Scammers Use Religion to Defraud Investors

Don’t let shared values cloud your logical judgment.

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Patrick Kiley, the host of the Christian Radio show Follow the Money, has been indicted in a $194 million Ponzi scheme in Minnesota.

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According to the U.S. Attorney’s Office, the scheme involved solicitation of investments in a foreign currency trading program using the acronym UBS. The UBS referenced was not the huge Swiss-based bank with offices in 50 countries, employing over 65,000 people. This UBS was Universal Brokerage Services, an entity allegedly used to defraud investors. Kiley’s program was carried on more than 200 stations around the world, including the Worldwide Christian Radio network. He told his listeners he was a senior financial adviser and warned them about a “coming financial Armageddon”, which could only be avoided by investing in the foreign currency trading scheme. Kiley now claims he was only reading from a script prepared by others and he believed in the scheme.

Kiley is the latest in a string of scams perpetuated by advisers who gain the trust of their victims by invoking common religious beliefs. An Internet missionary church bilked fundamentalist Christians out of $550 million by quoting Luke 6:38: “Give and it shall be given unto you.” Another scam targeted members of churches in rural areas, promising outsized returns in foreign bank instruments. Some 125 church members lost $7.4 million. In 2009, two Maryland men were charged and arrested for allegedly fleecing 21 Michigan churches out of $660,000. The pastors of these churches gave the scammers access to church bank accounts.

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This is only a small sampling of scams using religion as the means to gain the trust of the victims. It is difficult to conceive of more despicable conduct than fleecing people whose trust you have gained through shared values. Fortunately, by taking a few simple precautions, you can avoid falling victim to these scams:

The golden rule of investing. Remember the golden rule of investing: Increased returns always come at the expense of increased risk. There are no exceptions to this rule. Every scam is premised on convincing you the investment being proposed will give you high returns with little or no risk. It’s ironic that these investments are the opposite of what they promise. They are all risk, with no return, except to those sponsoring them.

Diversification mitigates risk. It’s surprising how common it is to hear victims tell stories of being scammed out of their entire life savings. No one should invest a significant portion of their funds in any one investment, no matter how good it sounds. Enron, Worldcom, and Lehman Brothers were all touted as terrific investments before they filed for bankruptcy.

[See Investing in the Oracle of Omaha Falls Short.]

Avoid all private investments. Private deals of all stripes share characteristics that should be a red flag for investors. They are typically illiquid. They are not subject to supervision by the Securities and Exchange Commission. They often don’t have financial statements audited by major accounting firms. The investments are not transparent. You would be well advised to avoid all private investments. Instead, consider a globally diversified portfolio of low management fee index funds, passively managed funds, or exchange traded funds in an asset allocation appropriate for your tolerance for risk.

Use a major custodian for your assets. Your funds should be held by a major custodian like T.D. Ameritrade, Fidelity, or Charles Schwab. Funds should be deposited directly with the custodian. You should be able to access your account on the web site of your custodian and should receive reports directly from the custodian. Following these simple rules will insure that you will never be a victim of any scammer, regardless of his religious persuasion.

Dan Solin is a senior vice president of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, will be released in September, 2011.