Forex Investors May Face $1B Loss as Trade Site Vanishes
bloomberg.com
bloomberg.com
And then, under the article, "UK public snaps up bargains using bizarre online trick - madbid.com" and "How new iPads are selling for under £30".
I'm getting mixed messages here.
"Secure Investment said it offered something safer: It made trading decisions for investors and guaranteed their principal."
Ultimately the long tail perverse incentive (I don't know if there's a name for it, but it's the same perverse incentive that performance bonuses create) is a tricky one and I think it permeates a lot of things. Say, these guys came out with a more credible claim. They guarantee 80% of your principle and target 10%-20% returns. There probably are trading strategies that produce nice results in the -20% - 20% range with a long tail risk of 100% loss.
Over twenty years, they might average over 10% returns with nice fees or bonuses (regardless of how this is set up) with an occasional cost to honoring the guarantee. One year out of twenty, they wipe out all investors and the game is up. The company takes home whatever it's made up until that point and investors lose their entire principle.
This kind of risk is difficult for us to understand. Regulation chokes on it. Investors choke on it. A 43 year old fund manager looking at his competitors' successful 17 year run is very likely to choke on it.
I just think the made-up story they are telling, these lies, are usually variations and exaggerations of the stories told by "legitimate" players. It's interesting.
Laws, standards and people's brains need black and white. A line after which things are fraud, crime and such. But I think from the perspective of the scammers, they probably saw themselves as part of a spectrum. They probably pay more attention, compete with and emulate their neighbors on that spectrum. Little dodgy funds copy little legitimate funds. Little illegal scams copy little dingy funds. In the wild, the line between this and that doesn't exist. It's like the line between pirate, privateer, wrecker and merchant.
For context that is much much better than the Bernie Madoff Ponzi which claimed average returns of just above 10% over 17 years and people thought that was suspicious.
Do they mean that you can't compound daily, that the 1% per day applies to compounding monthly or annually?
Any interest rate will eventually reach 1% of the original principal per day. Even a rate like 1% per year will average that much after a solid 800 years.
I don't want to victim blame, and I certainly feel terrible for these people, as I have been a victim of scams myself. But jeebus, I do more research into buying an iPhone case than these people did for wiring money to a foreign country.
For context this is roughly 2 - 3x bigger than the Mt Gox loss of 850k Bitcoins.
At the same time it isn't as bad as the MF Global fraud that cost investors 1.6 billion.
[1] https://www.youtube.com/watch?v=zQZMtMLrykM
[2] https://www.youtube.com/watch?v=yOb9y7cUH2Q
dynamic [boom] daily [boom] profit [boom]
In the UK at least, loans must quote an Annualised Percentage Rate (APR), which is the IRR (Internal Rate of Return) over a year. So, any adverts or contracts for this 1 month loan would have to show prominently '435% APR'.
The loan is framed as '435% APR', when in fact you're paying $30 for a $200 1-month loan.
I am always surprised when I read stories like this. They've lost 2000 pounds and the next thing they do is invest 60.000$?
This is a good example why we need more financial education in school.
Not even close. A 1% daily return is science-fiction.
Not really. In 1990, the most common kind of "savings account" used here (caderneta de poupança) had one month with over 80% returns. That's a bit more than 1% daily return, for an investment almost everyone could (and did) have.
Of course, that year the inflation was over 1000%/year...
Cue the next exception and so on. The point is that such high returns are a huge red flags and absent any explanation for them you should be extremely wary and probably just assume that it is a scam until you've proven otherwise.
Edit: and a review http://plus.maths.org/content/reckoning-risk
There are several caveats. According to what I read on that page, these funds use a combination of derivatives and fixed income to protect the principal. On the "risk factors" part, it says the principal cannot be guaranteed if you get out of the fund early; even if you wait until the end and get back the principal, it won't be adjusted for the inflation (6.5%/year and growing); and you always have to pay for the fund administration (1.5%/year for the fund I'm looking at).
Of course, the average return for these kinds of funds will be less than the return for funds which do not guarantee the principal. A quick search found an article (http://www.valor.com.br/valor-investe/o-consultor-financeiro...) with a comparison between one of these protected capital funds and a balanced stock/fixed income fund (last graph in the article). Most of the time, the balanced fund won.
So, guaranteeing the principal is not a red flag. What should have been a red flag is the return rate: 1%/month is too high, even more it they are guaranteeing the principal (which should decrease the expected return). High return rates tend to be correlated with higher risk.
Of course, ROI is capped at 2% with a minimum 1yr commitment.
[0]: https://www.gfmag.com/awards-rankings/best-banks-and-financi...
Yes, and they advertised 1%/day
How anyone could possibly believe that I don't know
In my country, there are safe investments with guaranteed returns of over 12%/year (prefixed federal bonds). For instance, if you buy a LTN 010118 right now, it will return 13%/year (before taxes) when it expires on 2018-01-01 (the current buying price is R$ 684,17, it gives back exactly R$ 1000,00 when it expires).
Of course, that's if you don't look at the inflation. With inflation currently at 6.5%/year and rising, the true return is more like 6.5%/year before taxes, and more like 4.5%/year after the 15% tax on investment gains above 2 years. So yeah, if you do consider inflation, 1%/month is too high.
Variations of this kind of guarantee are a big part of what whacked the financial services market. It's black swan risk. Unlikely to happen, but big when it does.
These maneuverings to "reduce risk" are not really reducing the risk fully. Some of what they are doing is aggregating normal risk into long tail risk. Instead of 10% chance of a 10% loss, they turn it into is a 1% chance of a 100% loss. This new 1 in 100 risk is a sort of dark matter that the financial system produces. No one knows where it is and it doesn't get fully priced into financial products. In the event of the risk materializing, who knows where it ends up. Every liability is ultimately limited by bankruptcy laws and/or the reality of not having the assets to cover an unlimited liability.
Even when most sober financial institutions advertise limited risk investment, one eyebrow should go up.
Why do people keep falling for the same scam over and over again?
Anyone with at least a bit of sense in business would avoid this... Anyone else would lost their money anyways, in either this or other get rich fast scheme. It looks like very expensive lesson to many...
Nominative determinism hits again.
fat stature implies he has been fed nothing but high quality dinners at premium restaurants, a sign of success.
Feel sorry for those who lost money, but, I can't imagine transferring money to someone making such promises
In Spanish we say "even though the monkey dresses up in silk, it's still a monkey." But people are blinded by their own greed and can't see through the sham.
I kind of understand what you mean, but this is a little unfair to Latvia. It's a member of the EU and the eurozone, its banks are (don't laugh please) supervised, and the bank itself was very likely not shady at all. Rather, the bank's customer, which opened an account with the bank, was a shady fraudulent business.
The issue with transferring money like that is that it makes investigations harder and slower, as there are more jurisdictions in play. But I think the bank that processed the transactions was basically quite all right, unless there is specific evidence to the contrary.
Completely agree, it'd be just as possible to perform such a scam with bank accounts in e.g. the UK or the US.
It doesn't take much. Here's a 16-year-old complaining about his bank's conduct after he was basically caught processing fraudulent payments via his bank account:
http://www.theguardian.com/money/2012/jul/07/strange-bank-ac...
The severe economic depression that hit Latvia in 2008/2009 forced the worst problems in the banking sector to the surface. In that way, the Latvian part of the EU banking system might be even more stable than that in other EU areas.
To a shady bank in Latvia, no less.
Except when it isn't, but it usually amounts to high amounts of information assymetry, or high (real or perceived) risk.
I know people who have made massive amounts of money in short-term bets - during the fall of the Pound Sterling due to the threat of Scotland independence was the last such event, but they already had money to lose and were pretty experienced.
How seemingly intelligent people (the guy was a doctor) read this and don't think "too good to be true" is beyond me.
http://www.domaintools.com/research/screenshot-history/secur...
- International phone numbers prominently displayed
- Security certificate at the bottom
- Success Stories with names
- Social buttons with thousands of "likes"
- People photos prominently displayed
and, while screenshots do not show them, there were addresses for offices in several countries
It was an extremely well-designed scam, it hits all of the points other articles on HN mention to gain trust for startups :)
This is where they lost me. How can a company involved in billions of dollars' worth of transfers be hard to trace? It's not like they can make a cash withdrawal and close down their account. Ordinarily, there is an enormous amount of official scrutiny around large international capital movements. This lack of enthusiasm in following the paper trail suggests governments are involved at some level.
Lack of government action doesn't mean that governments are complicit! It might just mean that they don't have the reseources to track criminals across several different jurisdictions.
See "carousel fraud" for an example of a fraud that used to be difficult to tackle. http://uk.reuters.com/article/2009/08/20/uk-carousel-fraud-b...
That "fact" came from their website. Along with the P&L from their trading and the endorsements. What makes you think that the rest is fake and that bit isn't?
They probably had a few million across a dozen accounts in half a dozen countries. Well worth setting up a scam but hardly Bernie Madoff.
And even if it was more serious money, they weren't actually investing it so they only needed to keep enough around to Ponzi returns until the scrutiny got too much.
I already thought forex trading individuals weren't the sharpest, but COME ON PEOPLE.