What The Sting teaches you about investment scams

Matthew Partridge looks at what investors can learn from The Sting, a 1973 film inspired by real-life swindlers.

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The Sting was a 1973 film inspired by real-life swindlers Fred and Charley Gondorff. Set in 1936, it tells the story of Johnny Hooker (Robert Redford), a small-time conman. After he and his partners, Luther Coleman and Joe Erie, steal money from a crime syndicate's courier, Luther is murdered on the orders of crime boss Doyle Lonnegan (Robert Shaw). Seeking revenge, Hooker partners with experienced grifter Henry Gondorff (Paul Newman). Together they come up with a scam, based around a fake off-track betting parlour, aimed at ensaring Lonnegan.

The key moment

Hooker claims to Lonnegan that he can access inside information about the results of horseraces, though he doesn't immediately reveal how he does so. This information will supposedly enable Lonnegan to place bets on the races at Hooker's boss' betting parlour, in the certainty that they will pay off. Sure enough, Lonnegan's trial bet comes through, as does another. Convinced that he is on to a winner, Lonnegan places $500,000 ($9m at current prices) on another one of Hooker's "tips", only to learn that he has "misunderstood" the instructions, causing him to lose the entire sum.

Lessons for investors

Like Hooker's and Gondorff's scam in The Sting, many fraudulent investment schemes have several "red flags" in common. Unrealistic promises of high returns for little or no risk are a classic hallmark. Scams also like to keep investors in the dark to stop them asking awkward questions about how their schemes work. What's more, since most fraudsters are serial offenders they will often have a track record of involvement in dubious schemes or complaints against them. Many fraudsters also hint that they are getting an unfair edge, such as insider information, in their pitch. Not only does it make their claims look more credible, but it also deters victims from going to the authorities. As Lonnegan says: "What wasIsupposed to do callhimforcheating better thanme?"

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