Pyramid swindlers unmasked:Ponzi scams are being laid bare by the slump

/Home/Charles Ponzi and Modern Day Ponzi Schemes/Ponzi Schemes Reported in 2009

Pyramid swindlers unmasked
Ponzi scams are being laid bare by the slump
Dominic Rushe in New York
On its website, Agape World claims: “We provide the bridge to your future.” The New York lender specialising in short-term loans also claims to have been in business since 1999. The date must be wrong. At the end of the millennium founder Nicholas Cosmo of Long Island, New York, was serving 21 months in jail for mis-appropriating funds. Sadly it wasn’t the only number Cosmo had wrong.

Last week the 37-year-old was arrested, accused of swindling investors out of $370m (£254m). Among his alleged victims were a group of disabled policemen and firemen, all lured in by the promise of sky-high returns. Many lost their life savings as Cosmo blew their cash on limousines, a baseball league and paying off fines from his earlier fraud.

As Cosmo was led off to court last week he was dubbed “the mini-Madoff”. Like Bernie Madoff, the money manager accused of a $50 billion scam, Cosmo ran a “Ponzi” scheme, paying investors with the money from new victims, the authorities allege. More than 1,500 individuals trusted their money to Agape World (agape means Christian love), and they are not alone. At least six suspected multi-million-dollar fraud cases are being probed.

The Securities and Exchange Commission, the US financial regulator, has launched four Ponzi investigations so far this year. It started 23 Ponzi cases last year, up from 15 in 2007, and experts believe there are many more to come. A decade of lax regulation, booming markets and changes in investment attitudes created the perfect environment for financial scams. “It’s like a petri dish for the bacteria of fraud,” said Robert FitzPatrick, president of consumer watchdog Pyramid Scheme Alert.

Collapsing markets have investors clamouring for their money across the US, and as they call in their accounts more Ponzi schemes are being exposed. Last Tuesday the authorities arrested Arthur Nadel, a Florida hedge-fund adviser who had gone missing amid accusations that he defrauded clients of millions of dollars. Earlier last month Marcus Schrenker, an Indiana financial adviser, was arrested in Florida after allegedly trying to fake his death in a plane crash to avoid an investigation of his businesses. Schrenker parachuted from his plane, which crashed just 200 yards from a residential neighbourhood.

When investigators found the wreckage they also found a national campground directory with the pages torn out. Schrenker was arrested three days later at a Florida camp-site where US marshals found him semiconscious inside a tent muttering the word “die” as he bled from a self-inflicted gash to his left wrist.

Schrenker was not the first financier to fake his death in the latest meltdown. Last year hedge-fund manager Samuel Israel III’s 4X4 was found abandoned on a bridge in New York. The words “Suicide is Painless” were scrawled on the bonnet. After the authorities launched an international manhunt, Israel turned himself in. He was convicted for his involvement in a $450m fraud and sentenced to 20 years.

It’s not just the US where Ponzi schemes are proliferating. In Canada 1,000 farmers recently lost money in a bird-brained scheme that promised record returns for breeding racing pigeons. Arlan Galbraith, owner of Pigeon King International, sold racing pigeons to farmers for $500 and promised to buy back offspring for $50 each. Investors were told Galbraith would sell the pigeons to rich Arabs. When the baby-pigeon market failed to hatch, many farmers lost their life savings.

And there were riots across Colombia last year after the collapse of a series of firms that had conned people with promised returns of 150%. One firm alone managed to take in more than £110m in its last four months. Many investors had turned to the scam firms because they did not trust the established banks. The criminals left taunting notes. “Dear investors, thanks for trusting us and depositing your money,” said one.

“Now, for being stupid and believing in financial witchcraft, you will have to work for your money.”

The US, though, is the centre of the Ponzi renaissance. “These schemes by definition survive by bringing in new money. Now everybody is pulling money out while no new money is coming in they are all collapsing at once,” said Robert Mintz, a former federal prosecutor and now a partner at McCarter & English in New York. Mintz said in the instance of Madoff there were signs that might have alerted the authorities, but most of these schemes were difficult to detect until they fall apart.

FitzPatrick said the schemes were hard to detect because they so closely resemble legitimate ventures. “The Ponzi scheme is like the evil twin of normal business. It can operate fluidly in a regular environment,” he said. And in a market where big promises were being made for returns on investments, it offers the promise that those returns can continue, said FitzPatrick.

One factor behind the rise of the Ponzi has been the rise of hedge funds, said FitzPatrick. Lightly regulated, opaque and invested in complex derivatives few of their investors understand, hedge funds sound like scams themselves, he said. Investors who have heard of the success of hedge funds are more likely to feel comfortable with a scheme that once might have given them second thoughts. “The disguises have become better and better,” said FitzPatrick.

He added that what was happening on Wall Street had been raging on Main Street for some time. He believes pyramid schemes (the poor man’s Ponzi) have doubled over the past 10 years as people look for extra income to meet rising healthcare, education, food and housing costs. In the search for extra cash, practices that were once seen as illegal have been legitimised, he said.

The same trend had also been seen in the housing market where fraudulent appraisals were combined with fraudulent loans and sold en masse to Wall Street. “It goes all the way up the line,” he said. Even with the crackdown, FitzPatrick believes scams will proliferate. “Unless there is very rigorous regulation, a lot of public education, people going to jail, I can’t see it changing.”

The Ponzi scheme is essentially a confidence trick, so what better victims could there be than investors who have lost their confidence in the established finance firms and are desperately in need of cash? When all else fails, fraud will be there to meet their demands.