Monday, April 26, 2010
Sunday, April 25, 2010
The 10 Nastiest Ponzi Schemes Ever
Bernard Madoff pulled a shocker last week by revealing that his exclusive investment securities firm was actually the biggest Ponzi scheme in the history of mankind. As the impact of Madoff’s decades-long crime reverberates around the world, it invokes memories of past Ponzi masters, who laid the groundwork for planet-sized schemes like Madoff’s.
Ponzificating–perpetuating a fraud by paying off early investors with new investors’ money–is a concept as old as Indian giving. Honoring everyone involved in the act would be like writing a history of cheating itself. So we narrowed the Ponzi criminals down to the more recent, more nasty ilk, including Madoff himself:
10. The Fraudulent Feminist
(Note: This isn’t Howe. Just an 1880s woman from a catalog.)
In 1880, Boston Ponzian Sarah Howe promised women 8% interest on a “Ladies Deposit.” She said it was only for women, selling an implicit assumption of safety. She took the money and ran.
Nastiness Factor: Bad. Way to break the sisterhood of trust, Sarah.
9. The Haiti Haters >
Ponzi schemes popped up all over Haiti in the early 2000’s. These schemes sold themselves as government-backed “cooperatives.” They ran mainstream-sounding ads, some of which featured Haitian pop stars. As a result, people felt safe investing more than $240 million–60% of Haitian GDP in 2001–into the schemes, which ended up being a massive swindle.
Nastiness Factor: Bad. Haiti is already one of the poorest countries in the world. People there eat mud cakes when times get bad. Cheating them out of their meager savings is sick; alas, it also appears to be systemic.
8. The Scientologist Snake
Earthlink co-founder and Scientology minister Reed Slatkin posed as a brilliant investment advisor for A-list Hollywood residents and corporate bosses. Working out of his garage, Slatkin cheated the rich and famous out of roughly $593 million, creating fake statements referring back to fake brokerage firms to prove his mettle. He fed the Church of Scientology with millions of his winnings. In 2000, the SEC caught wind that Slatkin wasn’t licensed, and busted the scheme.
Nastiness Factor: Mild. Cheating the rich and famous usually results in fewer bankruptcies than, say, misling seniors out of their retirement funds.
7. The Lottery Uprising
When Albania was moving out from behind the Iron Curtain in the mid-1990s, a powerful government and environment of questionable ethics resulted in a financial system dominated by pyramid schemes. The government endorsed various Ponzis, which robbed the majority of the population and netted more than $1 billion in losses. Albanians rioted and overthrew the government.
Nastiness Factor: Deplorable. Don’t government officials realize that endorsing Ponzi schemes might get them overthrown?
6. The Costa Rica Crooks
Three Costa Rican brothers, Enrique, Osvaldo and Freddy Villalobos, defrauded clients–mostly American and Canadian retirees–out of $400 million in a 20-odd-year unregulated loan scheme that started in the late 1980s. They promised interest rates of 3% per month on a minimum investment of $10,000. Villalobos moved money through shell companies before paying investors. Its staying power had to do with the fact that margins were low, the brothers were disciplined, and the outfit just barely skirted past laws.
Nastiness Factor: Mild. The size of the operation gives it a place on this list, but the brothers also had real assets to back them up. It’s Ponzi Lite, but that doesn’t ease the burden on people who lost everything.
5. The Biblical Bilker
In fraud-rich Florida, the Greater Ministries International church used Bible-speak to cheat its flock out of $500 million. Starting in the early 1990s, the church, led by gun-toting minister Gerald Payne, offered worshippers investments in gold coins. Payne then created an investment plan that would “double the ‘blessings’ that people invested” by funneling money towards the church’s fake precious metals investments. According to the Anti-Defamation League,
Payne said that God had modernized the multiplication of the loaves and fishes and asked him to share the secret.
$500 million later, the Feds caught Payne, but most investors never got their money back.
Nastiness Factor: Disgusting. Anyone who uses holy speak to bilk people out of their retirement savings is disgusting, plain and simple.
4. The Boy Band Bandit
Beginning in the late 1980s, Lou Pearlman, Art Garfunkel’s cousin and former manager of ‘N Sync and the Backstreet Boys, offered attractive returns through his FDIC-insured Trans Continental Savings Program. The scheme was neither a savings and loan nor FDIC-approved, but that didn’t stop Pearlman from bilking investors out of nearly $500 million, with which he planned on funding three MTV shows and an entertainment complex.
Nastiness Factor: Deplorable. Pearlman was already a multimillionaire. The fact that he became a compulsive criminal after that means he should sit in a cell for a very long time.
3. The Retiree Plunderer
Mexican resort owner Michael Eugene Kelly schemed retirees and senior citizens out of $428 million. He offered them timeshare investments in Cancun hotels that he called “Universal Leases.” The timeshares came with rental agreements promising investors a nice fixed rate of return. Most of his victims used their retirement savings, thinking they would get solid, low-risk returns. The SEC says that “more than $136 million of the funds invested (came) from IRA accounts.” Kelly, meanwhile, bought himself a private jet, racetrack, and four yachts.
Nastiness Factor: Disgusting. Defrauding senior citizens out of their retirement savings is just about as low as you can go.
2. Madman Madoff
Bernard Madoff’s scam is still unfolding. The facts as we know them now are that Madoff spent decades building the biggest Ponzi scheme in history, bilking nonprofits, famous people, funds, banks, and countless others out of $50 billion.
Nastiness Factor: Deplorable. The man single-handedly destroyed charities, life savings, and other organizations yet to be named. The amount of money involved earns him a spot just below Charles Ponzi himself.
1. The Namesake
The King of Get Rich Quick, Charles Ponzi became a millionaire in six months by promising investors 50% return in 45 days on international postal coupon investments. He earned $15 million, which in 1920s terms was serious money. After Ponzi was caught, investors only received $5 million back.
Nastiness Factor: Mythical. This ancestor of fraudulent men passed his name on to the many schemes that would follow his own. His legacy, and his scheme, are forever memorialized, earning them a unique Nastiness Factor label.
Credit: http://www.businesspundit.com/the-10-nastiest-ponzi-schemes-ever/
Ponzificating–perpetuating a fraud by paying off early investors with new investors’ money–is a concept as old as Indian giving. Honoring everyone involved in the act would be like writing a history of cheating itself. So we narrowed the Ponzi criminals down to the more recent, more nasty ilk, including Madoff himself:
10. The Fraudulent Feminist
(Note: This isn’t Howe. Just an 1880s woman from a catalog.)
In 1880, Boston Ponzian Sarah Howe promised women 8% interest on a “Ladies Deposit.” She said it was only for women, selling an implicit assumption of safety. She took the money and ran.
Nastiness Factor: Bad. Way to break the sisterhood of trust, Sarah.
9. The Haiti Haters >
Ponzi schemes popped up all over Haiti in the early 2000’s. These schemes sold themselves as government-backed “cooperatives.” They ran mainstream-sounding ads, some of which featured Haitian pop stars. As a result, people felt safe investing more than $240 million–60% of Haitian GDP in 2001–into the schemes, which ended up being a massive swindle.
Nastiness Factor: Bad. Haiti is already one of the poorest countries in the world. People there eat mud cakes when times get bad. Cheating them out of their meager savings is sick; alas, it also appears to be systemic.
8. The Scientologist Snake
Earthlink co-founder and Scientology minister Reed Slatkin posed as a brilliant investment advisor for A-list Hollywood residents and corporate bosses. Working out of his garage, Slatkin cheated the rich and famous out of roughly $593 million, creating fake statements referring back to fake brokerage firms to prove his mettle. He fed the Church of Scientology with millions of his winnings. In 2000, the SEC caught wind that Slatkin wasn’t licensed, and busted the scheme.
Nastiness Factor: Mild. Cheating the rich and famous usually results in fewer bankruptcies than, say, misling seniors out of their retirement funds.
7. The Lottery Uprising
When Albania was moving out from behind the Iron Curtain in the mid-1990s, a powerful government and environment of questionable ethics resulted in a financial system dominated by pyramid schemes. The government endorsed various Ponzis, which robbed the majority of the population and netted more than $1 billion in losses. Albanians rioted and overthrew the government.
Nastiness Factor: Deplorable. Don’t government officials realize that endorsing Ponzi schemes might get them overthrown?
6. The Costa Rica Crooks
Three Costa Rican brothers, Enrique, Osvaldo and Freddy Villalobos, defrauded clients–mostly American and Canadian retirees–out of $400 million in a 20-odd-year unregulated loan scheme that started in the late 1980s. They promised interest rates of 3% per month on a minimum investment of $10,000. Villalobos moved money through shell companies before paying investors. Its staying power had to do with the fact that margins were low, the brothers were disciplined, and the outfit just barely skirted past laws.
Nastiness Factor: Mild. The size of the operation gives it a place on this list, but the brothers also had real assets to back them up. It’s Ponzi Lite, but that doesn’t ease the burden on people who lost everything.
5. The Biblical Bilker
In fraud-rich Florida, the Greater Ministries International church used Bible-speak to cheat its flock out of $500 million. Starting in the early 1990s, the church, led by gun-toting minister Gerald Payne, offered worshippers investments in gold coins. Payne then created an investment plan that would “double the ‘blessings’ that people invested” by funneling money towards the church’s fake precious metals investments. According to the Anti-Defamation League,
Payne said that God had modernized the multiplication of the loaves and fishes and asked him to share the secret.
$500 million later, the Feds caught Payne, but most investors never got their money back.
Nastiness Factor: Disgusting. Anyone who uses holy speak to bilk people out of their retirement savings is disgusting, plain and simple.
4. The Boy Band Bandit
Beginning in the late 1980s, Lou Pearlman, Art Garfunkel’s cousin and former manager of ‘N Sync and the Backstreet Boys, offered attractive returns through his FDIC-insured Trans Continental Savings Program. The scheme was neither a savings and loan nor FDIC-approved, but that didn’t stop Pearlman from bilking investors out of nearly $500 million, with which he planned on funding three MTV shows and an entertainment complex.
Nastiness Factor: Deplorable. Pearlman was already a multimillionaire. The fact that he became a compulsive criminal after that means he should sit in a cell for a very long time.
3. The Retiree Plunderer
Mexican resort owner Michael Eugene Kelly schemed retirees and senior citizens out of $428 million. He offered them timeshare investments in Cancun hotels that he called “Universal Leases.” The timeshares came with rental agreements promising investors a nice fixed rate of return. Most of his victims used their retirement savings, thinking they would get solid, low-risk returns. The SEC says that “more than $136 million of the funds invested (came) from IRA accounts.” Kelly, meanwhile, bought himself a private jet, racetrack, and four yachts.
Nastiness Factor: Disgusting. Defrauding senior citizens out of their retirement savings is just about as low as you can go.
2. Madman Madoff
Bernard Madoff’s scam is still unfolding. The facts as we know them now are that Madoff spent decades building the biggest Ponzi scheme in history, bilking nonprofits, famous people, funds, banks, and countless others out of $50 billion.
Nastiness Factor: Deplorable. The man single-handedly destroyed charities, life savings, and other organizations yet to be named. The amount of money involved earns him a spot just below Charles Ponzi himself.
1. The Namesake
The King of Get Rich Quick, Charles Ponzi became a millionaire in six months by promising investors 50% return in 45 days on international postal coupon investments. He earned $15 million, which in 1920s terms was serious money. After Ponzi was caught, investors only received $5 million back.
Nastiness Factor: Mythical. This ancestor of fraudulent men passed his name on to the many schemes that would follow his own. His legacy, and his scheme, are forever memorialized, earning them a unique Nastiness Factor label.
Credit: http://www.businesspundit.com/the-10-nastiest-ponzi-schemes-ever/
The Rise and Fall of Bernard L. Madoff
Posted by: Monica Gagnier on December 12
No one could have been more shocked than I to read that federal investigators yesterday arrested trader and fund manager Bernard L. Madoff for allegedly defrauding investors of $50 billion in a Ponzi scheme.
I got to know Madoff, and his brother Peter, who has not been indicted, during the 1980s, when I covered NASDAQ for the startup financial paper Investor’s Business Daily and later for the newsletter Trading Systems Technology.
The Madoff brothers helped push for greater transparency and accountability to the over-the-counter market, which was then in a major battle for listings with the New York Stock Exchange and the American Stock Exchange. That was their public stance; I can’t vouch for what their position was behind closed doors.
Bernard Madoff, a former chairman of the NASDAQ Stock Market and founder of Bernard L. Madoff Investment Securities, was one of the few NASDAQ market-makers who competed with the New York Stock Exchange, by trading stocks listed on the Big Board. His broker/dealer firm did this through an electronic market that was operated at the Cincinnati Stock Exchange.
Through the Cincinnati exchange, the Madoffs were pioneers in electronic trading and publicly spoke of the need to use technology to transform the inefficient and sometimes shady over-the-counter stock market.
The Madoff brothers were boys from the Outer Boroughs who made the big time. I liked their street smarts and their charm. Bernie was the elder statesman and Peter was the young visionary. They were generous with their time, whether it was explaining the intricacies of market structure to a fledgling reporter or striving to improve the competitiveness of the NASDAQ Stock Market.
It was thanks to the efforts of people like Bernie Madoff that NASDAQ was able to attract listings from top-tier tech companies such as Apple, Sun Microsystems, Cisco Systems, and later search powerhouse Google.
The Madoffs weren’t altruists; they were realists. They understood that high standards in the OTC market would help attract the best publicly traded companies to NASDAQ. That in turn would increase trading volume, giving their broker/dealer firm more chances to earn the spread between the bid and ask price for a stock, even as greater transparency narrowed that spread.
My first thought upon reading how Madoff’s secretive investment fund had crumbled in the wake of the stock market collapse was that I was glad that former NASDAQ CEO Gordon Macklin, who died in 2007, wasn’t here to witness his friend’s downfall. After all, the Madoffs have been in the OTC business for nearly half a century and on Wall Street are synonymous with NASDAQ.
It’s ironic that a man who campaigned for greater transparency within NASDAQ should end up being charged with fraud and losing billions for innocent investors. What could possibly have driven him to risk his family’s name in a world (Wall Street) that depends on the sanctity of the promise, “My word is my bond”?
Obviously, Madoff lost sight of the fact that there are some things worth more than money in this world — namely, your standing within the community.
Credit: http://www.businessweek.com/blogs/recession_in_america/archives/2008/12/the_rise_and_fa.html
No one could have been more shocked than I to read that federal investigators yesterday arrested trader and fund manager Bernard L. Madoff for allegedly defrauding investors of $50 billion in a Ponzi scheme.
I got to know Madoff, and his brother Peter, who has not been indicted, during the 1980s, when I covered NASDAQ for the startup financial paper Investor’s Business Daily and later for the newsletter Trading Systems Technology.
The Madoff brothers helped push for greater transparency and accountability to the over-the-counter market, which was then in a major battle for listings with the New York Stock Exchange and the American Stock Exchange. That was their public stance; I can’t vouch for what their position was behind closed doors.
Bernard Madoff, a former chairman of the NASDAQ Stock Market and founder of Bernard L. Madoff Investment Securities, was one of the few NASDAQ market-makers who competed with the New York Stock Exchange, by trading stocks listed on the Big Board. His broker/dealer firm did this through an electronic market that was operated at the Cincinnati Stock Exchange.
Through the Cincinnati exchange, the Madoffs were pioneers in electronic trading and publicly spoke of the need to use technology to transform the inefficient and sometimes shady over-the-counter stock market.
The Madoff brothers were boys from the Outer Boroughs who made the big time. I liked their street smarts and their charm. Bernie was the elder statesman and Peter was the young visionary. They were generous with their time, whether it was explaining the intricacies of market structure to a fledgling reporter or striving to improve the competitiveness of the NASDAQ Stock Market.
It was thanks to the efforts of people like Bernie Madoff that NASDAQ was able to attract listings from top-tier tech companies such as Apple, Sun Microsystems, Cisco Systems, and later search powerhouse Google.
The Madoffs weren’t altruists; they were realists. They understood that high standards in the OTC market would help attract the best publicly traded companies to NASDAQ. That in turn would increase trading volume, giving their broker/dealer firm more chances to earn the spread between the bid and ask price for a stock, even as greater transparency narrowed that spread.
My first thought upon reading how Madoff’s secretive investment fund had crumbled in the wake of the stock market collapse was that I was glad that former NASDAQ CEO Gordon Macklin, who died in 2007, wasn’t here to witness his friend’s downfall. After all, the Madoffs have been in the OTC business for nearly half a century and on Wall Street are synonymous with NASDAQ.
It’s ironic that a man who campaigned for greater transparency within NASDAQ should end up being charged with fraud and losing billions for innocent investors. What could possibly have driven him to risk his family’s name in a world (Wall Street) that depends on the sanctity of the promise, “My word is my bond”?
Obviously, Madoff lost sight of the fact that there are some things worth more than money in this world — namely, your standing within the community.
Credit: http://www.businessweek.com/blogs/recession_in_america/archives/2008/12/the_rise_and_fa.html
What is Ponzi Scheme
What is a Ponzi scheme?
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.
Why do Ponzi schemes collapse?
With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.
How did Ponzi schemes get their name?
The schemes are named after Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. At a time when the annual interest rate for bank accounts was five percent, Ponzi promised investors that he could provide a 50% return in just 90 days. Ponzi initially bought a small number of international mail coupons in support of his scheme, but quickly switched to using incoming funds to pay off earlier investors.
Does the SEC investigate Ponzi schemes?
The SEC investigates and prosecutes many Ponzi scheme cases each year both to prevent new victims from being harmed and to maximize the recovery of assets to investors. The majority of such cases are brought as emergency actions, which often seek a temporary restraining order and an asset freeze.
During 2009, the SEC filed 60 enforcement actions involving Ponzi schemes or Ponzi-like payments, including charging Robert Allen Stanford and his companies with allegedly conducting an $8 billion Ponzi scheme.
Who is Bernie Madoff?
Bernard L. Madoff, who is currently serving a 150-year sentence in federal prison, orchestrated a multi-billion dollar Ponzi scheme that swindled money from thousands of investors. Unlike the promoters of many Ponzi schemes, Madoff did not promise spectacular short-term investment returns. Instead, his investors’ phony account statements showed moderate, but consistently positive returns — even during turbulent market conditions.
In December 2008, the SEC charged Bernard Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for the multi-billion dollar Ponzi scheme he perpetrated on advisory clients of his firm for many years. The SEC filed emergency motions to freeze assets and appoint a receiver, and worked to return as much money as possible to harmed investors.
Madoff had been a prominent member of the securities industry throughout his career. He served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market’s board of governors and its executive committee and served as chairman of its trading committee. Madoff founded his investment advisory firm in 1960.
How is the SEC responding to its Office of Inspector General’s reports on the Madoff fraud?
In August and September 2009, the SEC’s Office of Inspector General issued three reports on the Madoff fraud, including one entitled Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme. The SEC has closely analyzed the reports.
Even before the release of these reports, major efforts were underway to make improvements and address the shortcomings that were identified in the reports. A list of decisive and comprehensive steps the SEC is taking to reduce the chances that similar frauds will occur or be undetected in the future is available on the SEC’s Post-Madoff Reforms web page.
What are some Ponzi scheme “red flags”?
Many Ponzi schemes share common characteristics. Look for these warning signs:
High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
Secretive and/or complex strategies. Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.
Issues with paperwork. Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.
Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.
If you are aware of an investment opportunity that might be a Ponzi scheme, contact the SEC by phone at (800) 732-0330 or online at http://www.sec.gov/complaint.shtml.
What steps can I take to avoid Ponzi schemes and other investment frauds?
Whether you’re a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.
The SEC sees too many investors who might have avoided trouble and losses if they had asked questions from the start and verified the answers with information from independent sources.
When you consider your next investment opportunity, start with these five questions:
Is the seller licensed?
Is the investment registered?
How do the risks compare with the potential rewards?
Do I understand the investment?
Where can I turn for help?
For more information, read Investing Smart from the Start: Five Questions to Ask Before You Invest.
What are some of the similarities and differences between Ponzi and pyramid schemes?
Ponzi and pyramid schemes are closely related because they both involve paying longer-standing members with money from new participants, instead of actual profits from investing or selling products to the public. Here are some common differences:
Pyramid Scheme Ponzi Scheme
Typical “hook” Earn high profits by making one payment and finding a set number of others to become distributors of a product. The scheme typically does not involve a genuine product. The purported product may not exist or it may only be “sold” within the pyramid scheme. Earn high investment returns with little or no risk by simply handing over your money; the investment typically does not exist.
Payments/profits Must recruit new distributors to receive payments. No recruiting necessary to receive payments.
Interaction with original promoter Sometimes none. New participants may enter scheme at a different level. Promoter generally acts directly with all participants.
Source of payments From new participants – always disclosed. From new participants – never disclosed.
Collapse Fast. An exponential increase in the number of participants is required at each level. May be relatively slow if existing participants reinvest money.
http://www.sec.gov/answers/ponzi.htm
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.
Why do Ponzi schemes collapse?
With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.
How did Ponzi schemes get their name?
The schemes are named after Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. At a time when the annual interest rate for bank accounts was five percent, Ponzi promised investors that he could provide a 50% return in just 90 days. Ponzi initially bought a small number of international mail coupons in support of his scheme, but quickly switched to using incoming funds to pay off earlier investors.
Does the SEC investigate Ponzi schemes?
The SEC investigates and prosecutes many Ponzi scheme cases each year both to prevent new victims from being harmed and to maximize the recovery of assets to investors. The majority of such cases are brought as emergency actions, which often seek a temporary restraining order and an asset freeze.
During 2009, the SEC filed 60 enforcement actions involving Ponzi schemes or Ponzi-like payments, including charging Robert Allen Stanford and his companies with allegedly conducting an $8 billion Ponzi scheme.
Who is Bernie Madoff?
Bernard L. Madoff, who is currently serving a 150-year sentence in federal prison, orchestrated a multi-billion dollar Ponzi scheme that swindled money from thousands of investors. Unlike the promoters of many Ponzi schemes, Madoff did not promise spectacular short-term investment returns. Instead, his investors’ phony account statements showed moderate, but consistently positive returns — even during turbulent market conditions.
In December 2008, the SEC charged Bernard Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for the multi-billion dollar Ponzi scheme he perpetrated on advisory clients of his firm for many years. The SEC filed emergency motions to freeze assets and appoint a receiver, and worked to return as much money as possible to harmed investors.
Madoff had been a prominent member of the securities industry throughout his career. He served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market’s board of governors and its executive committee and served as chairman of its trading committee. Madoff founded his investment advisory firm in 1960.
How is the SEC responding to its Office of Inspector General’s reports on the Madoff fraud?
In August and September 2009, the SEC’s Office of Inspector General issued three reports on the Madoff fraud, including one entitled Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme. The SEC has closely analyzed the reports.
Even before the release of these reports, major efforts were underway to make improvements and address the shortcomings that were identified in the reports. A list of decisive and comprehensive steps the SEC is taking to reduce the chances that similar frauds will occur or be undetected in the future is available on the SEC’s Post-Madoff Reforms web page.
What are some Ponzi scheme “red flags”?
Many Ponzi schemes share common characteristics. Look for these warning signs:
High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
Secretive and/or complex strategies. Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.
Issues with paperwork. Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.
Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.
If you are aware of an investment opportunity that might be a Ponzi scheme, contact the SEC by phone at (800) 732-0330 or online at http://www.sec.gov/complaint.shtml.
What steps can I take to avoid Ponzi schemes and other investment frauds?
Whether you’re a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.
The SEC sees too many investors who might have avoided trouble and losses if they had asked questions from the start and verified the answers with information from independent sources.
When you consider your next investment opportunity, start with these five questions:
Is the seller licensed?
Is the investment registered?
How do the risks compare with the potential rewards?
Do I understand the investment?
Where can I turn for help?
For more information, read Investing Smart from the Start: Five Questions to Ask Before You Invest.
What are some of the similarities and differences between Ponzi and pyramid schemes?
Ponzi and pyramid schemes are closely related because they both involve paying longer-standing members with money from new participants, instead of actual profits from investing or selling products to the public. Here are some common differences:
Pyramid Scheme Ponzi Scheme
Typical “hook” Earn high profits by making one payment and finding a set number of others to become distributors of a product. The scheme typically does not involve a genuine product. The purported product may not exist or it may only be “sold” within the pyramid scheme. Earn high investment returns with little or no risk by simply handing over your money; the investment typically does not exist.
Payments/profits Must recruit new distributors to receive payments. No recruiting necessary to receive payments.
Interaction with original promoter Sometimes none. New participants may enter scheme at a different level. Promoter generally acts directly with all participants.
Source of payments From new participants – always disclosed. From new participants – never disclosed.
Collapse Fast. An exponential increase in the number of participants is required at each level. May be relatively slow if existing participants reinvest money.
http://www.sec.gov/answers/ponzi.htm
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