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- An insurance company is launching what it says is the first embezzlement insurance for wealthy individual investors.
- Many investors facing fraud have trouble recovering their money, said financial adviser Steve Craffen, the chair of the National Association of Personal Financial Advisers.
- One lawyer, who co-wrote an 800-page book on Ponzi schemes, said the insurance ‘could be a great thing for investors’ but she cautions buyers to read the fine print.
Travus Pope understands too well the need to protect against fraud.
The insurance executive is still working through a fraud claim against a distributor for his last venture, a film company. He was set to reach a judgement in December, but the distributor filed for bankruptcy just before, leaving Pope without a way to collect what he was owed
Alongside two of his close friends, who also were the victims of business fraud, the trio decided to spend two years creating a new product to protect wealthy individual investors in case their financial adviser or asset manager embezzles their money.
Their new business, Fort Myers, Florida-based Capital Shield Insurance Services, on Tuesday launched what it says is the first embezzlement insurance for individual investors.
“You can buy insurance for almost everything else of value in your life, from houses and cars to boats and art," Pope said. "But until now, individual investors have not been able to insure their money in the event that their asset manager or investment advisor embezzles their money."
Pope said investors have good reason to be cautious about fraud, particularly after the Bernie Madoff scandal a decade ago. He said Capital Shield’s new product would have covered the tens of thousands of investors hit by that fraud. As of July, a government-run insurance program had collected over $13 billion for Madoff’s victims, about 75% of the $17.5 billion lost by individuals covered by that insurance.
A decade after Madoff, government regulators continue to uncover instances of fraud, particularly against the elderly. In February, the Securities and Exchange Commission stopped a Florida investment fund scheme, alleging that two men defrauded individual investors out of $3.6 million. In January, a Florida court ordered an alleged Ponzi scheme operator to pay $1 billion for defrauding 8,400 clients, many of them elderly.
Kathy Bazoian Phelps, a Los Angeles-based lawyer with Diamond McCarthy, co-wrote an 800-page book on Ponzi schemes and even considered launching a similar product to protect investors from fraud.
"It’s ridiculous how much this is a problem, still," she said.
However, she’s skeptical that Madoff’s investors – or even most fraud victims – could benefit from such a product because of the variety of ways they invested in the Ponzi scheme.
"It’s a good start," Phelps said. "It’s a potentially useful product, but I think the definitions and the scope have to be worked out. Anyone considering this needs to understand the coverage."
With this new product, investors can buy coverage to cover $1 million to $10 million if an adviser is indicted, with larger limits expected in the future. Right now, the insurance covers investments in publicly-traded markets, but it could be expanded to other areas.
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Pope said the product could appeal to any of the 7.5 million millionaires in the US, particularly to investors who lack the time or knowledge to monitor their portfolios for fraud. Clients could include elderly investors, or their heirs; those overseeing and those benefitting from trusts; and divorcees handling their finances alone.
Pope and his co-founders have received significant interest in the product from major insurance agencies, he said. He compared the nascent product to cybersecurity insurance, a product that didn’t exist decades ago and now commands tens of billions of dollars in premiums.
New Jersey-based financial adviser Steve Craffen, who chairs the National Association of Personal Financial Advisers, said that in the cases of fraud he’s seen, investors often struggle to recover their money. Often, independent wealth advisers lack the “deep pockets” of a major brokerage to repay clients after they’re found guilty.
He agreed with Pope that embezzlement insurance could help elderly and trustees in particular.
"For people that are very cautious and monitor their portfolio and are with a traditional custodian – a Schwab or a TD Ameritrade – fraud is becoming much more difficult,” Craffen said.
Those groups typically have checks in place to prevent fraud – advisers often can’t wire money to accounts other than their clients’, for example.
Craffen noted that the most infamous examples of fraud, Madoff’s Ponzi scheme, hurt investors because Madoff kept investors’ capital in-house instead of at a custody bank, where it would have been subject to more oversight.
“I bet that true fraud is not that common,” he said. “I think what’s more common is advisers doing things that are just wrong for the client,” like investing in high-fee products, he added.
In her legal practice, Phelps said she’s seen many examples of fraud and embezzlement that may not end with an indictment, which is when Capital Shield’s policy kicks in.
"Like any insurance policy, there will be a million ways to find there’s not coverage," she said. "I’m leery of how much protection it’ll provide, but I hope it does – it could be a great thing for investors."
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