Ponzi Schemes

History & Legal Issues

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How to detect/ prove a Ponzi scheme. How to cope when you are a victim.

Ponzi: Reasons for Belief

A Ponzi scheme is simply a fraud that victimizes you by your own greed. The con-man exploits this weakness in your charachter, fostering a belief in a get-rich quick scheme. To get your guard down, you are told that you are privileged to participate, as few are allowed in. This elite feeling is used to make you feel sorry for all the ‘suckers’ outside your privileged elite. You think the ordinary working man is caught in a trap of the fluctuating stock markets and hard work, while you have a sure thing and the easy life. How do you avoid falling into this fantasy? First, keep in mind there is no such thing as easy money. Anything making money as a real investment does not want to make investors a privileged few but a large number. Finally, nothing pays 10 points of interest above everything else unless it is a Ponzi. Thus, Madoff’s 14% in a 4% prime world made nonsense.

How do you detect a conman? Here is one site’s apt advice:

But the term con artist is short for confidence artist — they gain your confidence just long enough to get their hands on your money. They can be very charming and persuasive. A good con artist can even make you believe he is really an old friend you haven’t seen in years.[1]

The Standard Pitch

In the 13th Episode in the recent BBC production of Little Dorrit you will hear Mr. Merdles provide a pitch that all Ponzi victims have heard. Merdles’ bank is paying 20% per year. But he tells a rich man that not everyone can join unless a very “long figure of numbers” is next to his name. This only further fuels Mr. Dorrit’s ambition to join. Like most other victims of Ponzi schemes, Mr. Dorrit did not stop at just putting in some of the money. Most victims almost always go all in because they cannot imagine any investment that could pay better than the Ponzi swindler is offering. Indeed this is true, but this should have raised suspicion, not gullible credence.

Key Tipoff: Church Leaders / Members Are Pitchmen For $$$

Beware any church elder/ deacon who ever invites you to invest in a high profit deal. This is a standard MO for Ponzi artists. People tend to trust someone of such stature. One FBI investigator told me that most Ponzis involve some church figure with a title defrauding members of the flock. Hearing is believing. Here is one that operated from 1996 to April 2009. Neighbors gave their life savings to him:

    1. LDS Bishop

 A former bishop from the Church of Jesus Christ of Latter-day Saints Church has been accused of operating a Ponzi scheme….[2]

    2. Self-Professed “Favor of God” Proven Success – Swindled Church Members

Here is another story whose facts are revealing:

SEC Sues Man for Defrauding Church Community in Ponzi Scheme

Aug. 31 2009 (Bloomberg) — The U.S. Securities and Exchange Commission sued a California man and his company for allegedly defrauding a church community by claiming his investment successes were an “obvious favor of God.”

DS, 53, described by the agency as a former truck driver and handyman, raised more than $1 million from 28 investors tied to a Redding-based church from August 2007 until April 2008 by promising an annual return of more than 150 percent, the SEC said today in a lawsuit filed at federal court in Sacramento. His firm, D.A. S Investments, LLC, also was named as a defendant.

DS allegedly told investors their money would be placed into pools to buy stocks or invest in projects such as a real estate development or an Oklahoma water-bottling plant. DS never made investments and used the money to pay “fictitious high returns” and to cover his personal living expenses, the SEC said.

In March 2008, DS paid $10,000 to a couple who invested $1,500 six months earlier “to create the false appearance of a successful business operation,” the SEC said. Hearing of the payment, others gave Souza their money, the SEC said.

DS paid back about $230,000 to certain investors and spent $100,000 to rent and furnish an office. He made more than $100,000 in charitable contributions to the Redding church community, about 180 miles north of San Francisco, where he advertised his fund in materials headlined “Where Business Is Moral and the Miraculous Is Routine.” The agency didn’t identify the church by name.[3]

    3. Gullible Church Members

A California Ponzi scheme that defrauded church parishioners is sued by the SEC

March 12, 2009 – 9:30am | Investment industry | News
A California Ponzi scheme that defrauded church parishioners is sued by the SEC
One more company that was running a Ponzi scheme is being sued by the Securities and Exchange Commission in Northern California. On Wednesday the SEC filed a complained in federal court against the investment company Equity Investment Management and Trading to freeze its assets in an attempt to save investors’ money.

The SEC complaint reported that AV, the company president, began attracting clients in 2004 by claiming that he had computer software that allowed to him to buy and sell stocks with the profits of 3.5% and little risks. Many of his investors were the members of his church.

According to the regulator’s allegations a Folsom, Sacramento-based Equity Investment Management and Trading raised over $40 million from about 150 investors. Still there is no distinct information on where the investors’ money went as reported by Michael Dicke, the associate director of the SEC’s San Francisco regional office. Meantime, the SEC had located one bank account containing $1.2 million that was under the control of the Folsom company’s president, AV.

“We do believe that they lost some of the money through securities trading,” Dicke said in an interview. “We believe they (also) put it into other schemes — a strip mall and a Utah mining company — and various other scams where they lost investors’ money.”

Dicke says that by the moment the agency haven’t obtained any evidence proving that AV and the firm’s vice president, KK, had inappropriately spent investors’ money on themselves. In case this is confirmed “we will be looking to get all the money back,” he said.

No criminal charges were filed against the two. The SEC complaints asks to freeze the assets and to order AV and KK to account for all investor money, “disgorge their ill-gotten gains” with interest, pay civil penalties and be barred from future violations of federal securities law.[4]

    4. Minister – Architech of Two Ponzis

Here is a distressing one where the perp was a pastor:

Minister Who Bilked Church Members In Twin Ponzi Schemes Pleads Guilty; Congregants Lost More Than $1 Million

By admin on April 8th, 2009

A Pennsylvania minister who ran two Ponzi schemes and bilked New Jersey churchgoers out of more than $1 million has pleaded guilty to mail fraud and wire fraud.

TM of Phoenixville faces up to 40 years in prison and fines in excess of $250,000. Sentencing is set July 14, before U.S. District Judge Joseph H. Rodriguez.

Prosecutors said TM, 47, fleeced members of the Church of Grace and Peace in Toms River, N.J., by getting them to invest in fraudulent real-estate schemes. One of the scams involved foreclosure bailouts. The scams were uncovered by an attorney who belonged to the church and notified authorities.

TM had been a guest minister at the church and soon pitched an opportunity offered by his Pennsylvania company, known as 4 Life LLC.

“Soon after he first spoke to congregants, TM began soliciting money from church members and holding meetings at the church and elsewhere,” prosecutors said.

TM positioned himself as “a legitimate investment advisor” and required each potential investor to pay between approximately $1,000 and $1,500 as an “entry fee” to the [My Home Banc] program,” prosecutors said.

Congregants were told that My Home Bank, or MHB, “would help investors eliminate debt and build wealth through investments in income-generating real estate,” prosecutors said. TM also suggested investing in distressed real estate.

“After paying the fee, potential investors met with TM regarding the investment program, at which time TM  told the potential investors that he would identify and provide them with information about available income-generating properties which would generate positive cash flow for the potential investor,” prosecutors said.

In some instances, TM advised church members who did not have cash at their disposal to refinance their homes, prosecutors said.

Mixing investors’ money with his personal money also was part of the scheme, prosecutors said.

“TM admitted that he did not maintain the funds in escrow accounts as he told investors would be the case,” prosecutors said. “[He] also admitted that aside from helping two investors identify and arrange for the purchase of an investment property in Charlotte, N.C., he never purchased or arranged for the purchase of investment properties for investors from the church as part of the mail fraud. TM  used the investors’ funds to repay earlier investors and to pay his personal expenses.[5]

Legitimate Businesses Can Turn Into Ponzis

Ponzi victims must understand that the Ponzi swindler may have started with a legitimate business. It is not always a made-up business. The presence of some real business should not fool you. The swindler may have learned to take money in, make promises, and how much easier than hard work it would be if he could just convince his ‘investors’ to roll the money over and he pay back a little of what they put in, in which case he could float the same idea to a lot of other dupes. This way he could keep going for a long enough time to live a good life while ripping off countless people.

Remedies Available

The sad thing is that often the money you put in is being doled back to you in small portions as you let ‘it roll.’ Yet, because you thought this was interest, you paid tax on it. When you come to the realization of the fraud, you may be able to refile all your tax returns and show the money declared as income was merely your principal returned to you in the guise of interest. Thus, you might get a refund. Check with a tax adviser. (See some of the issues below.) There is also a special category of investment loss this falls into, and allows you to write it off on taxes in one year and carry over the unused loss the next year without limitation rather than deduct normal investment losses to a maximum of $3,000 each year. Again, check with a tax advisor for the precise details. (For more information, see Tax Issues below.)

In a civil or bankruptcy context, a trustee or liquidator may pursue clawback remedies which benefits those who lost money. Clawback requires those who received more than they put in to now give up their excess. This is to even the loss among all participants. A good recent article on this can be found at Asset Search Blog

Tax Issues

The IRS gives you SOME guidance on a page with a FEW answers. See this link.

The position that taxpayers cannot amend open years to exclude phantom income is at odds with the Tax Court’s position in Greenberg, T.C. Memo. 1996-281 and Taylor v. US, 81 AFTR 2d 98-1683. The position also is at odds with Underhill, 45 T.C. 489 (1966), Philipps v. Frank, 295 F2d 629 (9th CA, 1961), CCA 200305028 (IRS Field Service Advice) and NSAR 020419, Vaughn # 20419. The IRS position presumably is based on the theory that the open transaction doctrine should be sparingly applied. This position was sanctioned by the courts in Parrish, 168 F. 3d 1098 (10 CA 1999) aff’g T.C. Memo 1997-474 and Premji, TC Memo 1996-304 and espoused by the IRS in CCA 200451030 and FSA 19990942.

The IRS is trying to dissuade Madoff Ponzi victims from seeking their full right to a refund on phantom income. Rick Taylor, CPA, explains in 2009:

The IRS has issued Rev. Rul. 2009-9 discussing the tax treatment of the Madoff losses and Rev. Proc. 2009-20 providing a “safe harbor” for claiming such losses.  In general, taxpayer incurring losses related to their investment with Madoff will be allowed to claim a business theft loss in 2008. As a result, no percentage limitations apply and the loss can be carried back up to 5 years if it gives rise to an NOL ( and if the gross receipts test of the new 5-year carryback rules are met). What is disquieting about the IRS “guidance” is that taxpayers are essentially being pressured into accepting less than what they otherwise are entitled to claim under the law.  In addition, the IRS requires these taxpayers agree not to amend their returns to exclude phantom income on which taxes were paid in prior open years. In exchange, taxpayer will be allowed to claim a larger loss.[6]

The application for a refund essentially is in 3 years from filing. (26 USC 6511.) This is a statute of limitation, and you must adhere to it. Instead of using losses as a carryover backwards, or in addition, you may still be able to deduct the tax payments on phantom income as part of your economic loss, according to CPA chatter on the Internet.

In agreement is an attorney named Lehman (whom I am not endorsing in any way for hire). Here is an excerpt of a news article from January 13, 2009 where he outlines the issues:

BOCA RATON, Fla.--(Business Wire)--
Tax refunds could help victims of the alleged Bernard Madoff Ponzi scheme
recover 35- to 50-percent of their losses, an issue largely overlooked by many
claimants, according to attorney Richard Lehman, a U.S. tax law expert.

"The IRS acknowledges Ponzi schemes as `theft losses,` and there are several
methods of tax recovery available," said Lehman, a prominent tax attorney in
Boca Raton, Florida and former senior attorney for the IRS. "However, each of
these potential options of recovery has its limitations, restrictions and strict
requirements that must be met in order to take advantage of the maximum tax
benefits from the alleged Bernard Madoff theft."

According to Lehman, victims of any Ponzi scheme, including the alleged Bernard
Madoff fraud, may have the following three tax refund options:

* "Theft Loss" - In a Ponzi scheme, theft loss is an extremely valuable tax
deduction that could have a cash value equal to 35- to 50-percent of the lost
investment, depending on city, state and federal income taxes.
* "Capital Return" - In certain cases, funds that were paid from a Ponzi scheme
and reported as `income` in a previous year may instead be considered a return
of the defrauded investor`s capital.
* "Phantom Income" - Income taxes paid by Ponzi investors on what turns out to
be fake profits, or "phantom" income, may be recovered as theft losses or under
certain circumstances by re-characterizing the income as non-existent.

Lehman also cautions victims of the alleged Bernard Madoff Ponzi scheme against
two common mistakes that will limit the potential tax recovery: failure to
deduct tax losses in the proper year and entering into premature settlements
that convert theft losses into capital losses of lesser total value.

****

For more information, visit www.bernardmadofftaxloss.com or
www.lehmantaxlaw.com.[7]

Net Carry Loss

Another approach that does not depend upon phantom income but ends up in the IRS giving you money 
is you file for a Net Operating Loss Carryback
claim form based on an investment loss due to Fraud.

I have been told by a CPA you can recover up to 95% this way of the amount of your investment loss.
You can even carry it forward if there is any unused investment loss left.

A CPA advised me that this is explained in the IRS Revenue Ruling 20092-20.

The result can be a tax refund of all taxes paid three filing years earlier.
It does not require proof of a ponzi; only proof of an investment capital
loss. The NET RESULT is you recover monies back because you suffered
a total investment loss due to fraud.

Example of Legitimate Business Turned Into A Ponzi

States: California’s Attorney General filed an indictment in 2009 based upon a Ponzi scheme. This scheme structure reveals how a somewhat legitimate business can be converted into a Ponzi. Here is a synopsis of this scheme from an article you can read in its entirety at this link:

[The perpetrators] created a network of more than 55 business ventures over a period of 10 years to enrich themselves and keep their Ponzi scheme afloat.

Brown’s investigation revealed that in 1997, the three men began peddling construction and real estate projects across California. This included: “Quail Hollow,” a residential subdivision in Susanville; Lake College, a for-profit vocational school in Redding; Mountain House Golf Course near Tracy; a light industrial distribution center in Brentwood; and dozens of other so-called “investment opportunities.”

Victims were promised that these were safe, secure, low risk investments with double-digit returns, averaging 12 percent.

In recruiting their victims, Armitage organized “investment planning seminars,” many of which targeted retirees, in the Bay Area and throughout California. Based on advice from these seminars, Californians invested sums ranging from $50,000 to more than $1 million. Some turned over their entire retirement portfolios and savings accounts.

Many of the construction and real estate projects, however, were poorly managed and were not financially viable, resulting in huge losses. Some projects were left unfinished or ended up in foreclosure.

Rather than inform investors about the failures, the complaint says Koenig, Armitage and Guidi sought to attract new investors, whose funds could be used to offset losses and pay returns to earlier investors. In doing so, the defendants withheld vital information that impacted investment decisions, including past business failures and Koenig’s 1986 federal fraud conviction.

With double-digit returns and no knowledge of the investment failures, most investors kept their money in place and many invested in new projects. This Ponzi scheme continued for more than 10 years.

Under this scheme, the defendants’ company would purchase an assisted living facility and sell it to one of their affiliate companies. The affiliate would then sell ownership shares in the property as an “investment opportunity” at an even higher price to new investors. Meanwhile, an additional affiliated company would manage the property to maximize revenue.

Revenues, however, were not reinvested into the facilities, but were pooled and used to pay interest to investors and keep investors at bay.

In April 2007, the Ponzi scheme began to collapse under a mountain of debt, and the defendants were unable to pay interest to investors. Nevertheless, they continued to solicit new investors in the vain hope that they could keep the operation alive, raising $23 million from 91 new investors.

The defendant’s businesses finally went closed their doors in June 2008.

Read more: http://www.consumeraffairs.com/news04/2009/05/ca_ponzi02.html#ixzz0TJtrrOQd

Example of Church Recruiter

 

 At Amazon you can buy a book that tells of a complaint that alleges:

Allegedly, beginning in 2004 and continuing through at least August 2007, [Mr. X] solicited hundreds of investors, most of them fellow members of her church, to invest money with her and her company, [KS], LLC. According to the Complaint, Mr. X told these investors that she was partnering with a successful businesswoman who would be responsible for investing their money in real estate in the United States and abroad. Mr. X promised investors that the investments were safe and secure and guaranteed 100 percent annual returns. The case alleges that there were no bona fide investments made and monies were spent for personal use. The Complaint is merely an accusation, and Mr. X is presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.[8]

Example: Too Good To Be True Smell Test

Here is an example where the percent promised — 50 percent — is just too good to be true. Then people took on trust what normally they would require independent verification of legal documents. It helped that the perp was an attorney. SB is his initials. My point is not to expose his name, but show how to detect a Ponzi:

[SB] was accused of operating the scheme between 2002 and 2006. Authorities say he promised clients profits in excess of 50 percent, but upon taking their money, he would simply deposit the funds into his firm’s escrow account. Prosecutors believe he would show investors forged legal documents and deeds to make them think transactions had occurred. Perhaps most shocking of all is the fact that many of the victims were friends and colleagues of Ballard.

In one case, [SB] sold a condo in Panama City, Florida to a retired firefighter. However, the condo was actually an empty lot that had been sold to numerous parties. The firefighter used his life savings to make the investment.

[SB] is scheduled to be sentenced in late September and faces a possible 20 years in prison. He must also pay the money back he stole. He has thus far returned about half the money, and is currently working at a convenient store and organizing golf tournaments to pay back the rest.

[SB] started practicing law in 1981 and was even an adjunct professor at Clayton State University. He was disbarred in 2006.[9]

Even an Arbitration Panel Got Duped

Any time you feel like you were a fool when you are victimized by a Ponzi, how about the arbitration panel from NASD (regulators over brokers, now called FINRA) that in 2003 heard the whistle blower on a major ponzi explain why it was a Ponzi, but the NASD panel disregarded her pleas, and ordered her to pay back a loan from her company. Here is an account:

 Ms Basagoitia told an arbitration panel at the National Association of Securities Dealers in October 2003 that she suspected Stanford Group Company, one of Sir Allen’s key businesses, was “engaged in a Ponzi scheme to defraud its clients”, according to case documents. In 2007, the NASD became the Financial Industry Regulatory Authority.
    In a nine-point critique, Ms Basagoitia pointed to many concerns cited again in 2009 by the SEC in its charges against Sir Allen’s businesses, including allegations about the lack of a credible auditor, mis-selling of products and the promise of consistently high returns that did not “correspond to the reality of the markets”.
    Ms. Basagoitia’s allegations were denied by Stanford Group Company and dismissed by the dispute resolution panel. She was ordered to pay Stanford $107,782 in damages, in repayment of a loan advanced to her while an employee of the company.[10]

Submitting Online Claim with US Postal

If the mails were used to commit a fraud, the US Postal Service may prosecute a Ponzi perp. The FBI may do so at the same time or not at all. Here is the place to report a Ponzi to US Postal https://postalinspectors.uspis.gov/

Further Resources

In November 2011, Bart Chilton, commissioner of the Commodity Futures Trading Commission, explained it has opened many more Ponzi investigations than usual.  According to a “The Street” article, Chilton gave a seminar and it reported:

Chilton told his audience that “many of the fraudsters are preying upon people through the use of ‘affinity fraud,’ where they use personal contacts to swindle family, friends, coworkers or even fellow church parishioners.”

Chilton and the CFTC have collected various tales of fraud in a book published by the government–profits from which will go neither to him nor to the CFTC. The book’s title is “Ponzimonium–How Scam Artists are Ripping Off America.”

“It is Ponzimonium out there. Individuals need to be more vigilant than ever about their investments,” Chilton said.

References

  • http://money.howstuffworks.com/con-artist.htm
  • http://www.cbsnews.com/video/watch/?id=4932819n
  • http://www.churchsolutionsmag.com/hotnews/church-ponzi-scheme-results-in-sec-lawsuit.html
  • http://www.ecommerce-journal.com/news/13890_a_california_ponzi_scheme_that_defrauded_church_parishioners_is_sued_by_the_sec?drgn=1
  • http://patrickpretty.com/2009/04/08/minister-who-bilked-church-members-in-twin-ponzi-schemes-pleads-guilty-congregants-lost-more-than-1-million/
  • http://www.wipfli.com/BlogPost_Tax_3_17_09.aspx
  • http://www.reuters.com/article/pressRelease/idUS55813+13-Jan-2009+BW20090113
  • http://www.amazon.com/Marcia-Sladich-Arrest-Million-Scheme/dp/1440420629
  • http://www.georgia-criminal-lawyers.com/2009/07/mcdonough_georgia_lawyer_plead_1.html
  • http://gweston.wordpress.com/2009/02/27/ponzi-scheme-whistleblower-ordered-by-corrupt-arbitration-panel-to-pay-a-criminal-organization-107782/