In fraud related news, there seems to be a sudden surge in the number of Ponzi schemes reported to law enforcement.
In fraud related news, there seems to be a sudden surge in the number of Ponzi schemes reported to law enforcement.

(From the NY Times): "Their names lack the Dickensian flair of Bernie Madoff, and the money they apparently stole from investors was a small fraction of the $50 billion that Mr. Madoff allegedly lost of his clients’ savings

But the number of other people who have been caught running Ponzi schemes in recent weeks is adding up quickly, so much so that they have earned themselves a nickname: mini-Madoffs.

Some of these schemes have been operating for years, and others are of more recent vintage. But what is causing them to surface now appears to be a combination of a deteriorating economy and heightened skepticism about outsize returns after the revelations about Mr. Madoff. That can scare off new clients and cause longtime investors to demand their money back, which brings the charade tumbling down.

“There is no way for a Ponzi to survive given the large number of redemptions and a lack of new investors,” said Stephen J. Obie, the head of enforcement at the Commodity Futures Trading Commission . The agency has experienced a doubling of reported leads to possible Ponzi schemes in the last year, and its enforcement caseload has risen this year.

On Monday, at a suburban New York train station, Nicholas Cosmo surrendered to federal authorities in connection with a suspected $380 million Ponzi scheme, in which investors paid a minimum of $20,000 for high-yield “private bridge” loans that he had arranged.

Mr. Cosmo promised returns of 48 percent to 80 percent a year, and none of his investors apparently minded — or knew — that Mr. Cosmo had already been imprisoned for securities fraud. In the end, 1,500 people gave him their money, often through brokers who worked on his behalf.

And in Florida, not far from the Palm Beach clubs where Mr. Madoff wooed some of his investors, George L. Theodule, a Haitian immigrant and professed “man of God,” promised churchgoers in a Haitian-American community that he could double their money within 90 days."

Overall I think that the number of Ponzi schemes reported to the authorities is going to continue to skyrocket as the bad economy makes it harder for some to operate, the rise in the fraudsters being caught wakes people up AND bad economic times push certain individuals towards making bad decisions that lead to criminality. If my time watching American Greed has taught me anything, is that if pushed certain previously law abiding citizens will turn to financial fraud to keep up appearances, make up for the inability to be successful in legitimate business ventures, etc, etc.

While the Madoff scandal has been purported to be a cause (as it may have caused many investors to be suspicious of high-returns), I believe that the majority of people who fall victim to these schemes probably aren't the most savvy of investors and that the real reason is that people simply need the money.

Just think about it: is a knowledgeable investor the type that is going to fall for an "investment program" that pays 80% returns via "private bridge loans", when the know the returns are outsized and if such a thing was possible every hedge fund, PE fund, investment bank, etc, etc, would be involved in the same activity?

I tend to think that it really just comes down a bad economy creating situation where you have people who need the money they would normally put into their "Ponzi Schemes", and a bad economy creating a situation where there are just far fewer people to dupe into investing into your alleged investments.

This is not to say that the Madoff scandal didn't wake some people up who may have been unwittingly part of a Ponzi scheme, just saying that the folks who are paying attention to things like the Madoff scandal aren't likely to get caught up in one.

Or at least I hope so. But then again when you look at the investors who get caught up in these things they're often quite successful people, so they're not simpletons per se, they simply don't know what they don't know about investing and money management. Perhaps having a modicum of success fools people into believing that they must be savvy with their money, due to the mere fact that they have it.

In any event the old adage is true: "If something is too good to be true it probably is" , and there should also be another rule in these instances: "If someone comes to you with some sort of super-lucrative money making secret that they claim only they and five Swiss bankers know, and/or is being kept top secret and is only available to certain individuals, RUN".

At the end of the day there aren't really any major secrets to building wealth, where people go wrong is letting greed guide their decisions, poor execution, ignoring their own common sense and/or following the herd.


The NY Times: "Troubled Time Bring Mini-Madoffs to Light" -- Leslie Wayne, January 27, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the
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