October 2011 Update: Nicholas Cosmo Sentenced to 25 Years – History Repeats Itself
Nicholas Cosmo’s guilty plea for running for $413 million Agape World ponzi scheme on October 29, 2010 reminded me of how this could have been avoided if investors had hired a professional private investigator to conduct a background investigation.
It’s easy to make such a statement in hindsight, but at least for two investors, they were well aware of Nicholas Cosmo’s dubious past well before the general public became aware of his issues.
In January 2008, I received two calls from two separate investors who had both invested with a Long Island investment manager Nicholas Cosmo of Agape World who was claiming to get substantial “guaranteed” returns in just a few months.
Both investors had already made investments with Cosmo and both had a good level of comfort with him; they had met him personally, played golf with him and were aware his contributions to the local community. Although they both had been receiving checks on investment gains and knew many other investors who had done extremely well, they wanted to conduct some additional background investigation, just to make sure.
The Only “Guarantee” in Life is Death and Taxes
Immediately, I was a bit suspicious. Firstly, the words “guaranteed” and “investments” in the same sentence should immediately raise a red flag (remember the old addage that the only things “guaranteed” in life are death and taxes). Also raising suspicions was calls from two investors on the same day who were claiming that Cosmo was trying to raise some more money.
This was prior to the term “ponzi scheme” becoming a household name (thanks to Bernie Madoff who was arrested in December 2008), but it was one of the first thoughts in my head. The trademark of the ponzi scheme is that earlier investors are paid with new investors money, and when a fund is desperately seeking new funds, it’s a clear warning sign that trouble may be ahead.
Cosmo’s Criminal Record
Needless to say, after a few hours of research, I had determined that Cosmo had served time in federal prison and had been banned by the NASD in 1999. It took about a week before I was able to get a copy of the court records from an federal archive facility, but once I did, it had proved my initial suspicions – Cosmo had been banned by the NASD in 1999 and served federal prison time for a scheme in which he stole more than $150,000 from his clients.
In addition to being banned from any NASD member in any capacity, court records showed that part of his sentence required Cosmo in a “facility that offers an intensive gambling therapy,” which, needless to say, is not a typical part of a sentencing agreement. Of course this information didn’t “prove” that Cosmo was operating a ponzi scheme, but it was enough to inform the two investors of some serious warning flags.
Other Warning Signs
Also suspicious was Agape World’s claim that they had been a “private bridge lender” since 1999, which is during the time that Cosmo was serving jail time (he wasn’t released until August 23, 2000). And based on information from other sources in the private bridge loan business, I knew that bridge financing was drying up due to the economic downturn and even if it was a legitimate business, there was no way that Agape could keep its pace or its “returns” to investors.
It was later learned that some Agape investors said the favorable Dun & Bradstreet reports along with Agape’s appearance on Entrepreneur Magazine’s “Hot 100” list of fast-growing businesses lent the company “undue credibility.”
It’s important to know that Dun & Bradstreet can be an effective tool for evaluating businesses (not typically investment schemes), but the information in these reports can be limited, most of the report is self-reported and, as in the case of Agape, they obviously did not conduct a criminal check on Mr. Cosmo. As for his appearance in Entreprenuer Magazine’s “Hot 100”, this informaiton is typically self-reported and facts are not always checked properly.
This is just another example of where a little background investigation by a professional private investigator can help you avoid fraudulent investment schemes. This fraud is particularly disturbing because unlike other notorious massive frauds that have victimized the wealthy (Bernie Madoff), the victims in this case were mostly blue collar workers.
And while fraudsters such as Bernie Madoff and Allen Stanford have received national attention for the SEC’s failures, ponzi schemes such as Nicholas Cosmo’s were not overseen by the SEC and even with the new steps in place to investigate and prosecute fraud by the SEC, Cosmo’s Agape World would not fall under their auspices.
So until there is some major financial overhaul, investors need to do their own homework to understand what they are investing in and who they are investing with.