According to federal prosecutors and court documents, Lauren Baumann, 43, of Downey, CA, admitted to having solicited loans from investors with claims that the money would be used to finance "battle of the bands" events featuring Christian rock bands and other music groups. As part of her pitch, Baumann represented that these events would generate profits from ticket sales and company sponsorships. Additionally, some investors were told that the funds would also be used to purchase, refurbish and resell homes.
Alas, there is quite a chasm between fact and pitch in these fraud cases. Apparently a chunk of the roughly $1 Million in investors' funds raised was used a la Ponzi to pay purported "profits" to earlier investors. Other funds were diverted to pay personal expenses of Baumann's, including approximately $10,000 a month to rent an historic mansion in Downey, CA and her children's private school tuition. In total, some two dozen victims lost about $560,000.
On October 3, 2011, Baumann pleaded guilty to wire fraud, and faced a statutory maximum penalty of 20 years in federal prison.
On March 6, 2012, Baumann was sentenced to 57 months in prison and with an order of restitution forthcoming.
Due Diligence 101
Okay, class, please, take your seats. When last we met, you may recall that I was lecturing you about the history of Wall Street frauds and how lazy investors often enabled the fraudsters. Some of you - those who did not nod off during class - may recall that I discussed my edgy theory of financial markets' eugenics, in which I mused how we all might be better off if we simply permitted foolish investors to be eaten whole by the ravenous wolves in sheeps' clothing who masquerade as legitimate financial advisors, stockbrokers, and deal-makers:
Sadly, the stupidity and the carnage just never seem to end. And it's not a threat that's just coming from the big boys. The likes of Goldman Sachs, JP Morgan, Citigroup, Bank of America, UBS, Morgan Stanley, Wells Fargo may be the names that you read about in terms of massive mortgage fraud or high-profile class action settlements, but there's plenty of garbage being dumped on us by small-time crooks. Otherwise intelligent and decent folks continue to invite small-fry predators into their lives because they either override every alarm that warns them that some investment is too good to be true or they resort to "trust" when they should resort to "due diligence." Which is not to suggest that we shouldn't give a great deal of credit to the sweet-talkin' patter of the con artist - never for a minute forget that a scamster who has done his or her work is a formidable thief capable of conning the most educated and most successful among us.
Well, so much for my public service announcement.
Now, class, for all of you naysayers out there, for all of you who have sent me notes characterizing me as a moron and an idiot for partially blaming some victims of financial fraud for their losses, let me show you how even the most rudimentary of due diligence attempts can produce important information.
Bill Singer's Incredible Five-Step Due Diligence
Let's use the Baumann case that was today's lesson as an example. Please utilize "Bill Singer's Incredible Five-Step Due Diligence":
- Enter http://www.sec.gov
- Click on "Search" in the upper right corner of that homepage
- Enter "Lauren Baumann" into the "Search SEC Documents" box
- Click on the first entry at the top of the results page: http://www.sec.gov/litigation/litreleases/lr15751.txt
- Read the item, which I have reprinted below:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
LITIGATION RELEASE NO. 15761 / May 29, 1998
SECURITIES AND EXCHANGE COMMISSION v. ACCELERATED FUNDING MORTGAGE CORP., LAUREN D. BAUMANN, BALI FINANCIAL, INC., and ODYSSEY FINANCIAL GROUP, INC., 3:98-CV-1190-D, USDC, ND/TX (Dallas Division)
On May 27, 1998, Judge Sidney A. Fitzwater, United States District Judge for the Northern District of Texas, issued orders of preliminary injunction halting the fraudulent money raising efforts of Lauren D. Baumann and three companies with which she is associated. The orders, which were agreed to by defendants, also continue an asset freeze granted by a temporary restraining order issued May 19, 1998 against the defendants, and relief defendants Balance Enterprises, L.L.C. and Balance Enterprises, J.V. The orders further require the defendants to provide an accounting of all monies and other assets received from investors or from the other defendants, and orders them to return to identified accounts in the United States of America all monies and liquid assets in their names, or under their control, outside the Court's jurisdiction. Previously, on May 19, 1998, the Court appointed a receiver to take control of the defendants assets for the benefit of investors.
In its complaint, the Commission alleged that the defendants violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, in the offer and sale of promissory notes and investment contracts ostensibly secured by secondary deed of trust liens. The complaint further alleged that investors were told their investments would earn phenomenal rates of return ranging from 101 to 273%, depending on the amount invested, and that their investment was low risk. The complaint also alleged that the defendants engaged in a Ponzi scheme whereby monies coming in from new investors were being used to pay purported high rates of return and/or return of principal and interest to prior investors.
How long did those five search steps take me? Maybe 30 seconds. Did I find "Lauren Baumann?" Well, I found a "Lauren D. Baumann." Was that the same person? You're right, we're not really sure. We may need to do a bit more investigation . . . a bit more investigation as in, geez, some woman named Lauren Baumann is asking me to invest money in her battle of Christian rock bands business and I worked really hard for those bucks so, hmmm, maybe I should invest just a bit of my time at the computer to see if this "Lauren D. Baumann" with a fraud history going back to 1999 is the same "Lauren Baumann" that's hitting me up for an investment
If you had done your homework and checked out Lauren "No D." Baumann," you may have been troubled by the fact that this was the same person as "Lauren D. Baumann." My, how clever, you drop the use of your middle initial and it turns out to be a pretty effective way to thwart a lot of online searches - not fool proof but, hey, there are a lot of fools out there, which is one of the things that many fraudsters count upon. So, assuming you pressed on with your due diligence, you might have uncovered what the Department of Justice confirmed in its various published comments about Baumann:
When she pleaded guilty, Baumann also admitted that she failed to disclose to investors that she had been convicted of securities fraud in 1999 in a Texas federal court and that she had been found liable in a related civil fraud action brought by the United States Securities and Exchange Commission.
Imagine that. A scam artist didn't disclose to her victims that she had a prior history of securities fraud. What a shock. That's outrageous! I mean, after all, is it really fair for potential investors to be expected to click five times on a website in order to undertake the most rudimentary due diligence?
Putting Back the "D" in DOJ
One word of caution: Searching government websites isn't always a positive experience. In addition to websites that are terribly laid out, afflicted by glitches, and not always timely updated, we have a number of disappointing anomalies. For example, if you visit http://justice.gov and enter Lauren Baumann into "Search This Site" (without quotes around her name), you get four hits, of which two are for the individual defendant in the case at issue; however, if you enter Lauren D. Baumann (without quotes), you get two hits of no relevance. Since the SEC's website provides us with positive hits for either variation of Baumann's name, it's unfortunate that the Department of Justice hasn't figured out that the "No D" and "D" are the same individual.