How fraudsters like Melissa Caddick can fool anyone


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Melissa Caddick's story has barely left the headlines since November 2020. But the investment scam she is accused of perpetrating is nothing new. So why do fraudsters keep coming for our investment portfolios? And how do they pull off the con? Elizabeth McArthur writes.

In a courtroom in Sydney on June 29, a judge heard that Melissa Caddick's fraud cost 72 investors approximately $23 million, maybe even more.

Caddick wasn't there to defend herself. She has been missing since November 2020, when she left her house in Sydney's affluent eastern suburbs in exercise clothes not long after ASIC had raided the premises.

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By March 2021, she was presumed dead. And, by April, ASIC had to drop the 38 criminal charges it was pursuing against her.

The regulator had to accept that Caddick wasn't turning up for court any time soon, and by withdrawing the criminal case her victims could start civil proceedings and attempt to claw back some of what they had lost.

Not long after that, in April, another Bernie Madoff died in a prison hospital at the age of 82.

He had been serving a 150-year sentence for what is said to have been the largest Ponzi scheme in history, in which approximately 38,000 investors lost an estimated US$65 billion in principal and fake returns.

His fraud makes Caddick look like a simple shoplifter by comparison, but Caddick's victims lost their entire retirement savings in many cases. And she had more in common with Maddoff than most might think.

Like Madoff, Caddick presented herself as a highly educated, trustworthy financial professional. She let those who handed over their money to her believe that she was an investing expert, that she could manage their money in ways others could not.

Caddick and Madoff both played a game of keeping up appearances.

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Madoff had his penthouse apartment in New York, the façade of a genuine Wall Street company and tickets to black-tie galas with the city's elite. Caddick had some of the most expensive real estate in Sydney, designer clothes and extravagant overseas holidays.

They are just two high profile examples of the kind of investment fraud that's been around for as long as the stock market.

Forensic psychologist Kim Dilati says it's easy to think that only the less financially literate would get caught up in fraud, that is simply not the case - anyone can fall for an investment scam.

In fact, perpetrators of investment fraud are likely to see the wealthy, and their financial advisers, as big targets and that's when they will deploy their best tactics.

"They've got the dispositions to be able to pull these scams off. A lot of these scammers have developed techniques to force compliance with their victims. It could be flattery, they could pretend to be friends with them over the course of many months, they try and build trust. A lot of them are quite deviant but you don't get to see the precursors before the scam," Dilati explains.

"The scammers are often quite self-confident in the way they manage the scam. Everything may appear to be compliant from the outside and the scammers exploit that, they exploit their position of authority."

A professor of psychology at North Carolina's Wake Forest University, John Petrocelli, agrees. He has devoted much of his academic research career to studying "the art of bullshitting", which in his opinion is a pervasive social behaviour.

"Most successful Ponzi scheme operators take advantage of two things: one, credibility, and two, the failures of critical thinking and questioning by their victims/investors," he says.

"As long as the Ponzi scheme operator appears to have credibility and a line of prior success, people will invest in their hedge funds or whatever scheme they are promoting. People want to make money on their investments, and they often treat the appearance of legitimacy and success as ipso facto highways to more money in their pockets."

2020 was a record year for Australians falling prey to investment scams. According to the ACCC, $328 million was reported lost in investment schemes last year - that is the largest amount on record, but the real number is probably higher as a feeling of embarrassment of a sense of having "gambled and lost" keeps many from reporting the fraud they are victim to. According to ACCC ScamWatch research only an average of 13% of the money lost in scams is reported.

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"It appears to be increasingly difficult for people to identify legitimate investment opportunities from scams. Scammers no longer just rely on professional-looking websites," ACCC deputy chair Delia Rickard said.

"They now have the ability to contact people through phone, apps, social media and other means. We saw more fraudulent celebrity endorsements of investment opportunities advertised across digital platforms as well as scammers posing as romance interests to bait people into scam investments."

It's no coincidence that the investment scam record was broken in a year which was incredibly difficult and unsettling for many. As Dilati points out, the type of cunning fraudsters who pull off elaborate investment scams also know how to prey on vulnerability.

They find victims who are at a vulnerable point and are cash-rich - the government's stimulus package and early access to superannuation were likely accidental fuel on the fire during the COVID-19 pandemic, making many even more attractive to scammers.

Dilati's research has led her to believe that many perpetrators of investment fraud have personality disorders like narcissism. Due to these disorders, when their vulnerable victims fall for their manipulation, the scammer experiences an ego boost and a feeling of accomplishment. Healthy individuals in the same scenario, who are perhaps manipulating due to sheer desperate need for money, will feel guilt about their actions. Disorders like narcissism mean the individual does not experience shame, remorse or guilt in a healthy way.

Petrocelli points to Madoff as a prime example of a scammer having it made in the credibility department. Wall Street knew Maddoff Securities as a legitimate brokerage firm that the likes of Charles Schwab and Fidelity Investments would send trades through. And Madoff himself was known as the former chair of NASDAQ - it doesn't appear to get more legitimate than that.

Caddick's victims, too, could be forgiven for falling for her schtick. She styled herself as a successful financial adviser and Financial Planning Association of Australia member, though that was not true. She even appeared on the cover of a trade magazine.

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Dilati says if you are the victim of financial fraud, don't hold your breath for an apology from whoever took your money. Try to keep in mind that the perpetrator is likely to have a disorder like narcissism that would allow them to commit an immoral act of fraud in the first place.

"The victims are never recognised by them as victims. They never acknowledge what they have done. There is no accountability," Dilati said.

She explains that for someone to commit fraud in the first place, certain conditions need to exist. These conditions are referred to as the fraud triangle: opportunity, incentive and the ability to rationalise their behaviour.

Once those conditions are in place, she says fraudsters can "rationalise the morals out of a scenario so they don't have guilt".

This is why fraudsters are so dangerous, she says. They become very good at manipulating people to get what they want and, according to Dilati, some fraudsters might even get a self-esteem boost from having victims fall for their manipulation tactics.

The largest asset most Australians have outside their home is superannuation. And for this reason, super has become a lucrative target for scammers. The government's early release of super scheme unwittingly created a boom for fraud in response to the pandemic unwittingly created a boom for fraud, according to the ACCC.

The ACCC found a total of $6.4 million reported lost from super to scams in 2020. The majority of these losses occurred when scammers also impersonated government agencies such as Services Australia with phishing emails designed to capture personal information and super details.

Once they had the information they needed, these scammers could take $10,000 out of their victims' super accounts - and if it went unnoticed they could go back for a second helping of $10,000 in the next round of early release payments.

Luckily, the ATO was able to observe much of the unscrupulous behaviour as it happened and reunite some with their lost retirement savings.

This is one of the easier types of scams to identify and prosecute. The kind of elaborate investment fraud that actors like Maddoff played out is much more complex.

The ACCC has acknowledged that investment scams are among the most difficult to investigate and prosecute. The agency is working hard to get more people to report investment scams to ScamWatch.

In 2020, it surveyed those who did fall victim to an investment scam and report it on what drove them to report. The ACCC found that most victims were driven by trying to make sure it didn't happen to anyone else (90%) and far fewer (60%) wanted help and support for themselves.

Petrocelli and Dilati acknowledge that media can play its role in lending undeserved legitimacy to individuals who people then trust with their hard-earned savings.

While not in the realm of Madoff, former financial adviser Sam Henderson graced the pages of Financial Standard prior to his appearance at the Royal Commission - where it was revealed he lied about having a Master's degree and had employees impersonate clients to super funds.

Henderson's business Henderson Maxwell was named Practice of the Year by the Association of Financial Advisers in 2016 and was even included in a list of the 50 most influential financial advisers in Australia, which Financial Standard publishes every year.

Speaking to him after the Royal Commission, Henderson made it clear that he sees himself as an easy scapegoat for a regulator desperate to appear to be doing something but too weak to take on the big banks (who Henderson claimed are the real villains).

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More recently, ASIC has been chasing Mayfair 101, its confusing web of shell companies and its founder James Mawhinney through the courts.

In court documents, ASIC said it has evidence that Mayfair companies were trading insolvent, and that money raised from new investors in some products was used to pay earlier investors - in a Ponzi scheme fashion.

One investor Financial Standard spoke to lost $1 million in a Mayfair 101 product after seeing it advertised in a respected national newspaper. He assumed the product was safe because of the context of the advertisement and when speaking with sales representatives at Mayfair everything seemed legitimate.

Mawhinney has since copped a 20-year ban from ASIC.

But he maintains that he is being prosecuted by a rogue regulator and that it is ASIC that has stopped investors from seeing the returns he promised. Through legal loopholes, he and his team are currently spruiking a new investment opportunity. Whether this is a legitimate venture or not remains to be seen.

But, Petrocelli says investors can take their power back.

"So, you say that you are inviting me to make a significant investment in an exclusive investment opportunity. What do you mean by that? What does that look like? How would it work? Tell me the logistics. How would I know it's working? Treat claims and ideas as claims and ideas and not as facts - and investigate if the claims and ideas are justified given any readily, available data," he says.

When asked how to spot a fraudster in financial services before it goes too far, Petrocelli offers: "Although I have no data on this, and know of no data suggesting it, I suspect that diagnostic warning signs include one's general willingness and propensity to bullshit others as well as their belief that people accept bullshit as truth."

This article first appeared in FS Private Wealth.

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Elizabeth McArthur was a journalist at Financial Standard from March 2019 to April 2022. She has a bachelor's degree in journalism from UTS and a master's in creative writing from Melbourne University.