One Phone Call Would Have Prevented Investors' $2 Million Loss

BOSTON – There was the top-of-the-line Mercedes, the sleek BMW and the fancy Range Rover, the diamond necklaces and the eye-popping watches.

John A. Baldo of Freedom Financial impressed his clients, enough so that they didn't know he was ripping them off, according to the FBI.

Click here to visit FOXBusiness.com's Investing Center.

The 38-year-old from Andover, Mass., was arrested in Las Vegas in late January on charges that he defrauded senior citizens of some $2 million, all while telling them he was investing their life savings. Baldo has been charged and released on his own recognizance to await trial.

The clients took Baldo's excessive show of wealth as a sign of what might be coming to them someday; they probably never knew about his $5,000-a-day strip club habit, or his previous convictions for forgery and fraud with a credit card, according to federal and Massachusetts state investigators.

Baldo's case is the new verse in the tired, old song of "the worst that can happen" when someone goes out searching for financial advice, and it bears lessons for anyone working with a financial adviser or considering such a relationship because Baldo's alleged victims could have saved themselves from all of the trauma by making a single phone call.

"The worst cases are the ones where it would be really easy to have figured out something was wrong, but the victims never made the effort," says Bryan Lantagne, director of the Massachusetts Securities Division. "They're too impressed by what they see, or they are too trusting or too polite. ... The worst thing is that it always seems like the victims are seniors."

Baldo's $2 million came from just a few victims, but the bulk of it was from two Connecticut brothers who took it at face value that he was a certified financial adviser and that his firm was legit, the FBI said.

According to the FBI, Baldo used their money for the Mercedes SLK600R ($150,954), the Range Rover ($101,152), the BMW 330 ($59,444), a Jacob World watch ($37,800), gambling debts ($297,690), the diamonds ($32,000+) and, of course, the strippers.

One phone call is all it takes

Had the victims called their state securities administrator, they would have found that Baldo was not registered as any type of adviser. Had they contacted the national financial organizations, they would have learned Baldo never was a certified financial planner.

One phone call, a few minutes of time, no doubt.

Says Lantagne: "You have a guy holding himself as an investment adviser, as someone who can manage their money conservatively and make them safe. The senior citizen says, 'I want to know if this guy is registered, and if he has any black marks on his record.' They make that call, they find out that he's not registered as an investment adviser or a broker-dealer, and suddenly they have so many questions that they keep their money to themselves."

Securities watchdogs and industry participants hate stories like Baldo's on several levels. Obviously, there is the pain of the victims. Secondarily, they fear how it paints an entire industry.

All parties in the financial-advice business agree that the vast majority of practitioners are honest. As in any business, there are good and bad players some brokers or financial planners just aren't as adept at building solid portfolios as their peers but the number of rogues and rip-off artists is tiny.

And yet it is that small portion of the population that forces consumers to start their search for an adviser assuming everyone in the business is a potential problem.

"People remember the horror stories, but I think they assume it's not going to happen to them," says Ed Long, executive director of Healthcare and Elder Law Programs Corp. (H.E.L.P.), which publishes the "Ask First" form to guide seniors through the basic questions that would help them determine an adviser's background and which would help to eliminate the rogues.

When it doesn't pay to be polite

"We tell people repeatedly to get references and to check backgrounds, but they don't do it. I sometimes think they feel it would be rude to do it," Long said.

That may be a big part of the reason why senior citizens are frequently at the center of the worst cases. Without making too sweeping a stereotype, experts suggest seniors come from a generation where the first reaction is to trust, and to be polite. Questions about backgrounds, references, potential conflicts of interest, how an adviser gets paid and more wind up being held back so as not to seem rude.

Ironically, the same people who are trusting the bulk of their wealth to a virtual stranger would double-check the background of a contractor doing a small job around the house, and would talk to friends to get a reference on an auto mechanic.

Even checking in with friends can be a problem, as the case of the brothers allegedly victimized by Baldo shows. Just because someone makes a referral doesn't mean they picked their adviser the right way; if they failed to do a background check, and didn't do the basics, trusting their referral is like starting to build a home without first laying down a foundation.

The moral of the story is simple: If you are hiring an adviser, don't be afraid to be demanding and difficult, to ask a bevy of questions, and to do your own research before giving your money to anyone. Do a thorough background check, and if something comes up amiss, ask more questions or simply run away.

If you can't get a good response to your requests for information before you give that person your money, you can't expect him to respond well once he has it, and have more control in the relationship.

"There are cases where it's hard to tell, where you just get caught up in a guy's ruination, and he goes from being legit to falling on hard times and gets desperate. That could happen to anyone," said Lantagne.

"But the guy who is just bad from the beginning, the one who is lying about credentials and background, he's easy to avoid. You just have to make the effort."

Click here to visit FOXBusiness.com's Investing Center.