Six Signs of Financial Fraud: This Will Never Happen to Me?

Don’t Be Fooled: A Brief History of Financial Fraud

Author: Ben Carlson (USA)

Translator: Ding Can

Publisher: Yilin Press

October 2025

Fraudulent activities happen constantly. No matter how the world situation changes, there are always some “masters,” vendors, and scammers skilled at promoting quick ways to get rich. Unfortunately, there are always people willing to be on the other side of these deals. By analyzing large amounts of data, I can estimate the number of people and the amount of money lost each year due to fraud. But in reality, these numbers are always underestimated because many victims, out of shame, have never disclosed their experiences. They feel ashamed because, in hindsight, the people or things they once believed in are clearly scams, yet at the time, they were deeply deceived.

Financial fraud will never disappear. Therefore, when hearing investment recommendations, we must stay alert and learn to recognize warning signs. Many early warning signals only become obvious after the fact because money often causes us to ignore common sense and lose judgment. Here are six signs of financial fraud:

When a fund manager holds your assets

If there’s one reason Bernie Madoff could deceive so many people and weave a Ponzi scheme worth up to $65 billion, it’s because he had custody of client assets. This means Madoff’s firm held clients’ funds themselves, which is a huge mistake. You should ensure that investment decisions and asset custody are separated. Any trustworthy fund manager or financial advisor should keep clients’ assets in a third-party bank or external financial institution, greatly reducing the risk of theft or personal use of client funds.

Photo from the series “The Big Short” (2015).

From an operational perspective, billion-dollar funds often cooperate with multiple financial intermediaries to implement their investment strategies. This includes brokerage firms executing trades to ensure competitive transaction costs; a fund management company calculating and reporting the market value of the portfolio; and a bank acting as custodian, holding assets on behalf of investors. But all these operations are done internally by Madoff’s firm, with no third-party oversight. They had no independent custodian, which allowed him to arbitrarily alter client reports, manipulate returns, produce false reports, ignore auditors’ supervision, and freely dispose of client funds. Bernie was arrested because he held client assets himself. This is just my personal opinion.

To-do:

Ask your financial advisor or investment manager who the custodian of your funds is. Make sure it’s an independent third party. It should allow your advisor to trade on your behalf but never transfer funds into or out of your account without prior permission.

When sales pitches are filled with exclusivity

In wealth management, the difference between the rich and the common people is simply that they have more money. The wealthy tend to believe they are special. So, a common tactic is to market investment opportunities as exclusive, tailored just for them. But there are no shortcuts to investing. Good investments are often dull. However, creating a sense of exclusivity can stimulate interest.

Professional investors love to boast about their “secret methods,” “exclusive investor circles for certain projects,” “little-known wealth-building secrets,” or “giving you the same priority as the initiator.” These marketing phrases make us feel good—after all, who doesn’t want to believe they are special when managing their life savings? We deserve special treatment, right?

Lloyd’s of London, a historic British insurance company founded in 1686, is renowned for its long-standing relationships with British aristocracy. In the 1990s, it promoted itself to American investors as a stable blue-chip institution, attracting new clients seeking steady returns and exclusive investment brands. But the problem was, these new investors were often attracted to high-risk insurance products, taking on debts they couldn’t understand, resulting in heavy losses for many involved, and Lloyd’s itself faced legal action.

To-do:

Ask yourself why this person or company wants to share so-called exclusive deals, investments, or strategies with you. If confidentiality is truly so important, why are they sharing it at all? Exclusivity might make a financial plan sound more important or appealing, but in 99.9% of cases, it’s just a sales tactic to get you to part with your money. Those “once-in-a-lifetime” investment opportunities are more likely marketing gimmicks than genuine, reliable strategies.

When strategies are too complex to understand

Will Rogers once said, “I’d rather be the guy buying the Brooklyn Bridge than the one selling it.” He was referring to George C. Parker, a con artist who somehow managed to sell the Brooklyn Bridge and other assets he didn’t own to unsuspecting buyers. Unfortunately, in the world of financial fraud, there are always more people wanting to buy the Brooklyn Bridge than sell it. They’re always looking for shortcuts to get rich quickly, which keeps these scams alive.

Scammers often use complex, hard-to-understand methods to lure victims because: (1) people like to believe they are smart and don’t want to admit ignorance, as that might make them look foolish; (2) when things become complicated or hard to grasp, we are more easily confused by randomness.

A group of psychologists found that most people watching magic shows don’t want to know how the tricks are done. In one study, participants watched a series of magic acts, including a magician making a helicopter disappear. Afterwards, they chose whether to learn the secret or watch another trick. Surprisingly, 60% chose to watch another trick, only 40% wanted to reveal the secret. This suggests that people are attracted to mystery. We are willing to be fooled, and many enjoy it.

Photo from “The Big Short” (2015).

“Trust us, we can handle it,” was a common phrase in old financial promotions, before the internet made information transparent. This kind of promotion was based on the idea that financial professionals knew more than clients, so people handed over their money for them to do as they pleased. But today, with transparent information, black-box operations are exposed. A professional wealth manager should be more knowledgeable but also capable of explaining their strategies and ideas clearly enough for a six-year-old to understand. Any legitimate investment strategy should not be vague, exaggerated, or overly complex to the point that clients can’t understand. Wealthy and powerful people tend to avoid showing ignorance to avoid appearing weak. But remember, don’t let arrogance harm your financial health.

To-do:

If someone cannot or will not explain how they manage your funds, that’s a huge red flag. You can entrust someone else to handle your investments, but never give up understanding your financial situation. If an investment is too complex to understand, don’t invest.

When a story sounds too good to be true

General Gregory MacGregor, a Scottish veteran who fought in South America, orchestrated the largest and most vicious scam of the 19th century. Known for his persuasive skills, he convinced many Scots that he was a prince of the Central American country of Poyas. MacGregor painted a picture of a land full of vegetables, fruits, game, and rivers of gold.

With his sales ability, investors quickly raised £200,000 in bonds to develop Poyas. Seven ships set sail with crowds heading toward this imaginary country. But when they arrived in Honduras, they saw only desolation, unfit for habitation. Many fell ill or died due to the harsh environment.

MacGregor exploited his reputation as a war hero and the promises of wealth he made in an era when high returns were hard to come by. Somehow, he convinced thousands that this fictional country existed hundreds of miles away. In 1908, a scammer published an ad in several newspapers:

This is not fake—no speculation, gambling, or voting required. Operate from home. Turn $5 into $10, or $10 into $20. Absolutely real. If you find it false within a week of receiving the secret formula, we will refund your money in full. The wealthiest people in the country have tested it successfully. Send us $2, and we will mail you the secret formula. Remember, if it doesn’t work within a week, your $2 will be returned.

Thousands sent $2, hoping to double their wealth with this secret. But the reply they received was: “Exchange your money for banknotes, then fold them.” If this sounds too incredible to believe… the outcome is predictable.

To-do:

Apply reverse reasoning to every financial idea or strategy you encounter. Conduct pre-analysis to identify potential risks and help you see issues you might overlook. If the returns sound too good to be true, they probably are. If the marketing sounds too good to be true, it likely is. If promises of wealth are overly enticing, it’s probably a scam.

When returns are outrageously high

In the late 19th century, William Franklin Miller worked at a brokerage firm, attracting clients with “insider information.” He promised returns of 10%, but that was not annualized; it was weekly—an astonishing 520% per year! But like many exaggerated promises, Miller never actually invested clients’ money in anything real.

Instead, his main business was spreading fraudulent investment schemes. His promotional brochures boldly claimed: “My goal is to make the Franklin Syndicate one of the largest and most powerful on Wall Street, so we can manipulate stock prices, raising or lowering them at will, and multiply profits fivefold.” Although securities laws were relatively lax at the time, openly declaring market manipulation took courage. Worse, he never actually tried to manipulate the market! It was a Ponzi scheme, generating about $80,000 daily. His boastful marketing attracted government investigations. Once exposed, Miller fled to Canada, leaving his “investors” empty-handed and bearing the losses.

Photo from “The Big Short” (2015).

Promising high returns always easily attracts attention because everyone believes in unicorns in the financial world. But stay alert—if someone can consistently earn high returns weekly, monthly, or yearly, why would they share the opportunity with you? If they truly had the secret to high profits, they wouldn’t need to tell you.

To-do:

Be rational about expected returns when investing. Do your research to understand reasonable return ranges. Don’t be fooled by promises of excessively high or stable returns. Whenever someone promises future returns, especially if they sound too good to be true, be cautious.

When they say exactly what you want to hear

The American Medical Association’s Maurice Fishbein, while exposing the charlatan John Brinkley (see Chapter 1), summarized three traits of scammers to help the public recognize their tactics:

1. They surround themselves with legends, half-truths, and outright lies. For Brinkley, this meant opposing orthodox medicine, promoting miracle cures, and advocating pseudoscience.

2. They are extremely selfish. Brinkley never shared his so-called medical secrets with other professionals, which is a major red flag because real doctors are eager to share research for peer review.

3. They are skilled at manipulating emotions. Scammers tell people what they want to hear, selling hope to control their feelings.

The simplest way to manipulate others is through storytelling. Yuval Noah Harari, in his acclaimed book Sapiens: A Brief History of Humankind, explains how humans leapt from small-scale hunter-gatherer groups to large cities, rich cultures, diverse communities, and complex organizations. This leap was not just technological but also rooted in our ability to tell stories:

How did Homo sapiens cross this critical threshold and build cities with tens of thousands of residents, even ruling over hundreds of millions? The secret may lie in the birth of fiction. These shared myths allowed strangers to cooperate and succeed together.

Photo from “The Big Short” (2017).

Telling a compelling story is no easy task, which explains why many people fail to notice scams. Scammers excel at using stories to sell themselves. Maria Konnikova, in her book The Confidence Game, explains why we often get fooled by appearances and overlook facts: “When a fact seems reasonable, we check its truth; but when a story sounds plausible, we tend to believe it.” She argues that when we hear a good story, we immediately lower our guard. Otherwise, how can we explain absurd schemes like the Nigerian prince scam, the airplane game, or the doctor claiming to cure male reproductive issues by implanting goat testicles? Or the multi-billion-dollar Ponzi scheme that no one ever lost money in? Stories stick with us, but facts and data often don’t.

To-do:

Every fraud in history is accompanied by a captivating story. Victims rarely verify the legitimacy or reasonableness of these stories. So, do your homework. Don’t believe just because you want to believe. Stories may sound beautiful, but only by scrutinizing the evidence behind any money-related story can you save yourself from self-deception.

This article is excerpted from Don’t Be Fooled: A Brief History of Financial Fraud, authorized for publication by the publisher.

Original author: Ben Carlson (USA)

Edited by: He Ye

Proofreading: Lu Qian