Does Your Team Loyalty Make You More Vulnerable to Securities Fraud?

By D. Russell Stroud, Student Intern Fall 2013

The Scam

microsoft clip art fanCollege Football Hall of Fame inductee and former UGA Head Coach, Jim Donnan, has been charged with investor fraud in conjunction with an alleged $80 million Ponzi scheme conducted between August 2007 and October 2010.  Donnan and his partner, Gregory Crabtree, are said to have convinced nearly 100 investors, the majority of which were players, coaches, and other contacts from Donnan’s prior coaching and commentating roles, to invest in their scheme.

A Ponzi scheme is a classic scam in which a “central fraudster” induces his targets to invest in a seemingly legitimate venture.  However, rather than utilizing the new influx of capital in the manner assured to the victims, the money is used to pay returns to earlier-stage investors.  The scam usually continues until the fraudster can no longer recruit new financiers, leaving his unknowing prey with little more than empty pockets.

Source Credibility

microsoft clip art coachWhile a formal list of victims involved in this Ponzi scheme has not officially been released, coaches from Virginia Tech, Texas State, the University of Cincinnati, and one formerly with the Dallas Cowboys are alleged to have been among those duped.  At least one former player of Donnan is reported to have invested $800,000 after he was assured that Donnan would take care of him.

Utilizing one’s prior relationship and experience, such as coach and player or fellow co-worker, with a potential victim is a common and often very effective tactic exercised by scammers.  The Consumer Fraud Research Group at FINRA labels this kind of approach as “Source Credibility.”

Phantom Riches

microsoft clip art mousetrapTo encourage potential targets to open up their wallets, the two claimed the investment was a no-brainer and guaranteed 50 to 380 percent returns in less than a year.  Investors were led to believe the company, GLC Limited, would be purchasing leftover sports merchandise at deep discounts then reselling the items for quick profits.  In reality only $12 million of the $80 million poured into the company was actually used to acquire merchandise.  The remainder was used to pay off promised returns to early participants and siphoned away by Donnan and Crabtree to the tune of $7 million and $1.08 million respectively.

Protect Yourself microsoft clip art stop football

While the exact outcome of this case is still pending in federal court in Atlanta, it reminds us to be wary of opportunities that seem too good to be true EVEN IF the source is someone we know and trust.  Four quick steps to protect yourself and your hard earned dollars:

1)    Ensure the individual or company pitching you this great deal, or any deal for that matter, is licensed to sell you the investment.  Do this by visiting FINRA’s BrokerCheck feature and running a search on the individual and company.

2)    Do a little background investigation of the product and know exactly what you are purchasing.  Visit FINRA’s Market Data and input the name of the product into the search engine.

microsoft clip art papers

3)    Keep all documents and materials – pamphlets, presentations, notes from conversations, confirmation of sales, etc. – related to the transaction.  Having this information available is crucial if there is ever a dispute regarding the information you were provided before making the investment and what your expectations were by getting into the deal.  Be sure to read through this material thoroughly and let the other party know if you have any questions or concerns with what you read or discovered while performing your own research.

4)    Beware of guaranteed returns.  It is easy to get taken in with the promise of assured results and safe bets, but there will always be some form of risk or opportunity cost associated with an investment.  Don’t be led to believe otherwise.  If it seems too good to be true…it probably is.

For more information on common investment scams and additional ways to protect yourself as an investor, visit the free investor education tools and materials on FINRA’s website as well as the resources on SaveAndInvest.org.