April 11, 2019
Far too often, a million-dollar fraud against a pro athlete will occur, and the chorus of responses from those in the sports industry follows a similar theme for athletes to “trust their team” of advisors.
This is the wrong response for a number of reasons. Do these industry folk really think that the athlete didn’t fully trust his advisor in the first place? They blindly trusted this advisor, giving the fraudster the opportunity to steal their money because he knew the athlete wasn’t watching over the money. Trusting your advisor is actually one of the most dangerous things you can do if there is no verification of that trust.
Kevin Garnett recently claimed that he lost $77 million dollars to fraud by his financial advisor, Charles Banks, the same financial advisor that had defrauded Tim Duncan for $7.5 million after being his financial advisor for 15 years. I reviewed the Garnett fraud on my blog, and it is truly one of the most jaw-dropping frauds I have ever observed. The fraud was completely preventable and occurred because Garnett blindly trusted Banks, to the extreme point that Garnett showed up in support of Banks at his sentencing for defrauding Tim Duncan! (Banks is currently serving four years in prison for his fraud against Duncan.)
Je N’ais Se Quoi
Sadly, but understandably, the majority of pro athletes do not understand the arcane language of finance. Nnamdi Asomugha, former All-Pro cornerback in the NFL who earned approximately $71 million in his 10-year career, said:
“I majored in finance at the University of California at Berkeley, but even that didn’t prepare me for protecting my money as a professional athlete. For athletes, it’s extremely tough to trust people with your finances. It’s so easy to be victimized. It’s crazy. It’s happened to me as an NFL player, to be honest. I think it’s happened to 99% of players in the league. When I hear about a player losing his money, I’ll rarely, if ever, point a finger at the player because I know how difficult it is. It’s not always “Look at this idiot who got paid all these millions of dollars and lost it all.” It may be more like, “This naive kid with a million things going on in his life put his faith in the wrong people.” I know because I was that person. Almost every one of my closest friends in the league has gone through it.”
Two-time NBA Champion and 11-time All-Star, Chris Bosh, was quoted in an article by Jackie MacMullan saying:
“I have millions of dollars and I don’t know finance. I’ve had some bad things happen in my career…I was 22 years old when I started. I didn’t know anything. People put stuff in front of me and I signed it, and then it came back and crucified me 10 years later.”
Athletes inherently trust what their advisors are telling them because they can’t translate what the advisor is saying. The beauty of finance for those selling it is that no matter what is happening, there’s a way to manipulate the situation into something positive. Instead of the exorbitant fees and massive illiquidity of variable annuities, it can provide you income for life! Instead of investing in a pile of low-rated garbage mortgage bonds a trader wouldn’t touch with a ten-foot clown pole, it’s manufactured into a AAA-rated mortgage-backed security that won’t ever lose value because housing prices never fall! “Mr. Athlete, did I forget to mention our company was also shorting those same mortgage-backed securities we were selling to you at inflated prices? No? Oh. Sorry.”
Welcome to the cost of doing business.
Stop That, Start This.
Let’s stop with the refrain of “trust your team” because the majority of people in finance and the sports industry shouldn’t be trusted. There’s too much money, too many conflicts of interest, too much corruption, and too many people at the unions and leagues fat and happy who want nothing to change.
The message to athletes should be to “continuously verify your trust of all people that control your money.”
When I started BrightLights, I realized that no one was educating athletes why people commit fraud; instead, athletes hear all the stories of fraud on repeat, eventually making it feel like a worn-out sitcom.
It may help for athletes to see the aftermath of frauds, such as the most recent one involving how Lonzo Ball’s business manager (and family friend and Co-Founder of Big Baller Brand), Alan Foster, a convicted felon who served seven years in prison for a $4 million fraud, allegedly stealing $1.5 million from Ball, but athletes discount these stories by thinking it won’t happen to them.
The question that fails to be asked is why. Why do people commit fraud?
The Fraud Triangle
This leads us to the foundational concept of fraud taught to fraud investigators: The Fraud Triangle.
The Fraud Triangle states that a trusted person, such as a financial advisor or money manager, commits fraud based on three chronological factors:
- Pressure – Trusted person has a problem that money can solve.
- Opportunity – Trusted person has access to someone’s money and believes his fraud is unlikely to be discovered.
- Rationalization – Trusted person justifies what he is doing to absolve himself of the guilt of the crime.
The first step of The Fraud Triangle is Pressure. Individuals face financial pressures in their life constantly. We are complex people with complex problems. Some suffer from drug, alcohol, and gambling addictions. Others have to maintain a lifestyle that is no longer possible with their income. Some just have debts that they cannot repay. These pressures are financial problems that will not be shared.
It’s important to understand that not all people who commit fraud are bad or evil people. 89% of people that commit fraud are first-time offenders with no criminal history. They have run into serious problems and resort to fraud to cover up their wrongs.
Imagine an athlete’s financial advisor owes a ruthless bookie $300,000 for a gambling debt. Odds are the advisor is not sending an email out to his clients, “Dear clients, I seem to have gotten myself into a bit of a pickle…”
This is not a problem a financial advisor responsible for managing your finances will tell you because he would be worried you would fire him.
The second step of The Fraud Triangle is Opportunity, where a trusted person has access to someone’s money and believes his fraud is unlikely to be discovered.
Once an athlete gives control of his investments/money management to a trusted person, the opportunity to defraud the athlete is now possible. Like anyone committing a crime, the trusted person doesn’t want to get caught.
Think of the financial advisor who owes his bookie $300,000. He needs to steal money to cover his debt, and his pro athlete clients fall under two buckets: Athlete Type A and Athlete Type B.
Athlete Type A looks at his bank account and investment account every month, he checks the incoming cash and outgoing cash, he reviews ATM withdrawals and Venmo transfers, asks about investments he does not understand, and so on. He asks his advisor about any question that comes to mind.
Athlete Type B doesn’t review his account statements and never asks questions. He only reviews his accounts when he has an annual review with his financial advisor.
It’s pretty obvious the financial advisor would steal from Athlete Type B. The advisor knows Athlete Type B does not review his accounts, so the advisor’s perceived risk of getting caught is low because he knows there are no controls in place for the athlete to identify fraudulent activity.
What may not be as obvious is that the majority of athletes fall under Type B. Without the athlete or a company like BrightLights monitoring his finances, athletes, time and time again, have failed to eliminate the opportunity to those in control to defraud. Hence, $500 million was lost by athletes to fraud in the last 15 years.
The final step in The Fraud Triangle is Rationalization, where a Trusted person justifies what he is doing to absolve himself of the guilt of the crime.
The most amazing part of humans is also the most fragile: our minds. We have so many behavioral biases and inexplicable tendencies to convince ourselves what we want to believe. In fact, there are 12 different types of biases that prevent us from being rational!
In my old job as a financial regulator, I sat at a table five feet away from countless individuals who had committed financial misconduct and deposed them. A court reporter made them hold their hand up and swear to tell the truth and nothing but the truth. I put evidence in front of them and asked them probing questions. I knew the answer to the majority of questions I was asking, yet the majority of time, these people lied straight to my face. But 99% of these people (I did have one guy come in and say, “Yeah, I did it.” That was amazing.) believed what they were saying as the truth even though it was a lie. They had rationalized that they could do this.
I recently watched a CEO in a documentary pitch a pyramid scheme on TV to unsuspecting people with the promises of riches to finally realize, “Wait, this guy actually believes he is doing something good for these people. He has convinced himself that screwing millions of people out of millions of dollars is somehow a cause for the greater good!”
If Mr. CEO can perpetuate a fraud against millions of people, do you think there’s a possibility that an athlete’s financial advisor:
- Believes he/she is underpaid?
- Thinks the athlete does not value his/her contribution?
- Needs to borrow some money and plans to repay it?
- Thinks he has earned it after all this time?
- Doesn’t think the athlete would even notice if he took $300,000?
- Heard about another person stealing money from the athlete so he might as well do it too.
These are only a handful of the millions of ways people rationalize fraud.
It is within an athlete’s own control to mitigate the opportunity of fraud by another person. The best way to minimize fraud is for an athlete to manage his money himself. He then controls and all three factors of the Fraud Triangle. In most cases, it’s not advisable because athletes have little to no understanding of finance and financial planning.
If athletes have other trusted people managing their finances, here are a few ways to help protect oneself:
- Continuously verify the trust of those with control of your money.
- Educate yourself on the basics of money management and investment. There are tons of free resources online that simply explain and educate you.
- Understand investment objectives and risk tolerance, and how these answers will dictate the investments your advisor should have you in and the amount of risk you are taking.
- Simplify, simplify, and simplify some more – Finance can very complicated, and the more complicated it is, the easier it is for you to be duped. Consolidate all your non-retirement bank investment accounts to two accounts. Only have one credit card and one debit card. Pay off any liabilities. And so on.
A Helping Hand
The unions, leagues, and teams believe (or the skeptic would say are simply punting the solution) that financial literacy is how they can protect athletes from being defrauded and exploited. While financial education is important for everyone, it is not the remedy to solve the plague of fraud that continually haunts athletes. No one in their right mind thinks that a few hours of financial education a year will provide pro athletes the knowledge they need to understand this world of money awash in greed and corruption.
One of the main principles of risk management is to “explicitly address uncertainty.” The uncertainty created from a blind trust by the athlete and no checks and balances by a professional to monitor an athlete’s financial advisor creates a huge uncertainty to the athlete’s financial future. The only solution is for athletes to either be like Athlete Type A or hire a professional like BrightLights to continuously monitor their finances. This will drastically decrease the occurrence of fraud in sports.