As a professional athlete, you're probably already aware of a target on your back, be it a target placed by fans, haters, instigators, advertisers, agents, family members and so on. Depending on who is doing the targeting, the reasons for those targets could be based upon good or evil intentions.
When it comes to investing in business opportunities, however, the reason for your being a target is pretty straightforward: money (and this could be good or evil).
Fortunately, federal and state agencies have plenty of rules out there to protect you and your finances, but they're inadequate. For example, if you're doing fairly well in your athletic career, you're most likely an accredited investor, which allows some parties to provide you with less information about your investment opportunities than would be required for your average, non-accreditor investor.
The unfortunate aspect about what it takes to become an accredited investor is that the requirements don't include a requirement for being financially savvy and experienced in complex business transactions, and fraudsters know this. Fraudsters and other opportunists are also quite knowledgable about the circumstances that generally surround professional athletes, such as:
the high demands placed on schedules by fans, coaches, trainers, family members, friends, and other personal commitments and obligations;
the large sums of money paid over a short time frame, resulting in significantly large checks at once;
the difficulty to personally dedicate time to reviewing business opportunities in enough detail to protect investment funds; and
the expertise and skills in a subject matter other than technical finance, accounting, fraud risk and securities laws.
These circumstances create the perfect situation for someone to take advantage of your trust and use it and your money to directly benefit themselves.
To fully understand how quick and easy fraud could happen to you, let’s take a look at the lawsuit Dallas Cowboys RB Darren McFadden (McFadden) recently filed against his business manager and financial advisor.
"Darren McFadden" by Keith Allison is licensed under CC BY-SA 2.0.
While this blog is no attempt to highlight McFadden’s misfortune, the recent lawsuit filed by McFadden provides a stark example of how easy fraud can happen and how significant the financial impact could be.
If you’re not familiar with his McFadden's impressive background, here’s a reminder:
4th Pick Overall in the 2008 NFL Draft (Oakland Raiders)
8-Year NFL Veteran,
2x Doak Walker Award winner,
2x consensus All-American,
Jim Brown Trophy winner,
Walter Camp Award winner,
2x Heisman Trophy Runner-Up and
2x SEC Offensive Player of the Year winner.
Even with the name recognition, incredible achievements on the field, positive reputation in the media and the power that comes along with those things, McFadden is now a plaintiff in the U.S. District Court of for the Eastern District of Arkansas against his former business manager and financial advisor who allegedly mismanaged, misappropriated and/or lost approximately $15,000,000.00 of McFadden’s money.
So what happened in McFadden’s situation?
In this section, we'll go over the events that led to the lawsuit, starting with when the Defendant, McFadden's business manager and financial advisor, apparently left a financial services company to privately "handle" McFadden's finances.
The Advisor’s Departure
According to the complaint, McFadden entered into an agreement with Ameriprise Financial Services, Inc. (Ameriprise), which is a well-known publicly-traded financial services company. Last year, Ameriprise generated approximately $12B in revenue.
One thing to note about financial services of this size is that they are heavily regulated by a variety of federal and state regulatory agencies. As a result, entering into a financial services arrangement with Ameriprise makes sense, so by his doing so, it was a great step in the right direction from a financial management perspective. In consideration of Ameriprise's brand, a sense of security about their management services for personal finances was reasonable.
Due to the regulatory environment at big financial services companies, for an employee to exploit a client without inside help from someone else in the company, that employee would have to go off on his own to avoid all the internal rules, regulations and auditors in place to protect clients, which is what McFadden’s now former business manager and financial advisor did.
Representations and Promises by Defendant
To work in the financial services industry, especially if you are pushing financial products (such as annuities, shares of stock, bonds, etc.), you have to have a knack for selling people and instilling confidence and security in prospective and current clients. While I don’t have the facts (which is what the lawsuit will prove), I can assume the Defendant had that knack on account of the representations and promises the complaint alleges the Defendant made, such as:
He was a registered, and would always remain, an investment advisor;
He would honor and respect the three primary fiduciary duties of care, loyalty and good faith;
He would remain prudent in his choices of investments;
He would avoid at all times self-dealings of any kind; and
He would protect and appreciate McFadden’s earnings.
Whether or not these representations and promises were truly made is irrelevant, mainly because these representations and promises are placed upon fiduciaries (i.e. people trusted with certain duties) under statutory and case law, not to mention ethical principles investment advisors, brokers, dealers and the like are supposed to uphold.
The bigger issue with all of these representations and promises is what they mean. While trusting a financial advisor who makes all of those representations and promises is reasonable, fully understanding what is required of that financial advisor to live up to those promises is more difficult. The best way to think about this is with this question: If someone promises you X, how do you really know you’re getting X (especially if you're not sure what X even means)?
How do you make sure they're following through with what they are saying?
This gap between (i) representations and promises made by not only financial advisors but other individuals with significant influence over an athlete's money and (i) understanding what it takes to meet those representations and promises is where I believe a lot of financial issues for professional athletes are created.
Example: The Defendant is alleged to have presented himself as a registered investment adviser.
Here's the issue: If you don’t know (i) what it takes to be a registered investment adviser, (ii) why that person needs to be registered as one or (iii) how someone can prove he or she is a registered investment adviser, how would you know he or she truly is a registered investment adviser? Sure, you can trust that person’s word, but with millions of your dollars on the line, you want to get proof first to help gauge whether you can trust this person at all. If there’s nothing to hide, asking for proof will not be a big deal. If it turns out through research that the person is not a registered investment adviser after claiming to be one, that's your first red flag.
The Securities and Exchange Commission (SEC) offers one way to verify if someone is an investment adviser through its Investment Adviser Public Disclosure website. On this website, you can search to see if someone is registered. In some cases, the investment adviser may not have to register with the SEC but may have to register with a state securities authority. In this situation, you would need to check with an individual state securities authority to determine if they are properly registered.
Food for thought:
Have you had any of your advisors or business managers make promises to you?
Do you understand what it takes for that advisor or business manager to satisfy those promises?
How are you making sure they are following through on those promises?
Are you holding them accountable?
Services Provided by Defendant
Based on the complaint, McFadden relied on the representations and promises of the Defendant and permitted Defendant to perform the following services on his behalf:
manage his bank accounts,
manage his credit card accounts,
pay his expenses,
provide cash for his personal expenses,
manage his investment and retirement accounts,
manage his real estate investments
provide advice regarding wealth and cash management, growth, income preservation and wise investment strategies.
To facilitate the provision of these services, McFadden executed a power of attorney, authorizing the Defendant to fully control McFadden’s finances in order to provide the services listed above. In effect, McFadden granted the Defendant the authority to be, in effect, McFadden in his business
transactions.
Granting authority related to these services is common with high net worth individuals, mainly because these routine and monotonous administrative tasks can be outsourced so those individuals can focus on making more money. So on its face, there’s nothing exceptionally out of the ordinary with these authorizations.
Unfortunately, abuse can also easily occur when this much authority is provided, despite the fact that upon signing of these documents, the service providers, in their role as fiduciaries, have a variety of duties place upon them to act with loyalty, duty of care and good faith.
Food for thought:
Have you signed any power of attorney forms for any financial advisors?
How involved are you in the services they are providing?
Have they been difficult about getting you your account statements?
How often are you personally reviewing your own accounts from the bank, brokerage firm or retirement company directly from their websites?
Mismanagement and Misappropriation Allegations
Over the course of the relationship between McFadden and the Defendant, the Defendant is alleged to have either stolen, misappropriated or lost approximately $15,000,000.00 of McFadden’s money. Some of the acts Defendant is alleged to have committed include the following:
Purchased property with McFadden’s money and then transfer title of such property into Defendant’s own name;
Used McFadden’s money for Defendant’s own personal use;
Formed several business entities for McFadden and then appointed himself to the businesses as the manager of all such businesses, including being custodian of all monies invested and/or received in connection with such businesses;
Created businesses to hide theft of McFadden’s money;
Withdrew and/or transferred McFadden’s money to accounts owned directly and solely by Defendant;
Claimed sole ownership of businesses started with McFadden’s money while also refusing to allow McFadden to access financial documents regarding those businesses; and
Leveraged relationships with local banking institutions to help hide statement activity reports that may have shined light on the alleged fraud.
As you can see, this is an extensive list that developed over a period of about 7 years. What particularly concerns me about these allegations is that they are especially difficult to uncover if you are not trained to sniff out fraud and implement procedures to prevent fraud.
These alleged acts go back to one of my earlier statements about not fully understanding what’s required of your financial advisors and business managers when handling your finances. Something that may seem reasonable may, in fact, be something that’s completely unreasonable when viewed in the light of traditional business operations.
Example: Let’s assume McFadden signed an operating agreement for an LLC that gave the Defendant the ability to be the LLC's manager in exchange for a management fee. In some circumstances, a management fee is reasonable, but let’s assume the Defendant wasn’t providing any services to the LLC that warranted a monthly management fee, but he charged one anyway. Knowing whether a management fee should be charge, and at what amount is reasonable, is information learned over time from experience. Experience that would be difficult to obtain for someone who has been dedicating a significant amount of time to the demands of being a professional athlete.
Food for thought:
How often are you reviewing your investments in details?
Do you know how to find certain publicly available information related to investments, such as titles and tax records?
Do you regularly ask for financial information from your businesses?
Do you try to understand the financial statements you receive from your businesses, or do you rely on your advisor or business manager to tell you?
Additional Financial Consequences
In addition to actual cash going out the door, McFadden also incurred other damages, such as:
Late fees and interests on bills Defendant allegedly failed to pay on time;
A credit score reduction (which can significantly affect current and future lending rates);
Inaccurate tax returns (which can lead to additional penalties and interest fees); and
Ownership of poor investments.
Unfortunately, these consequences are additional costs that come along with fraud.
How did the Defendant get caught?
Defendant’s plans came to light when he allegedly attempted to sell McFadden a building that Defendant allegedly purchased with McFadden’s own money. After some investigation by some of McFadden’s other representatives, McFadden was able to uncover the alleged schemes of Defendant. At this point, McFadden revoked power of attorney from Defendant. Unfortunately, by this point in time, a significant amount of the damage had been done.
What are the claims against Defendant?
So with all of the allegations, what are the claims McFadden is asserting against the Defendant. Here’s that list:
Fraud
Breach of fiduciary duty and professional duty of care
Conversion (which is defined by Black’s Law Dictionary as “the wrongful possession or disposition of another’s property as if it were one’s own.”)
Breach of contract
Unjust enrichment
Fraud by wire
Failure to register as a broker-dealer when acting as a broker-dealer
These are the claims just for McFadden’s civil case against Defendant. A criminal case may also be opened by the State of Arkansas or a federal agency with authority to file a criminal complaint.
What’s next for McFadden?
At the time of this writing, the Defendant has lawyered up with an attorney out of Arkansas, and he’ll have time to either file and serve an answer to McFadden’s complaint or provide another type of response under the Federal Rules of Civil Procedure, such as motion to dismiss.
What you can take from this situation?
Ask questions, even the basic ones.
I know it’s easier said than done, but try to ignore what that other person may think of you, and instead, think about what will happen to your nest egg, your financial security, your family and so on if that other person is not following through with the promises they make to you, and the only way to understand those promises is to ask about them. Some questions might include:
What training and experience do you have?
How do you get paid? By commission? Amount of assets you manage? Another method?
How frequently do I get statements? Do I understand what the statement tells me?
How much am I paying in commission or fees?
As a personal example, when I bought my first home two years out of graduate school (pre law school days), I made the developer’s salesperson sit and wait for me to read an entire purchase agreement line by line, and I asked questions throughout the whole process. At first, it was a little awkward because I could tell it wasn't the usual response to the agreement being placed in front of purchasers. Why did I do it? I felt because it was my money and my neck is on the line, I needed to make sure I fully understand what they are promising me and what I’m promising them. If you're not in the habit of feeling this way when you get agreements, I recommend you give it a shot next time.
As someone who regularly reviews contracts, I firmly believe that when you are dealing with your money, you can’t ask enough questions. There will always be more deals, more ideas and more opportunities for you to invest your money, so there's rarely a reason to act on impulse to sign agreements. If you are feeling pressured to act now, take that pressure as a red flag. It's a strong-arm selling tactic used by aggressive sales teams to pressure buyers into acting without thinking.
In contrast, if you find someone very receptive of your questions, it would be perfectly acceptable for you to get everything answered that would give you enough comfort to sign. (By the way, if you’re not sure about what questions to ask, I can help you on that. You can reach me here.) Additionally, for any promises made, be sure to get them documented in your agreement or an addendum to that agreement that references other specific writings, such as an email, handwritten note, etc. You may need this proof later.
Lastly, when I’m working with clients, I often share a trick when it comes to asking other people your questions without coming off as questioning that other person’s character. Simply state:
“Can you help me understand some things about this deal because I know my attorney/CPA is going to ask me for them later. He/she always does, and I would like to give him/her some answers.”
That’s right. Blame your attorney or CPA (we have a bad rap for being highly particular anyway). If you don’t have an attorney or CPA to reference, you can still use the line, and if they call you on it, feel free to contact me.
[If you're interested in seeing the legal complaint in full, you can find it here.]
[Editor’s Note: The allegations discussed in this blog post are just that, allegations. At the time of this writing, the defendant in McFadden’s complaint has not been, and may not be, found liable for any of the claims made by McFadden. Additionally, the purpose of this blog is to highlight how easy it is for “trusted” advisors to quickly take advantage of professional athletes. Professional skepticism (that is, being curious about what’s going on) can be good. For more information on the limitations on the use of the information provided in this blog post, please see the legal disclaimer here.]
Chris McCauley, CPA, Esq. is the founder of McCauley Investment Risk & Legal Consulting PLLC, a Seattle-based law firm dedicated to helping professional athletes guard their earnings and investments. Chris is an attorney licensed to practice in Alabama and Washington and a CPA licensed to practice in Washington and North Carolina.