Economic Downturn Speeds Collapse of Ponzi Schemes
Friday, June 12, 2009
The great recession has decimated many industries; home builders, automakers and bankers are obvious casualties.
Now, add Ponzi schemers to the list.
Ravaged by the same fiscal turbulence pounding the nation's legitimate businesses, Ponzi operations have been collapsing at a record clip, exposing prolific, rampant and colossal frauds that have bilked investors of billions of dollars.
The FBI, which is handling about 20 such cases in the Washington region, has almost 500 open Ponzi investigations nationwide -- up from about 300 in 2006, bureau officials said. Law enforcement officials with other agencies have noticed similar trends, and authorities said they expect to turn up many more cases in coming months.
"We have more open Ponzi scheme cases than at any time in FBI history," said Special Agent David G. Nanz, chief of the FBI's economic crimes unit. "We anticipated a spike, but the numbers we are seeing are even greater than expected. . . . There is an old saying, though: 'When the tide goes out, you can see who isn't wearing a bathing suit.' And that definitely applies to Ponzi" operators.
Pyramid schemes like those named after Charles Ponzi, a notorious rip-off artist who stole millions in 1920, involve investors who are told that they are buying real estate, securities and other assets. But no investments are ever made, and the flow of new money is used to pay "returns" to earlier investors. Eventually, the flow of new money dries up and everything collapses.
Authorities said the schemes blossomed during good times. But their very nature -- the constant solicitation of new investors to pay off old ones -- makes them vulnerable to the harsh economic climate. Federal officials said they also have become more aggressive in trying to uncover schemes before they implode and the assets evaporate.
The cases range from the $65 billion fraud orchestrated by Bernard L. Madoff, a former chairman of the Nasdaq stock exchange, to what is now considered a relatively minor rip-off -- a $23 million fraudulent hedge fund run by a Jacksonville, Fla., man guaranteeing a 50 percent rate of return.
In the Washington region, federal prosecutors recently charged five people in a $70 million mortgage fraud Ponzi scheme that targeted many in Prince George's County. Last week, they announced that they had charged a Vienna man with stealing $17 million in a sophisticated Internet Ponzi operation that led investors to believe that he had offices in the District, New York and London. In reality, the man rented a box from Mailboxes Etc., prosecutors said, and spent investors' money on expensive cars such as a Bentley and Ferrari.
"It has been a flood," said veteran postal inspector James H. Tendick, who supervises the Justice Department fraud team. "We don't have to go out scouring for these things. They are all just coming in the door."
As recently as a few decades ago, most Ponzi schemes were relatively small, relying on word of mouth, direct mail and advertisements in magazines. They generally burned out after two or three years. But through the Internet and modern communications, Ponzi schemes have grown in size, scope and sophistication.
During the economic boom years, many schemes lured investors -- including huge hedge funds and financial firms -- into putting up billions of dollars. Smaller investors, drawing on home equity loans, also flooded Ponzis with cash.