When Truth is Stranger than Fiction

Once in a while, when I need a topic to write about, I browse the latest press releases from the Securities and Exchange Commission (SEC). When looking today, however, even I had to do a double-take when I saw the headline, “SEC Charges Florida Broker in Astrology-Based Ponzi Scheme.” Here is the first paragraph:

“The SEC alleges that Gurudeo “Buddy” Persaud lured family, friends, and others into investing in his firm, White Elephant Trading Company LLC, by falsely guaranteeing their money would be safe and yield lofty returns ranging from 6 to 18 percent. Persaud told investors he would invest in the debt, stock, futures, and real estate markets, but did not reveal that his trading strategy was based on his belief that markets are affected by gravitational forces [via the lunar cycle].”

When Persaud’s moon-based trades did not work out, he resorted to using new investors’ money to pay off old investors, the hallmark of a Ponzi scheme. The SEC alleges that Persaud lost $400,000 of investor funds through his trading and diverted at least $415,000 for his own personal use. Borrowing a page from the Ponzi king Bernie Madoff, Persaud created phony account statements to hide his trading losses and give investors a false sense of security. “When Persuad blatantly lied to investors and hid their losses through a Ponzi scheme, he should have known that an SEC enforcement action was in the stars,” quipped Eric I. Bustillo, Director of the SEC’s Miami Regional Office.

Although I completely sympathize with Persaud’s victims, I cannot fathom why anybody would invest with a company called White Elephant. Besides being an unwanted object of dubious or limited value, a white elephant is also defined as an endeavor or venture that proves to be a conspicuous failure. It’s almost as if Persaud himself was waving a big red flag warning potential investors to stay far away. Since I cannot improve on the section of the press release that describes Persaud’s approach to trading, I will quote it directly:

“The SEC alleges that in making trading decisions, Persaud chiefly relied on an Internet service that provided directional market forecasts based on lunar cycles and gravitational pull. Persaud’s strategy was premised on the idea that gravitational forces affect mass human behavior, and in turn, the stock market. For example, Persaud believed that when the moon exerts greater gravitational pull on the Earth, people feel dejected and are more inclined to sell securities.”

If this had not involved the loss of other people’s money, it would be humorous. At Index Funds Advisors, Inc. we have always taken the position that directional market forecasts are worthless. It does not matter whether they are based on astrology or complex quantitative economic modeling or anything in-between. Investors who make decisions based on market forecasts are likely to regret it.