Too good to be true | Value Research The war between savers and fraudsters is always an asymmetric battle
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Too good to be true

The war between savers and fraudsters is always an asymmetric battle

Too good to be true

If you are an investor, then over the last few years you must have received many, many phone calls from call centres in a certain city in central India. I won't name the city because its citizens now tend to be quite sensitive about the unsavoury reputation that their hometown has gathered, specially because the city is more justifiably famous for many other things, most of them quite delicious.

A few days back SEBI published an order against an 'unregistered investment advisor'. The matter originated in a complaint from someone who had received a phone call from this research and trading outfit in the above city. This investor handed over a few lakh rupees to this outfit, part of it to be deposited in a demat account and part of it directly to this research and trading outfit as some kind of a fee. I'm sure you can guess the rest of the story. Most of the money vanished. The investor chased the company and got a little bit back. It's a common story, although the final denouement of a SEBI complaint, order and some kind of punishment is not so common. From what I have gathered, most investors take some losses and move on.

The sad part is the common 'I told you so' air of people commenting on the case on social media. The general idea seems to be that anyone with a modicum of understanding of how investing works should have known that such offers are likely to be fraudulent. I don't like this kind of a blame-the-victim response. I'm reminded of another case, one where the investor was a famous name.

Some years ago, Rahul Dravid gave Rs 20 crore to some commodity trading broker who promised very high returns. Compared to most such cases, that story ended relatively well - Dravid lost only Rs 4 crore and actually got back the rest. Of course, there was a huge stream of advice that flowed Dravid's way on Twitter, the most ironic and amusing being from commodity traders and other brokers who were basically telling him to come to them and if he wanted to actually make a lot of money.

Regrettably, everywhere, in all kinds of media, the general tone was one of victim-shaming. In newspapers and on Twitter, financial advisors were freely handing out quotes about greed and ignorance. There were articles about how much better Dravid would have done had he invested in this or that. Like any case involving a celebrity, it was basically just entertainment for most people.

I firmly believe that the blame, whether in the current case, or that of Rahul Dravid or the millions of other victims of fraudulent financial schemes, does not lie with the victims. In each individual case in which savers fall for some fraud, the easy conclusion that can be drawn is that the victim should have been more careful and less eager to earn higher returns. Essentially, that's the blame-the-victim argument that can be applied to (and often is) almost any crime. If one looks at any financial crime in isolation, it's easy to fall into this belief. However, when you step back and look at the aggregate, then it becomes clear that there has to be some other solution except wringing one's hands and talking about investor education so that people don't fall for scams.

Here's the important part: individual victims - even when they are well-off and educated - are poorly equipped to detect fraud. The fraudsters are invariably well-experienced at what they are doing because they have honed their skills on a large number of victims. The fraudsters can fail with a few targets, gain experience and move on to other potential victims. However, the victims are novices at detecting fraud. Just one fraud is enough to do serious financial damage to most of them.

This asymmetry means that the onus of preventing frauds lies with the regulator. As for us individuals, the lesson is to always be extra suspicious and extra careful. If something sounds too good to be true, then it is probably not true.

Essential read: Blood and money

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