Wherefore thou art ponzi schemes

A 2015 Review

In this article, Delena D Spann, thought leader and subject matter evangelist on the topics of fraud, white-collar crime and financial crime, reviews Ponzi schemes and their outcomes.

The economy has been in a see-saw recession, data breaches have been lurking in every major corporation, the news coverage of ISIS and ISIL have been daunting, the terrorist attack in Paris; and, of course, the fraudsters have continued to thrive in times of financial chaos. Thankfully, we are also seeing the increase of corporate financial felons paying their debts to society for the nefarious decisions that they’ve made.

We definitely had a great ending to 2015:  corruption and Ponzi schemes. How is it that we, the richest country in the world, have allowed ourselves to be tangled in a web that obviously is the antithesis of how we see ourselves morally? The American hegemony has long been the pioneer spirit, strong in body and mind, hard-working, honest, compassionate and generous. However, when I look around at some of our corporate, political and religious leaders I wonder that the saying is true: “power corrupts”. The average American hasn’t exactly been behaving either. There’s a fair amount of greed out there, and few of us can say we haven’t participated in it to one degree or another.

So now, how do we get back to our American ideals? How do we get back on track? Why is there an epidemic of Ponzi schemes? The late millionaire, Charles Ponzi, a Boston scammer is the father of Ponzi Schemes. A Ponzi scheme often occurs when the schemer promises returns that are above the legal rate. The “red flag” is that the returns are simply too good to be true.

Ponzi schemes

Ponzi schemes have two classifications which are primarily used in their promotions:

• Pure Cash-Endless Chain Schemes
• Product Fronts-Financial Instruments, Speculations and Multi-Level Marketing

The duration of a Ponzi scheme depends on a few factors:

• The first, is the promised return rate. The higher the return rate the shorter duration of the Ponzi scheme.
• Secondly, the redemption rate.
  Most Ponzi schemes begin as legitimate investments; however, in the end they all go belly-up. The return rate never comes to fruition.

Let’s look at a few of the historical and recent Ponzi schemes and their outcomes:

• The Baptist Foundation of Arizona had executives, former President, William P Crotts and former Chief Counsel, Thomas D Grabinski who were accused of conducting a fraudulent real estate Ponzi scheme while claiming to do God’s work. The Foundation collapsed in 1999 amid allegations of affecting well over 11,000 victims and losing $585 million dollars. Crotts and Grabinski were both sentenced in 2007. Let’s fast forward.
• In 2008, Norman Hsu, Democratic Fundraiser was charged in a $60 million dollar Ponzi scheme, the same year that Bernie Madoff was arrested and charged with orchestrating a $65 billion dollar scam, one of the largest Ponzi schemes in modern day history. The Ponzi schemes are a continuous saga when Scott Rothstein in 2009, a Florida attorney was charged with operating a $1.4 billion dollar Ponzi scheme, and Tom Petters made history in 2010 with his $3.65 billion dollar Ponzi scheme which has been noted as second in size to Bernie Madoff. The Ponzi scheme makes headlines once again in 2011 when a spell-binding documentary was released entitled “UNRAVEL” featuring Marc Dreier, an attorney, philanthropist and “Ponzi Schemer”. In a fascinating study of greed and motivation, Mark Dreier shares his account of a Ponzi scheme in comparison to Bernie Madoff.
• In 2008, Forbes listed Robert Allan Stanford as the 205th richest American. Stanford, thwarted by his $7 billion dollar Ponzi fraud scheme, was found guilty in 2012 with the conspiracy to commit wire fraud and obstruction.
• In 2012, the Securities and Exchange Commission (SEC) announced a $600 million dollar Ponzi scheme fraud orchestrated by Paul Burks, Proprietor of Rex Ventures. Burks beguiled the investors by promising them 50% of sustainable profits. The investors were to receive payouts via a profit sharing system that would eventually allow them to salvage points for cash.
• In 2013, Edwin Fujinaga, a Las Vegas financial advisor was charged with master minding an alleged $1.5 billion dollar Ponzi scheme.
• At the helm of 2014 is Neal V Goyal, a prominent Chicago investment advisor, Founder and Principal of Blue Horizon Asset Management and Caldera Advisors who finagled $11.3 million dollars from investors. During the course of the investigation it was discovered that Goyal had used the funds for his own personal gain.
  
  

Summary

It is a national disgrace to see investors and stockholders taken advantage of. Where did this unbridled greed come from? Our moral compasses have gone off course for sure. An article in the Sun Times on January 24, 2009, written by Rev. Robert Barron, summed the pervasiveness of this shameful state of affairs by comparing our current leaders (corporate and religious) to those of ancient times. 1 Samuel 30 is referenced in Rev. Barron’s article.

We don’t have a monarchy, but within these last few decades we have surely made CASH our king. Haven’t we experienced enough grief in pursuing monetary gain at all costs? Have we learned anything yet? As I am writing this, another Ponzi scheme has been unearthed: Martin Shkreli, hedge fund manager and former CEO of Turing Pharmaceutical has stepped down amid a seven count indictment where he is charged with conspiracy to commit securities fraud and wire fraud.

As we continue to see the increases of fraud and corruption I challenge each of us to conduct our due diligence in helping to secure our nation.

Case References:
Neal V Goyal, http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541933406
Paul Burks, http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171483920

Delena D Spann, thought leader and subject matter evangelist on the topics of fraud, white-collar crime and financial crime is employed by the United States Secret Service where she is assigned to the Electronic & Financial Crimes Task Force.

Spann is the author of Fraud Analytics: Strategies and Methods for Detection and Prevention, Wiley Publishers, October 2013.