Just why do people keep falling for financial fraud?

It's never easy to guess, when reading a story about financial fraud, just what the victims could've been thinking.

Sorry if this sounds like victim-blaming, but frauds almost always only resemble a legitimate business opportunity. Look closely and there should be some detail, some aspect of the deal, that somehow fails the test of common sense.

This came to mind again last week after three men were charged with fraud related to movie financing. One of them wanted to turn the cavernous basement of City Hall in Chisholm, a small Iron Range town, into a movie studio.

That alone should have raised some flags with anybody wanting to invest with the guy.

So far these are only charges that the prosecution still has to prove and that project in Chisholm wasn't mentioned. But the news release announcing the indictments still got dropped into a file here on local financial frauds. By now it's become a pretty fat file.

It's long been a puzzle how, if we Minnesotans really were honest and careful with our money, the scammers keep so busy. What the fraudsters all seem to know is that, without diligence, our hard-wired biases can make us vulnerable.

One huge temptation people have is to buy a scheme that quickly gets them ahead financially, some way of skipping the tedious long-term process of saving and investing. Or they've made some money in their career and they are confident they'll make a lot more money with their investments than the regular folks who put their savings in an index fund.

If big returns are what you are after, though, please understand you'll be taking big risks. This relationship between risk and return is an immutable law, much like how the speed of light is the same whether emitted from a flashlight or Luke Skywalker's light saber.

Here's where the common sense comes in. If promised a 15 percent rate of return, in an environment where the 10-year Treasury note yields about 1.5 percent, what are the odds of losing a lot of your money? Please understand the odds are not zero.

Oh, so the 15 percent is very low risk? OK, now you have good reason to be nervous. And if the 15 percent is "guaranteed," leave the meeting and call the sheriff.

Good investors have a strategy, of course, but any fund manager who claims to have some sort of "secret" investment process to generate big returns also can't be trusted. If the secret is just a complicated computer program, well, even sophisticated people fall for that pitch so often that there's even a name for it — the "algorithm scam."

The infamous Trevor Cook currency trading scheme that collapsed in the Twin Cities during the Great Recession was a classic of this kind. This guy, operating out of an old Minneapolis mansion, had somehow divined a trading strategy so clever that it was impossible for him to lose his investors' money.

What he told investors is that he would use their money to trade securities in different currencies. The innovative part was that he would also use free loans from a Jordanian bank, prohibited by sharia law from charging interest, to finance a mirror-image trading position.

This created a perfectly hedged transaction that eliminated risk and, he claimed, would generate guaranteed returns of 10 to 12 percent per year.

No risk? Guaranteed profits? Pure nonsense.

Cook was sentenced to 25 years in prison.

Investment trading is the heartland of fraud, but it can also happen in any number of other businesses. One proven way to get investors' money is to tout a new product, the more exotic-sounding the better.

The same logic that applies to sniffing out an investment manager pitching something that sounds too good to be true needs to be applied here, too.

Just ask yourself, if a genuinely groundbreaking product did get developed here in Minnesota, like a simple and cheap process to turn coal into natural gas, what are the odds you'd be given the exclusive chance to invest in it?

Coal gasification technology was at the center of the fraud of Bixby Energy Systems, and it was a perfect kind of product to pitch. It promised to make coal both cleaner and more efficient just as the world was waking up to the threat of climate change. There was also an undeniable underdog appeal to little Bixby of Ramsey, Minn., solving such a pressing problem.

What got turned into smoke was the money from investors. Co-founder and CEO Robert Walker lived well on investor money in a 12,000-square-foot house with an indoor pool. In 2014, he was also sentenced to 25 years in federal prison.

It was the same basic idea, a revolutionary new product, that was behind the famous Jerusalem artichoke scam in Minnesota. This one comes to mind because my dad had signed up for it.

As an explanation and not an excuse, this all happened in the early 1980s at the time of what became known as the Farm Crisis. Struggling Minnesota farmers heard the promise of $160,000 of profit on just 20 acres.

The failure of common sense here was that there really wasn't much of a market for these things. These were not the artichokes that restaurants like Kincaid's make into a lovely appetizer. As I remember the story, starving goats would have passed on them.

The money to be made was by selling them as seed for additional growers to plant the following season. Clearly this wasn't a long-term opportunity.

What made this one worse was the way "growers were assured the company was acting in their best interests, a claim some accepted because the owners were 'professing Christians,' " as described in a court decision.

Using an important common interest to build trust with the victims, in this case religion, turns out to be another hallmark of fraud. It happened in the Cook currency scheme, too. It's often called an affinity scam.

Even careful people can be hurt by determined bad guys, of course, so I do feel some sympathy for victims. We did later remind our dad, though, that had any of us kids planted a field of worthless crops, we would have never heard the end of it.

lee.schafer@startribune.com • 612-673-4302