Posted by on Sep 26, 2016 in Articles & Advice, Blog, Columns, Featured |

Image Credit: Christophe Vorlet

By Jason Zweig |  Sept. 23, 2016 1:39 pm ET

Earlier this month, the Securities and Exchange Commission announced that a trading newsletter company, Wealthpire, and its owner had agreed to pay nearly $1.5 million to settle allegations that they had defrauded subscribers through false statements and misleading advertisements.

Wealthpire and its owner, Manuel E. Jesus (who also goes by the name Manny Backus), settled without admitting or denying the allegations. While the money at stake was trivial, the lessons are important.

Wealthpire promises the potential for “big, fast” triple-digit returns “while keeping risk out of the equation.” Its website repeatedly mentions the chance to earn “1,483% gains.” That isn’t illegal, but it is highly improbable — and, for some people, irresistible. Such messages exert a hypnotic force on the minds of those who encounter them — blinding investors to red flags they might otherwise notice.

Mr. Backus, age 35, who uses that name on Wealthpire, is a self-proclaimed trading “prodigy” who has claimed online to have an I.Q. of 157. But, according to the SEC, he didn’t pick all the stocks or make all the trades that his services recommended. Until spring 2014, the SEC says, he sometimes hired another trader to pose as “Manny Backus,” pretending to make trades that didn’t even occur.

Wealthpire referred calls requesting comment to Andrew Holmes, an attorney at Holmes, Taylor & Jones in Los Angeles. He doesn’t dispute the SEC’s allegations but says they involved “very narrow, discrete problems,” not “the usual stuff of some horrible scheme to defraud.” Wealthpire, he says, has adopted procedures to ensure that “none of these problems persist today.”

Yet video presentations on Wealthpire’s website, until this past week, featured at least two different voices saying they were Manny Backus. After inquiries from The Wall Street Journal, Wealthpire removed the videos. Mr. Backus wrote the scripts but didn’t read them, says Mr. Holmes, and the website should have disclosed that.

Meanwhile, Wealthpire’s Options Profits Daily, which charges up to $297 per month for a subscription, promised that subscribers would learn how to “trade like a pro” from “master options trader” David Becker.

The website didn’t mention that in 2006 Mr. Becker pleaded guilty to federal charges of conspiracy to falsify bank records and to commit wire fraud in connection with a $20 million scheme that overstated the profits of his commodity-trading desk at Citibank, where he then worked.

Attempts to reach Mr. Becker for comment were unsuccessful. Mr. Becker wasn’t a Wealthpire employee, says Mr. Holmes, and stopped advising the newsletter in June, when Wealthpire learned of his “past offenses.” After questions from the Journal, his name was removed from the website.

In a few minutes of online research, anyone could have noticed that Mr. Backus was speaking in different voices, one of his newsletters was advised by someone with a criminal record and Mr. Backus himself had boasted about being disciplined by securities regulators in Pennsylvania after he promised “At Least +8% Gains In Your Stock Portfolio Each & Every Month, Like Clock Work” without proper registration.

So how did Wealthpire grow to the point at which it claims 95,904 subscribers? That number isn’t audited, although the amount of the SEC settlement is based upon subscription fees Wealthpire collected.

Mr. Holmes says “the quality of the research and the performance speaks for itself.” If customers aren’t happy with Wealthpire’s services, he says, they can ask for and receive a full refund. The SEC found that almost one-third of the returns Wealthpire reported for the stock picks of one of Mr. Backus’ services in 2013 were “false,” although it didn’t contest any of his other performance claims.

But why didn’t online traders notice the red flags waving so glaringly in their faces?

Robert Cialdini, a social psychologist at Arizona State University and author of the new book “Pre-Suasion,” is an expert on how people convince others to trust them.

“The mindset that you put people into when they encounter your material,” he says, “leads them to prioritize their attention and behave in ways that are consistent with that focus.” In other words, a consistent message can elbow your skepticism aside; clever marketing can administer a kind of investing lobotomy, numbing you to the most obvious warning signs.

By harping on that precisely expressed 1,483% gain, Wealthpire adds to its apparent credibility and makes its subscription fees sound like a bargain.

By emphasizing scarcity — “there are only 500 spots available” — Wealthpire triggers “fear of missing out,” says Prof. Cialdini. And its warnings to act “right now” trigger a sense of urgency.

By invoking century-old experiments by Nikola Tesla, Wealthpire cloaks itself in the great inventor’s authority, says Prof. Cialdini — making investors much more inclined to trust the website’s trading tips.

“Subscribers wouldn’t stick with it if it isn’t worth it to them,” says Mr. Holmes.

Still, the confluence of these forces primes investors to suspend their disbelief. It’s yet another reminder that good mental hygiene — deliberately choosing what to pay attention to and what to ignore — is one of the most valuable assets an investor can possess.

Source: The Wall Street Journal