The lessons from the financial meltdown of music producer Lou Pearlman's Orlando empire apply to far more investors than the 1,800 or so who were ensnared by his investment schemes.
In fact, they might be more useful to the rest of us, because unlike many of the victims, we still have savings to invest. And even if you've been investing awhile, some of those lessons might surprise you.
Some of the investors in Pearlman's Trans Continental Airlines savings program relied on reports by information providers Hoover's and its parent, Dun & Bradstreet - reports that turned out to be false.
"I could not imagine this company being anything but upstanding since it was listed in Dun & Bradstreet," said Janice Stir, a Pinellas Park investor.
Last week, Trans Continental still showed up on Hoover's free Web site as a private company with $419.2-million in annual revenue and 286 employees. Even when Trans Continental was still operating, those were gross exaggerations based on false information supplied by the company. Now it's nothing but a corporate shell held in state receivership.
The information presented sheds "serious doubt on Hoover's credibility," said investor Terry Hammonds. Although he never put money in Trans Continental, the Dunedin resident is concerned about investors' relying on information that is "old, out of date and bogus" - and even paying money for it.
Hoover's and Dun & Bradstreet sell company reports at prices ranging from $9.99 to $149.
A Dun & Bradstreet spokesman said the Trans Continental reports are based on 2005 audited financials supplied by Trans Continental. He said the company was "flagged" in the D&B database when its legal problems became public and it failed to supply updated financial information.
"We have been defrauded in a sense as well," D&B spokesman Joseph Jones said.
- Know where the information you're relying on came from. Lack of good information is a big reason why investing in private companies is inherently risky.
- Because of that risk, never invest more than you can afford to lose in any single company. Spreading your money among many different investments is a good idea for public company stock too, even though fraud is not as likely.
Largo investor Ambrose Marsh also tried to check out Trans Continental, writing to the Federal Deposit Insurance Corp. to ask whether the company's "Employee Investment Savings Account" was FDIC insured.
The answer: No, but his investments would be if the money were deposited in an insured bank on his behalf and properly documented. The letter noted that the "FDIC does not examine, approve or insure deposit brokers."
As we all know, Trans Continental did not properly deposit investors' money. It has less than $100,000 in cash to cover $317-million in liabilities. And neither the FDIC nor any other agency was checking on it.
- The surest way to get an insured deposit is to deal directly with a bank, savings institution or credit union.
- If you want a brokered deposit, deal only with a licensed brokerage firm. The money should show up on your statement as a deposit in a specific bank.
Of course we can't forget the obvious lessons, painfully learned whenever investment schemes unravel:
- Promises of high yields and no (or low) risk really are too good to be true.
- Investments should be purchased from banks, brokerages and mutual fund companies and not from insurance agents, tax preparers and unlicensed promoters who call themselves financial advisers.
Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, write email@example.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more questions and answers at http://blogs.tampabay.com/money