"Mini Madoff" Event Provides Investors With Experience And Lessons

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Do you want to prove it? Please come with us to this remote desert area of New Mexico.

Exposed by the authorities, Madoff cheated in February in New Mexico, known as the Land of Enchantment.

In New Mexico, the economically backward and sparsely populated state of New Mexico, the Albuquerque real estate operator, Douglas F. Vaughan, has raised $86 million from more than 600 investors in 1993, most of which has been squandered.

The Securities & Exchange Commission charged that Vaughan, like Madoff, used later investors' money rather than operating profits to pay early investors as profits - a classic definition of the Ponzi scheme.

Vaughan, who is 62 years old, has remained largely silent. He often quotes the "Fifth Amendment's right against self incrimination" when he formally interrogates, and refuses to accept Forbes's visit.

He has not yet formally defended the SEC's complaint.

But last month, when he interviewed Albuquerque TV station KOB, he denied that he had been involved in Ponzi scheme.

"We never had that intention," he said, adding that investors are "our very good friends and family."

However, the government survey pointed out that Vaughan investors and Madoff victims almost made the same mistake.

The following are painful lessons.

You can't rely on reputation alone.

Vaughan, who lived in New Mexico from an early age and majored in accounting at University, has one of the largest real estate brokerage companies in the state, Vaughan Company Realtors, which has 5 offices and 150 real estate agents.

Its sale signs can be seen everywhere.

In the words of judge Starzynski, Vaughan itself is a "very famous and popular businessman, and of course a very successful businessman in Albuquerque".

He wears expensive jewelry and owns a 5300 square foot house in a nice neighborhood near Albuquerque.

Many investors told Forbes that they trusted him for believing in the good reputation of Vaughan - Vaughan was elected the Realtor of the Year of the state.

Don't be too greedy.

Vaughan initially sold three year promissory notes (later partnership interests) with an average fixed rate of 17.5%.

This is far beyond the promise of Madoff or Allan Stanford. The Allan Stanford, a financier born in Texas, is now in custody and is facing criminal charges for allegedly manipulating the $8 billion Ponzi scheme outside the Caribbean.

According to court documents, Vaughan sometimes even provides up to 25% of earnings; an investor tells investigators that they get 40% of the profits.

Such a level of income is double the current interest rate of the minimum risk investment, from which we can see the huge danger signal.

Vaughan told investors that he was investing in real estate and issued high yield notes because he did not trust banks.

Be vigilant for healthy high returns.

Year after year, as investors continue to roll their investments to the next stage, Vaughan provides them with the same high or even higher rate of return.

William F. Davis, a lawyer for the bankrupt creditor, said that even in the early twenty-first Century, even a sharp fall in US interest rates did not affect Vaughan's rate of return.

Information disclosure is required.

Rob Burpo, a financial advisor in Albuquerque, said that in 2005, Vaughan made an investment request to him, with a commitment rate of 25%, but did not provide written documents relating to pactions or collateral, so the investment ended in the end.

"It's very doubtful," Burpo said.

Vaughan's usual trick is to sign personal guarantees and promise to use real estate as collateral.

But now it seems that he just keeps repeating the same mortgage - a mess of small town rental housing and his own home.

For example, Vaughan's $3 million 250 thousand house is now a $79 million investment collateral.

Investors also complained that they did not receive regular consolidated financial statements.

In the lawsuit filed by the securities and Exchange Commission (SEC), the cash flow of Vaughan was negative to US $25 million between 2008 and 2009.

The net operating losses recorded on his own corporate tax returns have been rising every year since 1994.

Do not blindly count on regulators.

Under the laws of New Mexico, promissory notes should be considered as securities and must be registered and mandatory disclosure of all relevant information.

However, Vaughan's promissory note was not registered. In the 90s of last century, he submitted his form for two times, claiming that he had immunity, on the grounds that he had less than 25 investors.

But at least New Mexico securities regulatory authorities cracked the case, as did the US Securities Commission's handling of Madoff. They also did not ignore investors' suspicion and report on Vaughan for ten years.

Last fall, after learning about the activities of Vaughan, they quickly dispatched a spy to him as a potential investor and recorded the situation with a tape recorder.

Maintain diversity.

Many Vaughan investors retire after selling their small businesses, and then invest all their property to Vaughan.

Terry White, the president of a trust company with a large number of independent retirement accounts, sighs, "many people have invested all their assets."

The head of the company has filed a bankruptcy claim against Vaughan for the court.

A promise of high return should keep investment diversified instead of reducing other investments.

Watch out for child care.

Some investors said they had participated in some seminars in the name of ordinary retirement schemes but were actually marketing activities aimed at Vaughan.

Investigators from the Securities Commission of the United States are investigating whether Vaughan has paid commission to these people privately.

About 100 investors are from outside New Mexico, including Feinikesi's Janice Dorn, whose website calls her "financial psychiatrist and financial futurist."

Her claim amount was $485000.

Overall, however, investors in Vaughan are different from Madoff. There are no financial elites or even regional celebrities. Only one of them is an exception. That is the 77 year old Ford dealer Bob L. Turner, who is famous for his retirement plans in the TV and radio advertisements that he has been broadcasting for a long time. She is very famous in Al Burke base area.

He lent Vaughan $4 million 400 thousand and said the latter was his close friend.

Although the scale of Vaughan has undoubtedly become a new record in New Mexico (2 million population), there are one or two Ponzi cases in the state almost every year.

After publishing his epic Ben-Hur, Binnn Wallace, governor of New Mexico in Indiana, wrote in 1881: "all the inferences made according to our experience elsewhere are not feasible in New Mexico."

At present, local famous commentary often invokes this sentence to explain all kinds of disappointing things.

In fact, New Mexico also has a different place -- its most famous historical figure is the nineteenth Century killer Billy Billy (the Kid).

But when it comes to being fooled, it turns out that the New Mexicans are not different from the big players in New York and Florida.

They lose less because they do not have so much wealth.