The 5 Levels of Financial Fraud

[Don Konipol]

In my experience these are the levels of how financial fraud is done

Level 1 - The “sponsor” is a fraudster from the beginning and the entire investment is a designed fraud designed to steal the investor's money 

Level 2 - The sponsor initially intends to operate legally and honestly but the temptation of easy access to money, usually fueled by addictions to drugs, sex, partying, etc. leads to the bad decision to line the sponsors own pockets

Level 3 - The sponsor intends to operate legally but a crisis in their life resulting in a need for money leads the sponsor to “borrow” from investor’s funds with the full intention of paying it back ( which they are unable to do).

Level 4 - The sponsor intends to operate legally but the assets under their management incur substantial loses; the sponsor attempts to cover up these loses by “temporarily” borrowing from one investor to pay another or submitting false results. They enter a quickly spiraling fraud that goes way beyond their control.

Level 5 - The sponsor, originally intending to operate honestly, enjoys an initial period of great success leading them to significantly changing their lifestyle and incurring a lot of debt for mansions, yachts, trophy spouses, etc.  When the economy tanks and the sponsors compensation is drastically reduced, the sponsor makes the decision to maintain there lifestyle at the investor’s expense. 

The results of investor’s losing their money may not be any different no matter which “level” above is involved.  It’s just interesting that most (imo) financial frauds actually start as legitimate business deals.  So, beside the question that needs to be asked by the passive investor as to whether the sponsor is a fraud, is whether the sponsor has the moral compass to resist the temptation to commit fraud if things don’t go their way.