Detectives and SFO reveal inquiry into big 'Ponzi' scheme and several 'mini-Madoffs'

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Detectives and SFO reveal inquiry into big 'Ponzi' scheme and several 'mini-Madoffs'

By Robert Verkaik and Mark Hughes


Thursday, 5 March 2009
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A spate of Bernard Madoff-style scams that threaten to bring misery to thousands of investors is being investigated by police and the Serious Fraud Office, The Independent has learnt. Bogus investment schemes have been uncovered by investigators focusing on crime resulting from the credit crunch.


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One senior officer has called them "mini-Madoffs", a reference to the US fund manager Bernard Madoff, who is accused of profiting from a £30bn pyramid investment fraud – or Ponzi scheme – which paid investors returns from their own money, or cash paid by subsequent investors, rather than from the scheme's profits. The Serious Fraud Office (SFO) is still investigating Mr Madoff's activities in Britain.

In an interview with The Independent, Richard Alderman, the director of the SFO, said he expected other alleged cases of "fraud on investors" to be made public soon. One allegedly involves a "big Ponzi" fraud, similar to that used by Mr Madoff, he added, without revealing further details of the case.

The SFO is also offering advice on how to avoid falling victim to a Ponzi scam. Mr Alderman said: "Clearly, in view of our interest in Bernie Madoff and Sir Allen Stanford [the Texan financier accused of fraud], people are talking to us about red flags for hedge funds, because as the stories unravel it is very interesting to understand the structure of what happened and what could have been picked up by people through due diligence."

He warned: "We are finding that people are talking to us about that and we are learning from them. We are not sharing operational detail but sometimes it is right that we feed back what we learn when we can. There is a lot more we can do on that; what kind of things due diligence could pick up."

Most Ponzi schemes – named after Charles Ponzi, who became notorious for using the technique in America in the 1920s – claim to offer 20 per cent returns and collapse quickly, but Mr Madoff's returns were 10 per cent.

Because he offered his investors a modest but steady and consistent income from their money, he was able to keep up his pretence for nearly 50 years. However, his scheme relied on a healthy stock market, so that depositors would be unlikely to collectively remove their money. When the world's financial markets tumbled and people did try to draw out their funds en masse, his scheme collapsed.

Detective Superintendent Bob Wishard, of the City of London Police fraud squad, said: "The growing number of frauds in the City and the deepening recession has prompted speculation that Britain could soon see its first £1bn fraud. I'm not aware of anything as big as £1bn, but there are undoubtedly some huge investment frauds going on – mini-Madoffs – that, in the fullness of time, will come to our attention."

Mr Alderman said the "ripple effect" of credit-crunch fraud was bringing misery to thousands. His organisation is investigating a range of financial crimes and is shortly expected to announce developments in cases involving investments, mortgages and fraudulent trading.

He added: "Some of them are ones where we have been asked to look at something that has gone on, and we are conducting a preliminary investigation. With others we are digging deeper. Some of it we have identified it ourselves. At least one [case] comes from a whistleblower. We are talking about quite large-scale fraud as a result of the credit crunch."

He promised to take tough action in cases that justified prosecution, and said: "This is the year in which I am expecting delivery. This calendar year is the year I want a lot of cases in the public domain out in court. Some corporates, some individuals, some cases involving individuals and corporates. I am expecting to send out some very strong messages as a result of what we are getting out into court."

The SFO has conducted a review of credit-crunch fraud which has identified the scale of the problem facing regulators. One particular area of concern, Mr Alderman said, was large-scale mortgage fraud involving "professional agents" such as solicitors and surveyors. It was clear, he said, that the recession had placed huge pressures on failing businesses. "It can give rise to temptation for businesses that are in great difficulties. And what we have seen before is that there are temptations to make various assumptions in their accounts," he explained.

"The obvious one is the over-recognition of revenues in the accounts: booking in year one all of the revenues that you hope to obtain from a contract over a series of years – things like that; going way beyond any prudent accounting principles.

"We see that, and we see the temptation for people to keep trading when they are effectively insolvent. The result is that they are not able to succeed in doing that in a recession, and lots of people lose out."