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.
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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Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
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