Ponzi scheme remains white collar fraud of choice

July 15, 2015

By Casey L. Higgs

higgs-casey-mug Higgs

Since the fall of Bernard Madoff, the Securities and Exchange Commission has upped its enforcement on Ponzi schemes. The SEC files approximately 125 complaints a year related to Ponzi schemes. However, the Ponzi scheme continues to be a fraud of choice among white-collar criminals. According to Ponzitracker.com, 70 schemes were uncovered in 2014, surpassing the 67 schemes uncovered in 2013. With losses totaling more than $1.5 billion in 2014, this equates to the discovery of a Ponzi scheme roughly every five days.

Indiana has seen its share of Ponzi schemes. In June, the Indiana Supreme Court suspended the license of an attorney serving a prison sentence that used his investment business to bilk investors out of approximately $19 million. In April, the SEC sued another Indianapolis investment firm over a Ponzi-like scheme involving more than 80 investors. Last November, another local company paid over $800,000 to settle a lawsuit related to an employee’s Ponzi scheme. And the list goes on.

Let’s go back to where it all started. Ponzi schemes have been around since money was invented. One of the first successful Ponzi schemes emerged in the 1920’s when Charles Ponzi stole $10 million from people through a postage stamp scheme. He made it so famous that the fraud is named after him. Today, those losses equate to $134 million. (Madoff, by comparison, stole an estimated $17 billion! Perhaps it is time for a rename?) The scheme generally works the same today as it did back then – new investors contribute money and their money is used to fake returns for old investors. New investors are duped into the scheme by being promised high returns with little to no risk. Today’s Ponzi schemes involve more money and a greater sophistication. But we are still faced with the question – Why are we not seeing a decline in a fraud that started over 100 years ago?

Ponzi schemes typically start in an economic expansion when incomes are rising and money is being made. The schemes are exposed when the economy contracts and investors cash out, which we saw with Madoff. Because Ponzi schemes require a constant flow of new money to survive, it eventually collapses when investors cash out and new investors are scarce. We are currently in an economic boom, which makes conditions ideal for the emergence of Ponzi schemes.

Financial matters and the methods of investing can be complicated. Investors targeted by Ponzi schemers generally lack the financial knowledge and understanding of investing. We often do not question what we don’t understand for fear of portraying ignorance. The easy way out is placing trust in others. Our trust in others lends itself to vulnerability and helps the Ponzi schemer succeed.

Money and material possessions are idolized in our economy. A Ponzi schemer and an investor both have an overwhelming desire to increase wealth. This desire leads to a greedy Ponzi schemer and a gullible investor.

We live in a world of information overload. This overload of information leads people to accept information as it is, rather than perform due-diligence to be certain of the accuracy.

Older Americans are often targets of Ponzi schemes. We are in a period where a populated generation of baby boomers are retiring or nearing retirement and are looking for ways to increase wealth. This leaves the Ponzi schemer with a vast base of potential victims.

Post-Madoff, precedents were set so that financial institutions and other advisors could be held civilly liable for not detecting Ponzi schemes. However, these precedents do not apply to all financial entities. They apply to public companies and do not necessarily trickle down to the local financial entities, where some significant Ponzi schemes have occurred.

Perhaps one of the biggest draws to a Ponzi scheme is just this – victims of a Ponzi scheme usually do not get all of their money back. If they get any, it’s a small percentage. By the time the scheme is unraveled, the Ponzi schemers have already had their fun sailing on a yacht, taking lavish vacations, driving expensive cars and throwing extravagant parties with investors’ money. Most often, the money is already spent, making it difficult to track down and collect.

No matter how many investors lose money, no matter the amount of money that goes unrecovered, new Ponzi schemes keep emerging. We have assisted many law firms with investment schemes by tracing and recovering assets, and providing an accounting of the financial activities. In the U.S. SEC v. Alanar, Inc., et al case, one of the largest Ponzi schemes in Indiana, over $300 million was raised from at least 11,000 investors over a 10-year period. We assisted the receiver with the recovery of assets and distributions to investors of 51 percent of investor claims. Ponzi schemes are not going anywhere anytime soon.•


Casey L. Higgs, CPA/ABV/CFF, CFE, CVA serves as manager in BGBC’s Litigation, Valuation and Bankruptcy Services practice and can be reached at 317-633-4700.