down, down. So.

Well, it was getting, it was getting crushed. And don't forget, December of 2008 is when the made off scandal broke. And, I mean, I can remember sitting in series restaurant, which is inside the lobby of the Board of Trade. And Rick Santelli, who was the CNBC rock star commentator from the bond pit at the Board of Trade, he was holding court with a bunch of traders and just kind of went on this rant. Yeah, this is really serious and that this happened and a lot of people lost a lot of money. But the only benefit that we're going to see is that, you know, we're going to learn what causes investment fraud. and the SEC and the media are going to kind of partner up and make sure this doesn't happen again, which of course, unfortunately, couldn't be further from the truth.

But, you know, I had clients who probably got a little bit nervous, who would call a little bit more often, hey, could we come down and see you? Or, hey, can you clarify this on your statements and all that kind of stuff? And it was a little bit more nerve-wracking for me, but they just didn't ask the right questions. And when they asked the right questions, they just didn't. didn't know how to prove what I was saying if it was right or if it was wrong. And I would say that's probably in terms of investors who are looking at investments. Some can't ask the right questions and some will get the documents and the marketing literature and they'll read it,

but they won't quite understand what's there or what's missing. And when they read it, they just have no way to kind of align with, you know, what should the company be doing versus are they doing what they say they're doing? And that's the key. right there. What did most of your clients think was happening during this period? You know, they thought we were doing, you know, one and a half to two percent, two and a half percent per month. Trading, you know, trading, you know, trading futures. Did you ever show them a loss? I think I had probably maybe six or seven losses, you know, in that, you know, one half percent to maybe one and a quarter percent, but nothing, nothing really major. So 2008 Bernie Madoff happens. Essentially, you are doing the same thing, similar thing, but on a smaller scale. You waited three years to turn yourself in. What led to that decision?

It's interesting. You know, I wake up one Sunday morning and I'm standing on the balcony. This is probably November of 2010. And I'm standing on my balcony looking, you know, downtown Chicago and I'm like, you know, I'm never going to make this back. It's been, you know, it's only, you know, $3.8 million. That's not a lot of money when looking at other types of fraud. But, you know, I'm not going to make it back. I'm just done. And I could have raised more money. And I just, I was just tired and just done with everything, tired of the lying and the

charades and the whole thing. And said, you know what? You know, I'm going to turn myself in. Yeah. In terms of the Bernie made on. scandal, that was $20 billion in cash losses and $65 billion in paper losses. So I can see from your point of view, oh, it's only $3 million. It's not nearly so bad. Right. So, but yeah, it was $3.8 million that you raised in its entirety. What did investors think the pile had grown

too? That number, probably a couple hundred million. And that's what new, new money coming out as or new money being invested as well. So investors thought they had a couple hundred million dollars with you that you had grown over eight years. Correct. But you had really lost most of 3.8 million or all of 3.8 million. Is that right? Correct.

How much did you have left in the coffers by the time you turn yourself in? 25 grand. Wow. And so what happens next? How does the, how you turn yourself in, you're charged. What are what, what, uh, judicial. civil items come up and how does this progress from here from there? I had the slightest idea what to expect. And, you know, I went to an attorney. And the attorney is like,

you know, don't turn yourself in. You don't want to do that. You really discouraged me from doing so. And I'm like, well, it's, it's, it's only me. There's, there's no other, you know, conspirators to this crime. He goes, he goes, look, there's, there's no benefit, you know, of what you're going to do here. So he goes, why don't you just go? go to California, learn how to surf, and we'll watch the federal and the state internet filings. And if your name comes up, we'll give you a call. And you know, you won't have to even go to court for probably two, three years, maybe a little bit longer. And I'm thinking myself, well, why the heck would I wait so long to, you know, to do that? And he goes,

well, he goes, do you, do you know anybody who's committing a crime on the floor? I go, well, of course, all the floor traders and all the tricks that they do to steal money from customers. That's really, really difficult to find. He goes, he goes, maybe we can go to the U.S. attorney and, you know, you could be a mold. You could wear a wire and you could, you know, try to, you know, he didn't use the word in trap. That's basically kind of what it would be of others doing other crimes. And I'm like, you know, no, let's just, let's just do it. So he actually went on vacation for a couple weeks.

This is getting closer to Christmas. and I really had a mental breakdown and I decided that I was going to end it. So what I did was I went to a firearm store outside of the city of Chicago and purchased a firearm and basically attempted suicide on January the 4th of 2011. And the firearm did not go off and it locked on me. And that's what saved my life. And then as I walked, as I went back to my condo, I, you know, talk to my attorneys. Like, oh, I can see you're serious. You know, I'll call the U.S. Attorney's Office and try to find the best of the worst.

And two days later, I'm sitting with the U.S. attorney and with the FBI. And I basically tell them, you know, this is what I did. This is how I did it. And here's all my clients. And, you know, where do we go from here? Wow. This is really, really powerful story. Thank you for sharing all of this.

What happens next? You talk to the attorney general. You're talking all this. What are the mechanics of how things transpire from that? It was one count of mail fraud, sending fictitious financial statements in the mail. With the federal system, it's a little bit different than the state system. So in that charge, the number, the money, it's like a point system, right? So besides your charge, you know, because I had over 50 victims, there was extra points for that.

because I was, you know, depending upon the loss amount, you get extra points for that. So my, I received a sentence. My range was eight to ten years and I received nine years, a nine-year sentence. And then I am, I am forced, not forced, I am obligated to pay restitution every month that goes into a victim fund. Okay. And then how much of that sentence did you, how much time did you actually spend in jail before being released? I served six and a half years. Six and a half years in prison before being released.

And you got out at what point? I got out in June, the end of June of 2017. Okay. So June 2017. And I understand that you decided to start studying other fraud cases and speaking to other fraudsters in prison. And you have then since made identifying, preventing, prosecuting. prosecuting, some combination of those things, your profession, starting in prison and then following prison. Can you tell us a little bit about that? Yeah, well, you know, probably early on,

you know, I think everyone thinks that, you know, what am I going to do when I get out? And, you know, I had no other, you know, skill set. You know, I didn't know how it lay brick or pour concrete or, you know, drive a truck or anything like that. What am I going to do? And I really kind of decided, it well, maybe there's an avenue that I can take to help prevent fraud. And as I spoke to dozens and dozens of other financial fraudsters, uh, and I, my family spent, spent a lot of money sending me, you know, forensic accounting textbooks and fraud examination textbooks that I kind of devoured. And the more I, I studied, you know, the red flags, you know, they're, they're all the same. And they were the same back in the, you know, 40,

50s and 60s as they were in the 70s and 80s as they were for you know my case in the 2000s and nothing has really changed so you know my whole you know mission became that I was going to tell my story but really kind of share you know the dozens and dozens of red flags that are out there um you know that fraudsters use that really hasn't changed in in a long long time all right we're taking a quick ad break and when we're back, James Brandolini will break down the tell-tale warning signs of fraudulent investment activity. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly

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amazing. Get more with Northwest Registered Agent at Northwest Registered Agent.com slash money free. Welcome back. We're talking to James Brandelini about if and how you can prevent investment fraud from happening to you. What was the Eureka moment where you kind of began settling on some of these and can you and then can you tell us what those red flags are? Sure. So I would say, not sure if it was a eureka moment so much as just, you know, as I was speaking to a lot of the financial fraudsters that I was incarcerated with, you know, they're saying all the same things. I would say probably some of the top ones are our audits. So in my case, probably three months after I started my fund three months into my fraud, so to speak, I get a phone call from,

you know, one of my parents, good friends who invested $100,000 with me. Hey, Jimmy, you know, a couple of us are looking for audited financials, you know, can you send you send, do you have those and can you send them over? It's like, yeah, yeah, I'll take care of it for you, not a problem. And it was a matter of, God, what am I going to do? So go to Google, hedge fund audit.pdbf and try to find a hedge fund that was similar to mine and basically kind of copied it almost word for word and did the, you know, came up with a phony accounting firm, did a website for a phony accounting firm with a New York address that nobody ever mailed anything to or ever called the number that was listed on there. there were so many mistakes in that audit that if my investors didn't notice it, which they probably wouldn't, their CPAs who I know looked at them should have easily recognized the right flags of the

mistakes I made because I wasn't a CPA. So that would be number one. Next, the three, four days after the beginning of the year, starting in 2004, I get a call from one of my investors. Hey, Jimmy, when is your accounting firm going to send the tax documents? We want to start doing our taxes. And I'm thinking, oh, boy, this is it. I'm done, right? I mean, what am I going to do? There's no way I got this fraud going on. And, okay, we're a year into it. I'm maybe down, you know, 20%, 25%, whatever it was at that time. You know, I could make it back, but there's no way I'm going to commit, you know, tax fraud, right? And what am I going to do?

So I kind of just came up with this, this lie that, you know, well, with hedge funds, you don't pay tax until you pull the money out. And not only did they believe it, but I had probably over the eight years, probably 12 to 15 conversations with their attorneys or CPAs talking about that. And nobody ever, ever questioned it. I mean, I had to do a lot of dancing when I was explaining it to him, but nobody ever called one of their colleagues who, you know, worked with hedge funds to say, hey, is this right? Is this true? And just never verified with what I was doing. Another thing. So I was always very open and transparent about people wanting to come and visit me on the trading floor. And I had a newer client who was with me three months come and he came with his CPA. And he says, you know, we'd like to see your trading for these three, for these first three months. I'm like, okay, no problem. So I'm thinking, well, you know, is he going to, is he smart enough to know the future's business? And I'll give you an example, what happened.

So he people, I pulled the first three months from my file cabinet of all the trades that I did. And my office was in, inside of the brokerage firm, my clearing firm at the board of trade. We walked to the back office and I said, hey, this is a CPA. He's with, with my client here. pull the three trades or the three months of trading that I did that you got from the board of trade. And they pulled all three monthly statements and they all matched. And the CPA was like, oh, yeah, this is fine. If the CPA had any knowledge of futures trading, he would realize that the size that I was trading or the level, the amount of contracts that I was trading was probably commensurate if I was trading a $10 million fund versus, you know, at that time I probably.

said I had a, you know, a $50 million fund. So if he were to, you know, if he were to look at it, if I would have looked at it, you know, as as a fraud examiner, I would have said, wow, this is, you're not really trading very much. You're trading really very light. But him not being familiar, you know, with the futures market and how it operates, he had had no idea to say that. So, you know, it's just, it's amazing. And those are, those are three of just bigger ones that that are out there. As a lay person coming into this, you know, things that, you know, from documentaries and other stuff that I've seen, like, you think, okay, these guys, they show super smooth returns.

Like that was one of the things in the Bernie Menaugh, Netflix documentary, right? Like the people were challenging him because it was like, wow, the level, the tightness of the return relative to the risk profile of these returns compounded over a really long period of time is just absolutely bonkers. And nobody ever will do that. It's just almost mathematically impossible to get something that smooth. It sounds like your returns were similar to that, right? Always within a narrow band, only a few months, you know, showing losses for it and all that.

Is that another red flag or common theme in a lot of these? So, yeah. So my returns weren't quite as streamlined as Madoffs were, but they were overall, they were, yes, they were definitely outside of the ordinary. And in some of the in the red flag report that I do, I'll look at, you know, a time series of all the returns that are being projected and try to find other benchmarks and just try to show that there are certain mathematical rules that will show anomalies in numbers when they are when they are construed, right? So if I'm picking, so every month I picked out a rate of return. So let's say this month is we're going to make 1.24%. And next month we're going to make 1.63%.

And the next month we're going to be down 0.74%. So when you're picking your monthly returns that way, there are certain mathematical clues that we can pull out that will show. Won't show fraud, but it'll show they were construed, right? And I've done those with my numbers and what Maynoff's numbers. And it's just amazing to see people who who fudge numbers how easy it is to kind of to see that. But yeah, you're right now. There are big hedge funds out there. And I'm not going to mention names that have been there on for a long time that are doing 20, 30, 40 percent a year.

And sometimes even more. But they're going to have volatility. They're going to have your 5 percent, 8 percent winners for the month. And then they're going to have, you know, 5 percent, 8 percent, 10 percent, losses, monthly losses. So it's going to, it's going to, you know, average out. But when you, when you don't have that downward volatility, and, you know, it's really like you just said, it's risk-adjusted returns. For this return, how much risk am I taking? And when your numbers, when your risk that you're

taking on your numbers is so much less than which you can get anywhere else, something's probably a miss. It also seems to me as a layperson that, you know, this, this, yeah, let me open my books to you. Here's the statements. Here's all that stuff. in real time is like almost like too much. And when when someone is giving you that much openness and coming in with there, that there's like a little bit of a red flag that should be going off to some degree. Like yeah, look, I'll prove that I did this, you know, here around that. Like no one asked you for that, you know, from this. Or like if there's something remarkable and then an over-eagerness to share in the name of transparency, it's almost like a red flag. It comes across as disingenuous

in a few instances in my career where that's happened. Let me prove I do. I do. I do all these things with that. The second is this total lack of transparency, like what I think Madoff did, where there was just nothing that they really got besides the statements in there. I guess that wasn't. Maybe he was more in the first category. But are those two items to look for as well? Again, I'm not an expert on this.

I'm just spewing things that I've picked up from documentaries and stuff. So with Madoff, it's a little bit easier only because, you know, he would never, you know, clients would ask for an audit and he would never show to him. Well, I don't want, you know, I don't want Goldman Sachs to find out what I'm doing and reverse engineer what I'm doing. But here's the thing. The thing about an audit, an audit's not going to give away any trade secrets, right? And, you know, having transparency in a back office, you know, and how you do things and how you process trades and how you do statements, that's not giving any secrets away in terms of how you're actually, you know, picking which stocks to buy or sell, right? Or which

properties to buy or sell. A back office is a back office. And, you know, really, in terms of audits, you know, what we're really looking for is, you know, to verify if the assets exist, you know, how the assets being valued, are the performance returns real and are the assets being custodied correctly? And that's just so, so important to be able to do that. You know, whether an investor is able to do it or, you know, they hire someone to do it. do it. But, you know, the second part of that, you know, I can have, I can have an audit. So, so, I would say, part of my business, people call me and they'll, they'll ask, they'll say, you know, I've invested in something. Would you take a look at it? And I'll, you know,

and I'll usually say, well, don't, don't let the company know that, you know, that I hired you. On the other side of it, which I much more prefer, is somebody call me up and saying, hey, I've got this investment. I've got all the documents. I've got all the paperwork. You know, the manager knows you're going to call. He's expecting a call from someone. And everything is out in the open.

But even with that case, Scott, you know, I could have that audit in my hand. And it's going to say who the CPA firm is. I've got to, you know, if it's a name that I don't recognize, I've got to verify, you know, if the CPA, if he's a real person, if he's a real CPA, which is relatively easy, right? You go to CPA verify. dot org, but also, too, has that audit been been misused? Meaning, you know, a lot of times people, you know, if I'll call up a, you know, a CPA firm

and they won't even say whether they've done the audit, you know, they won't even confirm that. And it's really difficult because you don't know, somebody could have done that audit and maybe the fraudster took a page or two and just added, you know, a couple zeros in a couple different places. And yes, they did the audit, but the audit's fake. Right. So it's so, so important,

once you've got the audit, that you're able to verify the authenticity of the audit. So how do I know that I'm getting correct information when I'm asking my hedge fund manager questions and he's giving me plausible sounding answers, like with hedge funds, you don't pay taxes until you pull the money out. I mean, that sounds,

if I don't know anything about hedge funds, you just said that I don't have to pay taxes. So how do I know, how do I get this correct information? As an investor, it'd be probably a little bit tougher, but you would go to your attorney or your CPA and they should know the answer. And if they didn't know the answer, that would be, you know, that's where the problem lies. I'll give you a great little story. I'm sitting with one of my larger clients, his son, who I've known.

known for years and years and years as the CPA has a small little firm down in Chicago. And we're getting we're getting finished with lunch. And he says, okay, so have you asked, you know, Jimmy everything? He goes, yeah, but I just can't understand how a hedge fund could, you know, can be exempt from paying taxes unless it's, it's in an IRA. And of course, I'm thinking, okay, well, I'm done now. That's it. You know, he's figured it out.

And, you know, why he didn't call somebody, one of his, you know, colleagues. to ask that question. Because, I mean, look, a hedge fund is or a private equity or a real estate fund, all they are is either a limited partnership or an LLC. And everybody's K-1 at the end of the year. So it's nothing rocket science, right? So for him not to know that or ask me that, it just, I'm just appalled, you know? And every once in a while I think about it and how I got away with this for eight years

and all of the other red flags that, you know, that the CPAs and attorneys, you know, didn't recognize. I just, it never ceases to amaze me that I got away with it for as long as I did. And it's not just me, you guys. It's, it's, it happens every single day. So let's tie this in with a really uncomfortable conversation here very quickly, right? And I'm going to use the real estate syndication space, right? which is right now, I think a lot of people raised a lot of capital to buy apartment complexes. You talked about 2 and 20 where you get 2% of the profits or 2% of the capital amount raised in

assets and management fees and then you get a 20% profit interest. Syndications make that look like a weak compensation model. These guys get paid 1% to 2.5% just to buy the real estate. Then they get the 2% management fee. then they get a one to two and a half percent if they refinance the property and another one to two and a half percent if they exit the property, then they get 20 to 30 percent carried interest, right? So incentives are right there. A lot of investors have invested in these types of syndications over the last couple of years and they're losing right now. Asset values have gone down dramatically. Some of them have already been exposed as Ponzi schemes or frauds at this point and you're already seeing prosecutions and that. as an investor, how can I protect myself in the real estate syndication space through all of this? And how do I, if I'm invested in something that's losing, determine if it was fraud, bad luck, gross negligence, some other combination of that? How can I parse that out without complete information and without being a forensic accountant who studied this as a profession like you do?

Yeah, you know, the real estate field makes it a little bit more difficult sometimes to do it only because you have to go and verify if the assets are real. And you have to see how they're registered and you've got to go to the courthouse or wherever you can go and you can check if these proper, how they're, you know, how they're custody and where they're located. I think the big scheme, I'm going to think I have a step back here, if you don't mind, Scott. You know, besides crypto, I think real estate syndication, real estate, you know, whether their family homes or multifamily is probably the largest sector of fraud that I'm seeing in terms of more fraud happening. I'm investing in your case right now in Colorado, an ex-Denver Bronco invested over half a million dollars in a multifamily well, let's just say snafu, right? So, and the money's pretty much gone.

So I'm not sure kind of what's going to happen there. But it, you know, it's a really bad situation. So I think one of the reasons why we're seeing a lot more fraud in the multifamily spaces, especially, is because, and I don't want to sound kind of sending at all, but, you know, you've got a lot of Joe Smiths in Kansas City who have bought 30, 40 doors. and they're experts in the multifamily space and want to raise money. And they raise money and the deal starts going bad. And, you know, they're moving, say they've got three or four deals, capital raises they've have. And, you know, one or two of the deals is not doing well.

And they've got a deal that's doing extremely well. So they're going to take money from one deal and put it to the other and not disclose that. And that's where a lot of problems are taking place. but to go back and answer your question. So since most investment fraud does not start out as investment fraud, it's really, really difficult to pinpoint it. I mean, you know, a lot of these, the syndications, many of them will have audited financials, and it's a matter of going through them with a fine-tooth comb and verifying everything that's

on there and probably even having a forensic accountant go and look at it. And even some of the cases that I get hired for, you know, I've got a forensic account that will, you know, stuff that gets really intricate will help me with, you know, the procedures of the back office and how everything's kind of working because some of the stuff is just really, really in depth. But you've got to go through the financials and you have to, you've got to look at the books. And a lot of, a lot of firms will not, especially the small ones, will let you look at the books. And it's a matter of, you know, if an investor's, you know, on their own trying to do it themselves, you know, they've got to say, look, either I'm either you let me look at them or I'm going to hire somebody and, you know, we're going to charge potential fraud and we're going to see what's going

on here because, you know, something's just not right. Well, James, this has been super helpful. Thank you for sharing all of this with us today. Where can people find out more about you? They can go to my website at the investmentfraud guy.com. and anyone can send me an email at James at theinvestmentfraud guy.com with any questions. I'd be happy to give my opinion and help you out. Well, I appreciate it.

And thank you for sharing your story and for the work you're doing now to prevent and find fraud. Yeah, thank you, James. This was very interesting. I learned a lot. Thank you, Scott. Thank you, Mindy. Wow, Scott, that was James Brandelini, the investment fraud guy. and that was a very interesting episode.

I don't know how I would have reacted if I had been investing with him because he had an answer for everything. And I mean, it really feels plausible that you don't pay taxes until you pull the money out with a hedge fund if you've never invested in a hedge fund before. It also seems completely implausible that you don't pay taxes. Spoiler alert, the government is always. going to get theirs. So I'm glad he was able to share some bits at the end about, you know, talk to your network, talk to your friends, talk to other people and ask them these questions

if it still seems a little hinky. I think today's lesson, the today's interview was a sobering one. It sounds like without being a forensic accountant who's going to study this stuff for years, it's really difficult in a practical sense to expect yourself to be able to spot fraud. I mean, you've got to call out the audit inconsistencies on there or go back and do the research for the audit firm. That's great. Let's have more people do those kinds of things and make it harder. But these fraudsters are going to be one step ahead in many of these cases, right? Some of the mistakes he made are probably ones that the next fraudster is going to be able to overcome in some of these things. It's scary because these people don't start out as fraudsters.

I believe that, right? I believe that nobody starts out or very few people start out with the intent to rob people of millions of dollars in this. And that it's more about, you know, I couldn't deliver the returns. And so I'm going to fudge them and see if I can get back. And then it becomes out of hand and spirals from there. How many people are legitimate who or seem legitimate today who went down that path, but one, and had that good month that saved them and were able to get back out of that spiral that led to James Ponzi scheme. You know, how many people are in the process of that right now pretending like they have that?

It took eight years for this thing to be exposed. I mean, it's so scary. People thought they were worth like a million. There was $100 million more in the fund than there was in there. It's just, I think the lesson is you never know. And you can't concentrate all your bets in one area in these kind of unregulated or private syndication or hedge fund opportunities. And you always got to have in the back of your mind that no matter who you're working with, this is a possibility and that you're just acknowledging that

if you're going to get into any of these private investing spaces and try to make it as difficult as possible for someone to do that, especially if you're with them for a long period of time and their returns seem great the entire time. Maybe that's the lesson. Well, and you just said something, Scott. You said it took eight years for it to be exposed. It wasn't even exposed. He turned himself in. Nobody caught on to this. Absolutely. Well, on that note, yeah. I am very thankful that he came and shared this story with our listeners today so they can start to think about what's going on in their investments if they have hired somebody to take care of them.

So ask questions. And if you don't like the answer, keep asking until you understand what they're saying or until you uncover something. I hope you don't uncover anything. Keep asking until you understand what they're saying. That's where I'll stop. All right, Scott, should we get out of here? Let's do it. That wraps up this episode of the Bigger Pockets Money podcast.

He, of course, is the Scott Trench. And I am Mindy Jensen saying, tuteloo, Yorkie Poo. If you enjoyed today's episode, please give us a five-star review on Spotify or Apple. And if you're looking for even more money content, feel free to visit our YouTube channel at YouTube.com slash BiggerPockets Money. Bigger Pockets Money was created by Mindy Jensen and Scott Trench, produced by Kaelin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.