Finance

A Bigger Risk Than GameStop? Beware the Ponzi Scheme Next Door

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The GameStop stock saga – with its element of David versus Goliath, not to mention the staggering gains followed by an upset stomach – may have been the topic of Wall Street for the past few weeks.

But that’s just a sideline.

A bigger problem for investors could be the increasing number of Ponzi programs that use money from new investors to pay previous investors until the scam falls apart. Many of the recent scammers have hunted down people who feel they have lost the big stock market profits of the past few years. The plans failed because they did not have the sophisticated machinery of two of the largest in the last decade – the billions of dollars perpetrated by Bernard L. Madoff and R. Allen Stanford.

Both failed in the financial crisis. What is different now is that Ponzi schemes are collapsing while financial markets are rising. This worries the lawyers and academics who follow the programs because the trend is only likely to get worse as markets pull back.

Over 600 Ponzi programs have been discovered in the past decade, said Marie Springer, who teaches at John Jay College of Criminal Justice in New York and wrote a new book titled “The Politics of the Ponzi Programs: History, Theory, and Politics.” .

Regarding Mr Madoff’s sentence, she said, “If he was 150 years old, why would anyone start a Ponzi program and think they could get away with it? But they do. They think they are smarter. “

Kathy Bazoian Phelps, a Los Angeles attorney who runs the Ponzi Scheme blog, said she identifies three to ten new Ponzi schemes in each monthly post. “It hasn’t even slowed remotely since Madoff,” she said. “It amazes me month after month the creative things people come up with to cheat other people out of their dollars.”

These and other experts agree that Ponzi programs – and not wild swings in a single stock – are what investors need to watch out for now. One group in particular is a mature target: comparatively wealthy, well-connected investors who are curious about new investments but are too busy to research them fully or who are suspicious of consistently high returns.

Nobody contacts the Securities and Exchange Commission or the Justice Department “when they are consistently making very high profits,” Ms. Springer said. “They never say, ‘I’m doing way too much. This has to be a Ponzi program. “They turn to the authorities when they lose money. Or she said, “If Grandma dies and you don’t get your money back, report it.”

In retrospect, Ponzi schemes always seem obvious. Charles Ponzi’s postage stamp investment fraud in the early 1920s was certainly not the first such program, but it was so well known that the ploy was identified with him.

Ms. Springer’s book is an examination of the different types of programs, scammers, and victims, as well as an economic and legal analysis of how fraud has been dealt with over the decades. Common themes abound, and she stresses that anyone who invests money in something needs to understand what constitutes a legitimate investment and what arouses suspicion.

Most Ponzi schemers start with friends and family because of built-in trust, said Ms. Springer, who she found in her research. Churches come immediately after them. That’s in part because of the connections people make in them. It’s also because people want to believe that someone they meet where they worship has the same beliefs and values ​​as them.

“We assume that they would not think about taking advantage of someone else because we would not take advantage of anyone else,” said Ms. Springer.

She has referred to it as “the way I am” syndrome and it applies to any affinity group, be it an immigrant community, country club, or school.

Updated

Apr. 5, 2021, 8:13 p.m. ET

“In many cases, the Ponzi perpetrators use the money they bring in to send their children to private schools,” said Ms. Springer. “There they use money to make connections with other people.”

Most schemers are men and usually older and able to project an air of success, she noted. “Not many people will have faith in someone who is 28 years old,” she said. “Aging enables you to have knowledge.”

Generally speaking, the scammers have worked in the industry in which they developed their program so they have a deep knowledge of what they are doing. Lawyers, accountants, and registered brokers are often at the forefront, but Ms. Springer has also uncovered plans involving farm produce, worm farming, and a “whale whisperer” promoting a music business made to the sound of whales and dolphins.

“In all of the Ponzi programs, the perpetrator has been very pleasant, someone you want to be friends with,” she said.

So how do you know what investments are a concern and what safeguards you need to take to ward them off?

The topics in the news are ripe for Ponzi programs. For now, that could be cryptocurrency, artificial intelligence, and research into Covid-19 treatments.

“Fraud is based on uncertainty, financial hardship, upheaval and times of change,” said lawyer Ms. Phelps. “That describes exactly the time we live in. Scammers take the latest news and exploit people.”

She’s seen Ponzi programs at companies allegedly developing a cure or treatment. “Beware of promises,” said Mrs. Phelps.

There are several proven ways to avoid fraud, although they can also be a bit time consuming. This is why Ponzi victims skip the duty of care and trust their friend who knows a man who says he’s a great investor.

The first step is to review the documents. All Ponzi programs have fraudulent documents. In Mr. Stanford’s $ 7 billion Ponzi program, which included what appeared to be safe but unusually high-yielding certificates of deposit, the company sent out legitimate brokerage statements with hundreds of actual stocks, if only a stock or two in each company.

Second, check the managers’ credentials and question their claims. Ms. Springer said she found out that most of the Ponzi schemers donated to political campaigns. “Then they get a photo of themselves with the candidate,” she said. “You trust someone who has what it takes to succeed.”

Most importantly, make sure you understand what the person asking for your money is doing and why that person wants you to invest. Artificial intelligence, for example, is ripe for fraud because it is interesting, apparently lucrative and not easy to understand.

“Every time I see the words ‘proprietary algorithms’ I think of fraud,” said Ms. Phelps. “Some say they use AI bots that get fixed returns of 20 percent. If generating AI returns is so easy then why would they want your money? “

Let’s say you received the promised payments from your investment, and then the investment scheme is revealed. You did not get any further. The bankruptcy judge or federal beneficiary will likely reclaim the money if the system collapses.

And don’t expect that you don’t know what happened. “There is an ancient legal defense that is often used on the unsuspecting victim,” said Randall A. Pulman, founder of the Pulman, Cappuccio, Pullen & Benson law firm in San Antonio. “You moan, whimper and snort. That’s really all you can do. “

Mr. Pulman knows well. For the past 11 years he has tried to win back the money lost in Mr. Stanford’s scheme. Mr Pulman said the U.S. Supreme Court rejected his faction’s final appeal – to sue one of the insurance brokers directly – in late 2020.

“The only people who made money were the lawyers,” he said. “Investors have a return of 5 to 6 cents on the dollar.”

Yet the believers persist. Mr. Pulman had a client in his office a few years ago who said he was receiving $ 1,000 every month from a $ 100,000 investment. When the person he gave the money for ran out, he brought in other investors.

“I looked at him and said, ‘You know this is a Ponzi scheme and one day it will run out of money?'” Mr. Pulman said. “My customer didn’t want to believe me. I was trying to explain to him the concept of a clawback, that one day your husband will file for bankruptcy and a trustee will look for you to repay all of the money he paid you. He just didn’t want to hear it. “

Mr Pulman said he has not heard from this customer since then.

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Robert Dunfee