Despite what the media would have us believe, the global financial crisis does not appear to be over. In these times of financial difficulty there is usually a rise in false and misleading investment advertising in regard to investments.

In January this year the owner of a Melbourne based mortgage broker business was sentenced to nearly five years gaol for defrauding investors through what is known as a ‘Ponzi’ Scheme.  Five investors lost $2.5 million when they invested in a scheme that they believes would provide between 4 and 5 per cent interest per month.

The way that a Ponzi scheme works I the broker uses the money invested by the second person to make initial payments to the first person, and the money from the third person was used to make payments to the second person and so on. These schemes continue for a time until the flow of money down the chain runs out.   Unfortunately by the time the investors figure out that they have been tricked there is no money left to recover.  Even if the perpetrator goes to gaol, the investors have lost all their savings or investments and so this may be cold comfort.

In our experience, if an investment opportunity seems too good to be true, then it probably is too good to be true.

During these financially trying times we also see a rise in people making informal loan arrangements (that aren’t documented) in an effort to save money on the costs associated with properly arranging their affairs.  Unfortunately if the loan is not repaid then it can becomes very difficult to get the money back either because there is a dispute about the terms of the loan, or because the loan was not secured over assets, or was not secured properly over any assets.  We have received instructions from clients who thought that their loan was secured over assets but did not discover, until after the borrower went broke, that their loan actually wasn’t secured at all.

Often in these matters hindsight is 20/20, and the first piece of advise that we give is you should have come and seen us before you did this. In our dealings with financial planners and accountants we are told that they also see a large number of bad investments, and are asked for advise after the investment has been made, and/or after the money is gone.

If you are looking to invest money or lend money, you should really seek both financial advice and legal advice.