James Goes to Jail, and then… | James Brandolino Part 2

28:13And they look a lot less likely to commit fraud. So that's probably the biggest one. And what two pieces of advice would you give to someone who's doing due diligence on whether it's a fund or a company or whatever? Number one, audited financial statements. And this goes not just to verify if the individual CPA and the audit firm are legitimate. Because, I mean, you can easily go to one of the state accounting boards and see it or go to, I believe, cpaverify.com and check out if they're valid. When the question comes in, you have a document in your hand, did that actual CPA, did he actually perform that audit?

29:03And that is probably the hardest thing to do because maybe the CPA performed that audit in its entirety. Maybe the operator is just pulling a name, a guy's name, and I hate to use a company name, from Deloitte, right? just picks a random CPA there and puts Deloitte on there. And, oh, Deloitte, no problem. I don't have to check this out. Yeah, we know who Deloitte is. But probably the biggest issue that I see quite often is a valid CPA and firm performing an audit and the operator going in and taking one, two, or three pages of financials and changing some of the numbers, adding a couple zeros, moving up a few decimal points.

29:46So in turn, if we were to call the CPA firm, we could verify that, yes, he did that audit for that particular company. But is it the exact audit that he did? And I think the biggest issue, and it's difficult because, you know, a lot of CPAs won't even confirm at times that they did the audit or that a particular fund or company is their client. But it's really important to get a copy from them directly of that audit. because you just never know what's been changed. And sometimes you can just change one or two numbers. It's not like they're massaging all the numbers, maybe just one or two numbers.

30:25And that's really all you need to fool people. But yeah, to your point, the hedge fund manager could be delivering to the accountant all the bank statements, but those bank statements could be manipulated. How do you check that? Well, you really have to talk to the CPA firm. How did you get these? I mean, most CPA firms that are doing audits these days are going to get the bank statements directly and the brokerage statements directly from the financial institutions themselves. They're not going to get them from the hedge fund operator, right? And how do they do it? They log in to the same account that the hedge fund manager uses or do they call the bank and say, send me these statements, but then someone in the bank could be in collusion or the number could be fake or whatever?

31:10So basically, the audit firm is going to send a, for every institution, is basically sending a form to the Hedge Fund operator that's basically giving the firm the right to release those statements to the audit firm for the purposes of an audit. Now, if you have individuals at the bank who are in on it and helping fudge the numbers, then at that point, yeah, it'd be really, really, really tough to find that fraud out. Although I haven't seen that personally. Yeah, I guess that's rare. But it would be rare. Yeah, I'm just trying to think of a case in Chicago back in the day that a big future firm that went under.

31:53But even then, no, the statements were coming directly to the CEO, and he was fudging it before the CPAs got it. Yeah, but the CPA has to get those documents directly from the financial institutions. I think of frauds that I've seen where, for instance, one manager would take really like long dated futures with, with no volume on it. And with one trade at the end of the year or the end of the month, you know, make one trade like 6 ,000 % higher. Again, there was no volume in this market. Nobody looked at it. It was like maybe 2027, you know, leaps on some weird option. And, uh, And so he'd be able to mark up his portfolio that way.

32:36And there was no way to, like an audit wouldn't help. Like there was no way to know he was doing this manipulation. Well, and I think to your point, I would even take that further and say, I think that most auditors, if they don't understand the products that they are auditing, it makes a big difference. So, for example, my third or fourth month in operation, I had a gentleman, an investor, bring his CPA with him to come see my operation. This gentleman already invested with me, and I didn't know he was bringing his CPA. And he had his statements with him. He goes, I want to see a copy to see the trade that you did for these three months and make sure that they comply with what you actually traded.

33:21So I went to my file cabinet, and I pulled my three monthly statements, right? We walked, my office was actually inside of my clearing firm, and we walked to the back office and said, hey, Nancy, this is a CPA. He's looking into my books. Can you pull my three-monthly statements of all my trades for the first three months of the fund? She pulled them. They all matched. And everything, you know, he didn't recognize any issue with it, other than the fact that I should have been, if he would have understood the futures market, He would have realized, boy, you're not trading the kind of size that you should be if you were managing as much money as you said you were managing.

34:04And what was going to be your answer if he did understand that? I don't know. I would have had to say something. Well, I traded other firms, and I did have other – I was using, I think, a total of four other futures commission merchants or brokerage firms. to do trades, and I would have had to concoct something up. Actually, this was not the first year. This was actually the second year, because I was actually, I think at the time I said I was managing$25 million or whatever I was managing. But anybody who understood the futures market, I was trading, let's just say, 20 lots in the S &Ps, where I should have been trading probably 50 or 60 or 70 lots to earn those kind of returns.

34:50So I mean, really, anybody who understood that market and what the tick value is on futures. And you could really just go in with a calculator and just kind of work backwards. Well, you made 1.3 % this month. You needed to make this amount, but you're only trading this size. It just doesn't make sense. And so, I mean, another type of fraud that I've seen, there's one guy who is a multi-billion dollar legit hedge fund manager now. He's in the news almost every single day. And I remember back in 2002 2003 he was getting in trouble because he took half of his then hedge fund he has a different one that he started since half of his then hedge fund and he just like bought like random golf courses or something else and uh like that he wasn't supposed to be trading and he lost all the money and somehow he restarted and now is a multi-billion dollar hedge fund like do you ever feel weird that some of these guys who should have been frauds ended up getting away with it completely and now are 100 % quote-unquote legit and billionaires?

35:54No, I really don't. My doing was between me, myself, and I. I made a really, really bad decision. I made a bad decision to not trade my original strategy and I made a bad decision to hide it. Yeah, no, I'm not saying you should have gotten away with it. I'm saying this guy, I can't stand it when I see that other guys got away with it and I don't know how they did it. It was just like out of charisma or some weird factor that they weren't, that everybody knew what they were doing, but they weren't, I don't know, maybe I'm just talking randomly, but I'm thinking of one guy in particular who's famous hedge fund manager now.

36:38And I'm thinking like, I always wonder, like how did he avoid not going to jail when it was public knowledge, what he did, he even had to shut his fund down and the whole thing. And then he survived. Well, it probably wasn't criminal. I mean, it would probably just be, he probably was sued civilly. I can't imagine if he lost that much money and had to close the fund at a loss. If he was trading or buying assets, that were not specifically disclosed in his hedge fund documents. I mean, that would be considered potentially fraudulent, and it's a civil offense. So he probably was sued. So in terms of him, he probably wouldn't have been prohibited from starting another fund.

37:23And if he was that charismatic in terms of raising money, I mean, raising money is raising money, right? He probably has a pretty big network and was able to do it and do really well. Yeah, no, I know. The more I think about it, the more I'm thinking of examples of this type of thing, where it was just, they got away with like, what I would consider abhorrent behavior, and somehow survived and, you know, lived to be even bigger. I mean, I just remember from the day when I was an ops manager, and there was not so much on our desk, but on the institutional desk right next to me, there was a bunch of hedge funds on there and names I'm sure that you would recognize.

38:03And there was situations where we had to kind of move trades that were losers for a couple of days, especially going from the end of one month and the beginning of the other month. So they go from, you know, from error account A to error account C to error account, you know, L. And then the next month we moved back into their error account, which we could hold it until the end of the month again. And I remember, you know, even for some of our clients that we had to do that. And that's just kind of in terms of moving stuff around. That's kind of how I even thought about, well, you know, I'll trade in my own account and I can move those losers into my personal account and take the winners from my personal account and move them to, you know, to that of the fund.

38:44So I was doing it just the opposite. Most fund managers or traders who are managing investor capital, they're taking all the winning trades from the fund and putting them into their personal account, right, and vice versa. I was doing just the opposite. I was taking the losers from the fund and putting them into my individual account, right? And then all the winners from my individual account were getting moved over to the hedge fund account. So, yeah, it was thoughtful.

39:26Honestly, I don't think I would ever trust a hedge fund at this point. not because of this conversation, but just in general, I've told people, I don't really trust hedge funds because you just never really know. Cause, cause it's not possible for like a small individual to do the kind of due diligence you're talking about. You're just kind of like going on. Maybe if something was run by like the, you know, BlackRock or something like that, then okay, it's probably legit, but it's just hard to trust. And that's why I guess the hedge fund business, the hedge fund industry in general has become more institutionalized because I I would never trust certainly a small hedge fund anymore.

40:00Yeah, well, it's really tough. And I would say in terms of, you know, that's why the audits are so important. Because, you know, audits mean a lot of things to a lot of people. But in terms of hedge funds, I mean, do the assets exist? Are they real, right? Is it cash? You know, are they in securities? Where are they at? How are they valued? If they're not marked to market, right? If they're not being traded, how are they marked to market? And number three, how are they costed? And a lot of ones now are basically checking the monthly performance returns to make sure that they are being computed correctly as well.

40:34You know, how they are marked is a huge issue because take a private equity fund or take a pipe fund where they get locked up shares at a discount. Are they valuing them at the discount even though the shares are locked up? Or did they get them at the discount and then mark them at full value just so they get their fees on them? like, and accountants go along with it. Like accounts go along with whatever the manager says in many cases. Well, and a big reason is that because the accountants don't even know. I mean, there's a Ponzi scheme that I'm investigating as we speak. And, you know, it's a multifamily, a big multifamily.

41:09It looks like it could be 25,$30 million. And, you know, I'm having a problem, you know, looking at the valuations and somewhat what the stuff should be valued at. And a lot of times the CPAs don't know or they'll, you know, they'll even go to the fund manager and say, which, you know, which give me a range of what this should be worth that gives them something that they can kind of work back on and support. Because a lot of times, I mean, it would just be ungodly expensive, James, for these guys to come in and figure it out. And multifamily and property real estate is much easier than, you know, some of these other derivatives that are out there.

41:46I mean, stuff that trades on an exchange that's marked to market is, I mean, it's a no brainer, right? That's the easiest piece to evaluate. But in terms of the other stuff, it's really difficult. And ECPs just pull their hair out trying to evaluate some of the stuff. So you get out of jail. And did you actually start getting hired to be a fraud investigator? Or what happened? So probably three, four months after I was released. I was released in July of 17. I started just doing a bunch of just kind of free talks, telling my story to, you know, local chamber outside of Chicago. So Cambridge, the Commerce, Rotary, et cetera, et cetera.

42:29And within the first three or four months of doing those talks, there was a law firm that was, a few of the partners were at Hurt My Talk. And we talked a couple of times and actually they they give me a lot of consulting business to, you know, come in and pick up the pieces, which I really kind of don't like. I really am trying to make the move and be more on the proactive side, be in the preventative side. Of course, you know, a lot of investors sometimes don't see how important it is that it's better to pay up front, you know, a fee to have somebody come in and do the due diligence rather than, you know, pick up the pieces and try to find out where the money's at.

43:10Yeah. Or I wonder even within, like, I wonder, do insurance companies get involved in this at all? Or, you know, not, not so much. You know, I would say probably my, my last three clients have been ex, ex professional athletes. And that's the area that I really want to really want to focus on. Actually, there's athlete, there's an athlete that is invested in this multifamily and, you know, probably in his career, he probably only made 15,$20 million. So you can, you know, after taxes and after paying all the fees to his, you know, business manager and agent, you can imagine what's left of that.

43:45And he invested about$600 ,000. So that's a big piece of his, of what he had left. And he's probably going to lose most of it, if not all of it. And, you know, a lot of these ex-athletes just get crushed in terms of, you know, ideas and, you know, business propositions from their family and friends, but also, you know, from their agents and managers. and not that there's malintention involved. You know, what's interesting, and I just can't say this enough, most professionals don't know how to evaluate these types of private investments. Yeah, so you should market yourself like to sports agents.

44:23Like, do you know David Meltzer? I know, and I see him on Facebook quite a bit. Yeah, because - I do that now personally. He's been on the podcast and I've been on his show. Jay, who's the producer here, he's listening. Jay, can you introduce James to David Meltzer? Send an email introducing the two of them. And you should meet him because he deals with a lot of clients. And I've seen some sports. Who is that guy? He's got the same name as like Clinton's old lawyer. And he was doing a Ponzi thing and he went to jail for a long time. And he was investing primarily athletes' money. I remember before I was revealed he was a fraud, I was trying to raise money from him.

45:02And he was like, why should I invest with you? I returned like double what you returned. and it turns out like all his returns were fraud. So horrible. Yeah, and it's a shame. It's a shame that I always kind of end my presentations with the story. My fraud lasted for literally eight years and my high net worth clients performed due diligence themselves or they farmed it out to their attorneys and their CPAs and IRA, independent trust companies and bank trust officers. Their offices dot the downtown skyline in Chicago. And what were the results? That my fraud lasted for eight years. That either, and really, either they didn't do the work, James, or they just didn't know what to look for.

45:49And I think that's probably the bigger part of my story. You know, I do a lot of continuing education talks for, you know, audit firms and law firms. They want to hear my story. Look, my story is great. This is what I did. I'm open and honest. There's no question I will not answer. And this is what I'm doing now. And that's all great. But I think the bigger picture is how could someone like me, you know, fool so many people for so long? And the thing is, is I didn't fool anybody. Nobody, nobody did the right amount of due diligence to find my fraud. Anybody, you know, who, you know, if it was me investing my fraud, I wouldn't have found that found out in the first hour of doing, you know, the analysis.

46:33And do you ever run into any old investors and, you know, are they upset at you? So, well, you know, I've talked, I reached out to all of them and I've sat with, of my, so I would say of my 62 investors, I've sat with probably at 12 or 13. And, you know, I just kind of want to let them know, well, of course, apologized profusely, but just to kind of let them know, it wasn't like I took their money and like I was like jet setting in a private jet all over the place. And I think that's what a lot of people don't realize. And I'm just going to, I'm not going to say it's with all fraudsters, but definitely with myself.

47:11You know, I really compare it to if you've seen the movie Scarface with Al Pacino. And, you know, you see all of this heartache and you see this in the middle of the film, there's like that two minute montage. I can't remember the song they play, Push it to the women, maybe, right? And he's getting married and he's driving the car and they show the house. And it's all of his smiles and laughs and all that stuff. And the rest of the movie is just kind of like depressing, right? And shows the struggles that he has. I really can't say that enough how difficult it was that knowing that this is on my back and that people should find out every day.

47:50And just walking the other, I mean, just being on the trading floor, right? and seeing a couple, you know, you'll see a guy or two, you know, walking the floor with, you know, with dark suits and white shirts. Oh my God, is that the FBI? Is that the SEC? Is that the Tomorrowly Futures Trading Commission? I mean, just living like that was just pure hell. And I think a lot of people don't realize that. And of course, you know, some clients, you know, don't want to meet. And, you know, I can respect that, you know, absolutely. I think, and I may be pushing the limit here a little bit. I think most of the individuals who don't want to meet with me really realize that, that they could have done the due diligence and found out early on that I was a fraud.

48:30Yeah. First of all, obviously you're at fault and you went to jail for it and you're not denying that, but I a hundred percent blame the clients for investing in you as well. Well, so I, so I, I can't be, because of my story, I can't blame them. Although I, you know, in my talks, when I, when I talk to, you know, investor groups, you know, I have a very, I have a big tough love message. You know, one of my biggest former investors, one of my biggest fans on the internet, just wham-bates me. And I get it. I understand he's upset even to this day. But understand that this person was a former investigative reporter for the Chicago Tribune and after that, he left to work for a major, major corporate security firm in Chicago.

49:15And he was on location at Walmart and a lot of places. I mean, this guy has an investigative DNA, right? And he was on the floor numerous times, and we had spent many, many lunches and dinners together over the years. And a lot of these guys asked the right questions, but they just didn't know how to verify the truth. And that would be probably the biggest thing. Everybody, you see these documents and marketing pieces and all that kind of stuff, and that's all great, right? Even, you know, even, and I want to get into this for a minute, on the financial advisor misconduct, financial advisor fraud, you know, even like the RIAs that, you know, they have their, you know, their documents required by the SEC.

50:00I mean, anybody can write anything they want in there. The question is, is going in there and proving, are they doing what they say they're doing? And that's probably the hardest, the hardest piece to do, to verify. Are they doing what they say that they're doing? And a lot of times though, hedge funds will say, listen, um, this information is proprietary. Like if you're investigating, for instance, you know, intricacies of a deal, they do like not, not again, like the vanilla hedge funds that just buy and sell stocks, but they're doing more complicated deals. They might, or, or, or they're trading some esoteric derivatives and they might say this information to investors, this information is proprietary.

50:41We, we don't give it out. What do you do about those situations when you're doing due diligence? um so so when i'm when i'm hired it's one of two things right uh i i get one of two phone calls it's some either somebody hey i've got this this this hedge fund or this private equity or whatever it may be that i want to invest in i've got all the documents you know what would you charge to you know to do it i you know i'll look i'll look through it and we'll have a conversation and yeah and the manager knows that somebody's going to call him and he's more than happy to talk to you right so that that's relatively easy on the other side you know you know james i i invested in this hedge fund or this whatever, this private company, you know, a year ago, I'm making a lot of money.

51:20There's no problems, right? But, you know, the statements are coming a little bit late now. And when I call, if I email or call and leave a message, it takes them a week to get back to me. Now, I'm not concerned, but I need you to go and, you know, kick it around and see what you can find. But definitely don't let anybody know that you're, you know, you're doing due diligence on them. And don't mention my name. And that's where it gets a little bit difficult. But to go back to what you said in terms of both hedge funds, I mean, look, I don't necessarily need to see the positions. I don't want to see your strategy.

51:53I don't want to see your positions. I mean, even if I can only verify your back office, how is your back office working? How is that structure working? And even though there may not be fraud going on. So even if a particular fund or a particular management company is absolutely clean, you know, is there back office infrastructure, is it prone to potential fraud in the future? You know, how are the separation of duties? Is there a third party that's in there, that administrator that's handling a lot of those transactions, that's handling the money in, money out, that's doing all of it, that's computing the numbers?

52:33And what does that look like? Because, you know, even, you know, Madoff wouldn't let people for a long time, although I have copies of some of the audits that he actually had done. had done or not he'd done, but his firm, his accounting firm did. And they were very, I mean, they were very minuscule at the very least. You know, there's nothing, looking at somebody's back office, there's no intellectual property there. There's no edge that if I know how your back office works, I'm going to be able to, you know, you know, front on your orders, right? Because I don't even need to know what you're trading.

53:15I mean, yeah, I guess I want to know what you're trading, but you know what I mean? I don't need to see all of that to, I just need to see your back office and how it's set up. Let's go there and then, you know, I can make a better decision. But it's just amazing how many, you know, how many investors will just kind of, you know, stop short of that. Man, James Randolino, you've given me so much to think about. and sounds like your six and a half years in jail were more satisfying life experience than the six and a half years prior to that, where you were just dealing with this hell of committing fraud and keeping it going and so on.

53:55Yeah, I hope I don't get in trouble by saying this. I'm not sure if I've ever said it on a podcast before. But look, I wish I would have made different decisions, right? I wish I would have had the guts to tell my clients that what was actually going on, but I didn't and things happened for what they happened. And, you know, I say now that, you know, if I would have known how my experience was in federal prison, how it actually turned out to be, I would have turned myself in long before I did. you know it was just a you know for me it was just a it was just a big kind of time out that you know able to you know really you know handle mental health issues and really see what you know what do I what am I going to do now that I can't go back to the industry that I spent my you know my entire career wanting to you know you know wanting to be in what am I going to do now how can I make a real difference how can I make you know amends with you know with my investors how can I, you know, how can I make a real difference in, in quantitatively reducing the amount of victims and the amount of fraud that's going on?

55:04So I, since getting out of jail, like when you first started, like, I don't know, dating again, was it a problem that you were in jail for all these years? Like, how did you get over that hurdle? It was a long time. I just started dating really probably a couple, a year and a half ago or so. So, you know, it's with my schedule, it's been really, really tough. You know, what's interesting is that, you know, when I do a lot of my live speaking events, you know, I'll get, you know, people come up to me and say, it's like, boy, if I wasn't married, I would, you know, I'd want to date you because, you know, I really respect with, you know, what you're doing and, you know, and you're really turning your life around.

55:47So it's just a matter of, you know, just meeting the right person. But it's definitely a – and it's definitely been a showstopper as well. I mean, for some people, it's a little bit more baggage than they want. And I accept that. You know, I just – you know, my focus, you know, whether it's somebody that I'm dating or my former investors or somebody who just doesn't, you know, like me or want to do business, that's great. because my focus is on my clients and making sure that they don't invest in anything that's going to be toxic and they're going to, where they face a total or partial loss of assets.

56:21Well, James Randolino, thanks so much for coming on the show and sharing this really intense story and being so forthright and honest about it. And I hope the work that you're doing now succeeds in saving people a lot of money because I believe, I still think there's a lot of fraud out there. Like you said, it never stops. It never changes. And this is an important message. Like investing is not simple. And there's a lot of, there's a lot of things against you, not just the markets, which could be against you also, but, but all these other situations, like these frauds or, or, or there's a lot of things where I call like near frauds where, you know, everything's disclosed, but it's in the fine print and it's really unethical behavior is occurring, even if it might not be labeled as fraud.

57:12So keep it the good work. It's hard enough for investors to make money with legitimate investments. And I think most investors are more concerned about the quality of the investment itself and can it earn the type of returns that the operator says it is. And that's kind of where they focus it on. They don't focus on, you know, does fraud occur? If fraud occurs or will it occur? so yeah well thanks again and and good luck and when you have a book come back on uh come back on the show we'll we'll talk about all the all the types of frauds there are thank you james thanks james take care