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.

921_MW_P36_profile_bottom_cut

EFAFD7

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?"

Recommended

The MoneyWeek Podcast: how to not lose money to inflation and financial repression
Investment strategy

The MoneyWeek Podcast: how to not lose money to inflation and financial repression

Merryn talks to Peter Spiller of the Capital Gearing Trust about how he navigated the last extraordinary year; what he's buying now; and how he plans …
16 Apr 2021
Why you should expect another stockmarket crash
Stockmarkets

Why you should expect another stockmarket crash

Many fear inflation, but a deflationary debt collapse is a more likely scenario in the near term, says Tim Lee
16 Apr 2021
World's biggest fraudster Bernie Madoff has died – what was his scam?
Investment strategy

World's biggest fraudster Bernie Madoff has died – what was his scam?

Bernie Madoff, perpetrator of the world's biggest Ponzi scheme, has died in prison at the age of 82. Matthew Partridge looks at his massive fraud sche…
14 Apr 2021
Coinbase, America’s largest crypto exchange, is going public. Should you invest?
US stockmarkets

Coinbase, America’s largest crypto exchange, is going public. Should you invest?

Cryptocurrency exchange Coinbase is to list on the Nasdaq stock exchange, hoping to cash in on the current crypto-mania. Saloni Sardana looks at wheth…
13 Apr 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
What does the Coinbase listing mean for bitcoin and other cryptocurrencies?
Bitcoin

What does the Coinbase listing mean for bitcoin and other cryptocurrencies?

As the bitcoin price hit new highs, the world's biggest cryptocurrency exchange, Coinbase, listed on the stockmarket. John Stepek looks at what that m…
15 Apr 2021
Lab-grown meat: the new agricultural revolution
Soft commodities

Lab-grown meat: the new agricultural revolution

Vegan alternatives are taking off, but the future of food technology lies in lab-grown meat – cultivating steaks and burgers from animal cells, says A…
16 Apr 2021