by Jordan Maglich | May 31, 2014 5:30 am
In the early 20th century, a little-known Italian immigrant gained international notoriety after his investment venture promising astronomical returns through the resale of postal reply coupons was proved to be mathematically impossible.
Charles Ponzi would eventually serve nearly two decades in federal and state prison for that and related scams, but little did he know that his surname would one day epitomize one of the most potent weapons of financial destruction ever encountered.
The “Ponzi scheme” was born.
The functioning of a Ponzi scheme is inherently simple. Investors are promised above-average returns that generally carry little risk. However, the payment of these returns is made not from legitimate business activities, but rather from incoming funds from new investors. Little if any legitimate investing actually takes place, and the Ponzi scheme depends on the continuous flow of funds from new investors to meet obligations to existing investors.
When the so-called “lifeblood” of a Ponzi scheme dries up and investor obligations cannot be met, the scheme unravels — often in destructive fashion, leaving a path of devastation in its wake and irreversibly affecting the lives of those ensnared in its web.
While tracing its origin back at least 80 years, the past decade has been unprecedented in terms of the number and severity of Ponzi schemes. Since 2008, at least 500 Ponzi schemes were uncovered worldwide, including Bernard “Bernie” Madoff’s legendary $17 billion scheme. All told, the financial impact of Ponzi schemes is pegged at more than $50 billion over the past six years.
No matter the type, a Ponzi scheme has a predictable and inevitable dire outcome, but some are certainly more notable than others. Ponzi schemes have seemingly endless variations, which has led to this list of newsworthy Ponzi schemes, ranging from a emu-raising Ponzi scheme to astrology to latex gloves.
We’ll take a look at these, but first, a look at the staggering stats behind Ponzi schemes.
Recently, Ponzitracker.com compiled an extensive collection of statistics from Ponzi schemes during the six-year period from 2008 to 2013, and the results were staggering. For instance:
Also interesting: The correlation of Ponzi schemes uncovered to the financial crisis is arguably strong. As the economy deteriorated, efforts by investors to withdraw money from their once-trusted financial advisers combined with the decrease in new investors collapsed many of the schemes.
Finally, the toll on the criminal justice system is also noteworthy. Perhaps unsurprisingly, the overwhelming majority of Ponzi scheme perpetrators were males — over 90%, to be exact. At least 385 of the perpetrators were sent to prison, with a total of nearly 5,000 years of cumulative prison sentences handed down.
Perhaps fittingly, Madoff’s 150-year sentence ranks as the longest Ponzi prison sentence.
Bernie Madoff became a household name after his arrest in December 2008 for the largest Ponzi scheme in history. The scheme, which spanned decades, ultimately caused at least $17 billion in losses to thousands of investors.
This New York investment adviser rose to prominence through high-profile leadership positions in the financial industry, including a stint as non-executive chairman of the Nasdaq Stock Exchange. His firm, Madoff Investment Securities LLC, offered consistent annual returns averaging 10% through a purported strategy that combined the purchase of blue-chip equities and corresponding options. Madoff’s Jewish heritage attracted a large amount of Jewish investors, and his stature in the financial industry was enough for numerous charitable and educational foundations to entrust their money to him. In total, nearly 5,000 investors invested in Madoff’s scheme.
Because of the length of the scheme, nearly half of Madoff’s investors ended up receiving cumulative interest payments exceeding their total investment. Many of these so-called “net winners” later faced “clawback” lawsuits by the court-appointed bankruptcy trustee seeking to recover funds for Madoff’s victims who were not as fortunate.
To date, Madoff’s victims have recovered nearly 50% of their losses through the trustee’s efforts, and this number is expected to increase.
While Madoff initially maintained that he acted alone, it became apparent that the sheer size of his scheme meant he alone could not have kept the scheme going for so long. To date, prosecutors have obtained at least 14 convictions — including a guilty plea from Madoff’s brother, Peter Madoff. Authorities also filed criminal charges against financial juggernaut JPMorgan Chase (JPM), accusing the bank of turning a blind eye to Madoff’s scheme while serving as his primary banker. The bank settled the charges by paying over $2 billion in penalties.
In India, thousands of citizens were duped out of an estimated $50 million after authorities uncovered a massive Ponzi scheme that promised steady returns supposedly generated not from stocks, not from options … but from raising emus.
Guru operated Susi Emu Farms (“Susi Farms”), which promised potential investors a weekly return of $120 in exchange for a $3,000 investment that supposedly purchased a baby emu. Susi Emu Farms took on the obligation of raising the emu, and investors were told that the returns were possible because of the alleged value in emu meat and oil. The dependable returns, as well as the use of advertising featuring popular Indian film stars, caused the scheme to spread like wildfire. In total, authorities estimated that Susi Farms took in more than $100 million from at least 8,000 investors.
However, the truth was that neither the meat nor the oil from emus was valuable. When incoming investor funds were not enough to sustain the growing obligations to existing investors, the scheme collapsed and Susi Emu Farm executives fled town.
In an unusual turn, when it was revealed that at least 100,000 emus were abandoned and left to starve, the Indian government was forced to step in and purchase $200,000 in emergency rations to feed the emus.
M.S. Guru was arrested by Indian authorities 2012 and charged with conspiracy and cheating after the scheme unraveled.
In California, a former tennis team owner was arrested earlier this year and charged with defrauding investors out of at least $125 million through his medical equipment businesses, International Manufacturing Group (“IMG”) and RelyAid. Deepal Wannakuwatte, 63, was arrested in February 2014 and indicted on federal fraud charges, including mail fraud and wire fraud, which each carry maximum 20-year prison terms.
According to authorities, Wannakuwatte’s companies solicited investors by telling them it had lucrative contracts totaling at least $100 million with the U.S. Department of Veterans Affairs (the “USVA”). Based on these representations, IMG and RelyAid raised at least $125 million from numerous investors.
However, while IMG and RelyAid did have a business relationship with the USVA, authorities alleged that this relationship was grossly overstated. Rather than having annual sales of $100 million, it appeared that annual sales were closer to $25,000. To create the appearance of a successful business, Wannakuwatte is accused of doctoring actual invoices with significant markups. For example, a $257 invoice was modified to create a $12 million invoice.
The companies came under suspicion after a creditor filed a lawsuit alleging nonpayment of a loan.
Among other things, Wannakuwatte was ordered to turn over “a $3 million private plane that had been pledged as collateral.”
A New York man was accused of using his position as head of a soccer club to dupe investors out of more than $5 million in a Ponzi scheme that purportedly financed the sale of cigarettes to a Native American Indian reservation. Robert Rocco, 48, was indicted in 2013 on multiple federal fraud charges that could land him behind bars for decades.
Rocco was formerly the president of the Dix Hills Soccer Club, where he enjoyed exclusive access to company bank accounts. In that position, Rocco solicited club members to invest in his company, Limestone Capital Services, which they were told provided wholesale financing of cigarette purchases for a tobacco shop located on the Shinnecock Native American Reservation. In exchange for their investment, Rocco promised investors annual returns ranging from 15% to 18%. In total, over two dozen investors invested at least $5 million.
Several years later, Rocco revealed that a rival Indian tribe had stolen approximately $4 million to $5 million of uninsured cigarette inventory from the reservation, resulting in a total loss to investors. However, according to authorities, these claims were false. Instead, Rocco was accused of operating a Ponzi scheme that used investor funds to pay returns.
Indeed, authorities alleged that Rocco even used his position as club president to withdraw nearly $67,000 from the club’s bank accounts — a move that nearly depleted club coffers if not for the generosity of club benefactors to cover the shortfalls.
In what is believed to be a first, criminal charges were brought against a Massachusetts husband, wife and son based on charges the trio operated a Ponzi scheme that duped investors out of at least $10 million. The three later entered into plea agreements with prosecutors, resulting for prison terms for the husband and son and a suspended sentence for the wife.
Viking Financial Group (“Viking”) was owned and operated by Steven Palladino, his wife Lori Palladino, and his son, Greg Palladino. Viking advertised itself as operating a high-yield, low-risk investment strategy that offered above-average returns by making secured loans to borrowers at inflated interest rates. In total, the venture raised over $10 million from at least 40 investors.
However, there were very few legitimate loans, and the Palladinos paid the advertised interest by simply using funds from new investors. Investor funds were diverted for a variety of unauthorized purposes, including trips to the Bahamas, hundreds of thousands of dollars in gambling losses, and even the payment of rent for Steven Palladino’s mistress. Ironically, Steven Palladino was also accused of using investor funds to make court-ordered payments stemming from a previous conviction for defrauding an elderly relative.
Even after the trio accepted guilty pleas from state prosecutors, Steven Palladino recently landed in more trouble when federal prosecutors indicted him on 25 charges of criminal contempt.
One Florida man went a bit too far in relying on the heavens for riches. Gurudeo “Buddy” Persaud, 47, was arrested and charged with operating a Ponzi scheme that promised risk-free returns derived from investing in the futures markets and other markets.
However, the reality was that Persaud did not invest in futures markets; instead, his trading strategies were based on lunar cycles and the gravitational pull between Earth and the moon.
Persaud was a registered representative with a Florida broker-dealer. In addition, Persaud also operated the White Elephant Trading Company LLC (“White Elephant”), which he registered with the state of Florida under the name of his family members to avoid scrutiny from his employer. Persaud solicited investors by promising risk-free annual returns ranging from 6% to 18%, telling them he was able to generate such gains through trading in futures and other markets. In addition, Persaud touted his status as a certified financial planner to assure investors that their funds were safe. Persaud was able to raise at least $1 million from investors.
However, Persaud’s trading strategy of relying on lunar cycles to make trades was not only undisclosed to investors, but also generated more than $400,000 in losses. Additionally, investor funds were used to support the lavish lifestyle of Persaud and his family members.
Persaud is currently serving a three-year sentence in federal prison.
A North Carolina company known as ZeekRewards, or Zeekler, solicited investors worldwide to participate in its penny-auction business where participants could “bid” on popular merchandise in 1-cent increments. In addition to the ‘retail” business, the company also promised its “affiliates” hefty returns for recruiting new participants and placing free advertisements on other sites. In return, those “affiliates” were handsomely rewarded with daily returns of 1.5%. In total, nearly 1 million “affiliates” would entrust more than $500 million to ZeekRewards.
However, in August 2012, the Securities and Exchange Commission initiated an emergency civil enforcement action and accused ZeekRewards and its founder, Paul Burks, of masterminding a massive Ponzi scheme that was on the verge of collapse. According to the Commission, Zeek Rewards’ current cash holdings of $225 million were at risk of “rapid depletion” had investors elected to receive cash distributions rather than accumulate “profit points.” A receiver was appointed by a North Carolina federal court to preserve and recover assets for the benefit of investors, and has recently sought to recover winnings from “net winners” that were fortunate enough to profit off their investment with Zeek Rewards.
While certainly paling in comparison to Bernie Madoff’s massive Ponzi scheme, ZeekRewards might be one of the largest Ponzi schemes in history as measured by the sheer number of victims affected. Indeed, while Madoff involved several thousand investors, the court-appointed receiver in ZeekRewards announced that he had received proof of claim forms from over 174,000 victims. Victims are expected to recover at least 50% of their losses.
Florida authorities arrested four people and charged them with orchestrating a $70 million Ponzi scheme that promised hefty returns to investors who thought their returns were coming from an investment in a “virtual concierge” machine. Joseph Signore, his wife Laura Signore, Paul Schumack and Craig Allen Hipp were recently arrested on multiple fraud charges stemming from their roles in JCS Enterprises. Coincidentally, a related company funded with investor funds was, until recently, the beneficiary of an investment by Barbara Corcoran — a star of CNBC’s hit show Shark Tank.
Investors were told that an investment in JCS Enterprises involved the purchase of a virtual concierge machine (“VCM”) that resembled an automatic teller machine and allowed users to view advertisements for products or services. Investors were told that their VCM would be placed in a business where it could generate lucrative profits that allowed the payout of annual returns of 80% to 120%.
One of the ways investors were solicited to invest with JCS Enterprises was through the placement of videos on YouTube. The video promised that the VCMs would “generate income for years,” and promised that a $3,500 investment could produce “huge returns.” The alleged mastermind, Joseph Signore, is also accused of soliciting investors via emails that included a Bible passage intended to create a false sense of security and appeal to the religious beliefs of investors.
In addition to criminal charges, Joseph Signore and Paul Schumack also are facing civil fraud charges filed by the Securities and Exchange Commission.
A Toronto pastor and his wife were accused of defrauding more than 200 parishioners out of nearly $9 million under the ruse that they were generating above-average returns through dabbling in foreign-currency trading.
Marlon Gary Hibbert and Verna Hibbert were charged with 38 criminal counts in mid-2013 by Toronto police, who alleged that the pair lived a luxurious lifestyle by misappropriating investor funds.
From 2005 to 2010, the Hibberts oversaw a congregation at the Masonic Church of God in Toronto’s east end. In addition to fulfilling their divine duties, Mr. Hibbert told parishioners he could generate monthly returns of up to 8.5% through his skills as a foreign currency trader. Interested congregants were required to invest at least $10,000 with Mr. Hibbert, and at least $8.6 million was raised from approximately 200 parishioners.
However, Toronto police alleged that Hibbert did not generate the promised returns, instead using incoming investor funds to make the monthly interest payments. Additionally, Hibbert and his wife diverted investor funds for their own personal use, including the purchase of luxury automobiles and real estate.
Toronto police have also been unable to account for several million dollars, which they believe was diverted to an offshore bank account in Panama.
Three men were sent back to federal prison after they concocted a Ponzi scheme — in prison — that promised lucrative returns through the distribution of comic book rights. Daniel Parrili, John Lauer, and Christopher Anderson met in a Wisconsin prison where, unsurprisingly, they were currently serving time for fraud-related charges.
After their release from prison, the trio formed Sundown Entertainment Inc. (“Sundown”), which purported to specialize in the distribution of film and comic-book rights. Potential investors were told that their investment would be used to purchase the rights to old film footage that then would be used to produce and distribute movies and documentaries. Sundown lured investors by promising returns on short-term investments of up to 150%. In total, Sundown raised more than $7 million from over 150 investors.
While Sundown did actually engage in comic book production, the resulting revenues were not nearly enough to make the promised returns to investors. For example, one two-month period resulted in $8,000 in legitimate revenue — and $1.7 million in new investments. Yet, instead of informing investors of the situation, Sundown continued to solicit new investments.
In addition to prison time, each of the men was ordered to pay restitution to scheme victims.
Jordan Maglich is a securities attorney with Wiand Guerra King P.L. in Tampa, Fla. He also serves as the editor and founder of Ponzitracker, an Internet blog that tracks the proliferation of Ponzi schemes across the United States.
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