Australian hedge fund manager John Hempton has spent a good part of his career rooting out frauds, both in Australia and overseas. He exposed Trio Capital in Australia ($176 million lost) and was vocal on German payment processor, Wirecard, before it eventually was proven fraudulent vaporising billions as it went down.
To expose frauds requires some detective work. It’s not just the financials, where there might be red flags in accounting. It’s also the people involved in the companies that may offer clues worth pursuing. In Hempton’s case, it’s meant his hedge fund has built a global database of names. Basically, it comprises thousands of scoundrels. If these scoundrels appear near a company, it might be worth taking a closer look at that company for signs of impropriety.
What are the notable attributes of a scoundrel? Hempton hasn’t gone into great detail, but says some groups surprisingly show up more often than others. And there’s one very unlikely group that punches well above its weight. Specifically, Mormons. Hempton says Mormons are overrepresented in of his database. This is a comparatively small religion, with just under 17 million members of the LDS church worldwide.
Hempton elaborated on a podcast a couple of years back.
“Mormons are 2 per cent of the US population but almost 6 per cent of Fortune 500 CEOs, and almost all of those Fortune 500 CEOs came up through a sales function,”
“Mormons are pound-for-pound the best salespeople in the world. The reason is obvious: if you are 19 and you go missionary, you are selling religion – and a pretty weird one – door-to-door. If you can sell religion door-to-door, you can sell anything. It’s the best training for a sales job anywhere.”
That might involve selling things that you shouldn’t. Hempton added that “probably 10 per cent of America’s dodgy frauds have a Mormon connection”.
It’s not speculative. The US Securities and Exchange Commission, which is tasked with protecting investors and regulating markets, have a head office in Washington DC, along with eleven regional offices. Those eleven regional offices are in the most prominent US cities or metropolitan areas, except for one. That one is in the 122nd largest city, in the 30th largest state: Salt Lake City in Utah, home of the LDS Church.
Per capita, Utah has more ponzi schemes than any other state in the US. It was the first state to set up a white-collar crime registry due to the scale of financial fraud that occurs in the state. Many people are surprised to learn Salt Lake City is the investment scam capital of the US.
This isn’t to suggest fraud is an inherent Mormon trait, but there are two reasons it does flourish in Utah. Firstly, as Hempton suggested, if you have a group of people who’ve been well schooled in the arts of conversation, persuasion, and sales, there will inevitably always be a small number of those people who use those skills in a dark manner. Suddenly, they are overrepresented against the rest of the population.
The second reason, Utah and the wider Mormon community is not just overrepresented with people who may have strong sales skills. It’s filled with people who have an overt willingness to trust people they have an affinity with, like fellow Mormons. It’s a signal that this person must good and honest like they are. This means doing little to no due diligence on investment opportunities pushed by people who share the same values. Sometimes it’s a trusted elder who is the first one conned or targeted, they then unwittingly vouch for the fraud and bring in other victims.
Non-Mormon scoundrels are also well aware of this Mormon blind spot. While there have been plenty of Mormons running frauds, there have been a number of outsiders to the church who’ve positioned themselves as followers of the faith to take advantage. Intertwining their supposed values into their investment pitch, before stealing millions from the unwitting.
All financial decisions at some point are about trust. An investor is looking for someone to invest their money with, or someone is pushing an investment idea at an investor. For many different reasons, investors won’t always fully understand the whys, the hows or the whats of an investment, or where the custody lies. That’s where trust comes in.
Having an affinity with someone is the easiest way in the door. It’s a short cut. Failing all else, if someone looks like you, talks like you, has similar beliefs, a similar background, schooling, religion, ethnicity, age. One (or more) of these affinities are usually played on when fraud is perpetrated. It’s why you’ll often hear of frauds targeting various immigrant communities. Affinity helps move past the financial details that investors may not understand, to focus on the what’s represented “if they’re like me, they must be trustworthy”.
This is worth keeping in mind as we appear to be at a precipice with Artificial Intelligence (AI). Late last year ChatGPT appeared in the public sphere. It was able to give detailed answers to all manner of questions it was asked. There are definitely some glitches, but as this evolves, it will mean that no longer will anyone receive laughable scam emails written in broken English from Nigerian princes. Dubious emails and chat bots will become more credible, relatable, and engaging, with correspondence more readable and pristine than those written by your adviser!
It’s not just writing; we can now upload samples of our voices (or someone else’s), and within a few seconds an AI version of that voice will read back whatever text it’s instructed to. It doesn’t just sound like a robot stuttering out unrelated words. Users can manipulate the inflection and cadence of the voice, so it sounds real. As hilarious as this might be for practical jokes, it will ensure fraudsters will be able to mimic or tailor voices to suit their agenda.
Nor will we be able to trust our lying eyes. AI is now able to manipulate and fake video in a concerning way. You might think you’re looking at President Biden declaring war on Australia! While the attempts at fakery were quite amateur looking a couple of years back, they’re now becoming more credible.
In similar fashion, fraudsters will soon be telling us they can get amazing returns via AI, their investment fund is AI powered, or their inputs into AI are able to predict the direction of markets and the next market crash. Lies, lies, and more lies.
Much of the fraud perpetrated over the internet often stretches the boundaries of credibility. We might think “how was this person so gullible?” The victim took the word of someone they never actually spoke to, couldn’t see, or made increasingly ridiculous claims.
That will change. The level of sophistication will ensure fraudsters are more persuasive. They will have the ability to look and sound just like whoever they’re targeting, fabricate video testimonials using notable people, or maybe even mimic your adviser! Fraudsters being able to build more of an affinity means it will be even easier for them to direct victims past the lack of credibility around any investment pitch.
Secure communication channels and verification will be important, but there are some things that can’t be faked. For investors who’ve never met the person they’re dealing with, simple questions can knock a house of cards down.
If you’re on a video call, ask to see around their office, or even out the window. You’ll know whether you’re really talking to someone in Sydney, St. Petersburg, Soweto, or Salt Lake City.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
