Bank Liability for Ponzi Schemes

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An article in a recent edition of the Bloomberg BNS Banking Report on Ponzi Schemes and bank liability referred to an article I wrote on recognizing red flags of Ponzi schemes:

Under each, a plaintiff must account for both the plaintiff’s failure to investigate the would-be fiduciary before investing with the fiduciary and the plaintiff’s failure to monitor the fiduciary’s activities subsequent to the investment. As to the first, there are often many red flags to alert an investor to a Ponzi scheme that reasonable investors should notice and that many investors choose to ignore in pursuit of high returns. Fraud detection expert Tracy Coenen has noted more than fifteen red flags signaling a Ponzi scheme that any investor could spot with a reasonably diligent (and fairly simple) investigation. These items include: Continue reading

Daughter Turns in Mom in Tri Energy Ponzi Scheme

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More than two years ago, I mentioned here a news story about a Ponzi scheme called Tri Energy Inc. The Securities and Exchange Commission first took action against the company in 2005:

The Securities and Exchange Commission yesterday obtained a temporary restraining order, an asset freeze, and other emergency relief, in a civil action filed against several individuals and entities alleged to be perpetrating an ongoing affinity fraud and Ponzi scheme. According to the Complaint, defendants have defrauded hundreds of investors of over $12 million by promising returns of 100% or more within 60 days. The Complaint alleges that defendants have been telling investors that these extraordinary profits were to be generated in part by helping an unnamed Saudi Arabian prince move gold from Israel through Luxembourg to the United Arab Emirates. In reality, according to the Complaint, although some money has been paid out to investors, these funds appear to have come from new investor money, and substantial amounts of investor funds have been transferred to bank accounts controlled by the proposed defendants and relief defendants. Continue reading

Spotting a Ponzi Scheme or Investment Scam

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All the talk about Bernie Madoff and others has everyone thinking about Ponzi schemes. Have you invested in a potential Ponzi? It’s only natural to be worried, and in my opinion, investors haven’t been skeptical enough.

How would you spot a Ponzi scheme? My latest book, Expert Fraud Investigation: A Step-by-Step Guide details some questions you should ask yourself about the investment: Continue reading

Red Flags Apparent in Alleged Ponzi Scheme

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Recent news of the alleged $50 billion Ponzi scheme perpetrated by investment advisor Bernard L. Madoff has done nothing to ease the fears of investors who have been annihilated by the stock market over the last couple of months.How does an investment opportunity go from being a legitimate investment vehicle to a pyramid scheme? In this case, it is alleged that Madoff invested the money of clients, but lost it and didn’t want to admit it. Instead of alerting investors to the losses, he used the money of new investors to pay “returns” to the original investors.

This is a classic Ponzi scheme, in which money is collected and spent or lost, and new marks must be recruited to “invest” new cash into the scheme. The pyramid grows, and requires continuously larger “investments” of new money in order to pay existing participants their phony returns. So long as the operator can continue to recruit marks and keep new money flowing in, the pyramid stays afloat.

How does a scheme like this grow to an estimated $50 billion in losses? It’s hard to imagine, but it is alleged that this operation was conducted in secret. Employees say the investment advisory business was run on a secured floor that was separate from the offices of the company’s core business of market making. Continue reading