Investment Fraud: Flavor of the Year Must be Ponzi Schemes

Seasons change, as do tastes, but investment fraud this year seems stuck in one genre. Ponzi schemes and related arrests are dominating news headlines in communities far and wide. Unscrupulous investment managers have been wrested from extravagant lifestyles, funded by investor monies, and paraded before judges from Calgary, Canada, to New York, and further south down Florida way. The current recession most likely led to their demise as the receding tides of turbulent markets revealed the rocks of their barren investment strategies.

The SEC charged six people for a $300 million Ponzi scheme

The SEC, with their investigative units operating in overdrive, charged four Canadian men and two in Florida on Wednesday with bilking investors out of over $300 million in an elaborate international Ponzi Scheme purporting to offer ownership in a very productive gold mining operation. The complaint alleges that over 3,000 investors were swindled out of their savings and retirement funds, and in some cases, even the equity in their homes. A Mr. Brost and Mr. Sorenson of Calgary were accused of conducting seminars across both Canada and the United States to solicit their victims. Returns of 36% were promised, and by investing in their client firms, shares would be further collateralized by gold.

Deposits from duped investors were actually invested in shell companies owned by the con artists and quickly transferred out to pay interest payments to early shareholders, to finance a few unprofitable operations, and ultimately to enrich the pool of perpetrators of the massive fraud. “Brost and Sorenson orchestrated a complex, far-reaching fraud disguised by a labyrinth of companies and foreign bank accounts they used to hide their misconduct from investors and law enforcement,” said Donald M. Hoerl, Director of the SEC’s Denver Regional Office.

And the “Ponzi” beat goes on

Most schemes are not nearly as large or as elaborate as this gold heist, but smaller promoters of the craft continue to prey on investor greed with expected results. The funds eventually run out.

In the small community of Callaway on the Florida panhandle, State and City law enforcement officials arrested Harrison H. Jones and charged him with investment fraud. 92 victims lost approximately $6 million that were supposed to be invested ostensibly in lucrative restaurant franchises. The investment vehicle was labeled as the “12% Savings Club”, but Mr. Jones admitted that no legitimate investments had been made since 2006. Authorities received complaints from investors in April 2010, when Jones could no longer make interest payments.

A little further north in Gatlinburg, Tennessee, a federal judge froze the assets of a local financial adviser’s firm and ordered the owner to halt his alleged fraudulent activities. Once again, the SEC had nabbed their man, accusing Aaron Vallett and his firm, A.D. Vallett & Co., of operating a $5.5 million Ponzi scheme. Mr. Vallett allegedly used investor funds to pay other investors and his personal expenses, a common theme, but as is also common at this stage of the investigation, Mr. Vallett has claimed no wrongdoing and denied any accusation of foul play. Meanwhile, investors are not being paid, and the search for their investment funds goes on.

Affinity Ponzi schemes

Ponzi schemes have become so prevalent these days that individual category names have been created based on the various styles that the swindle emulates. One of the more heinous types has been tabbed “Affinity”. Affinity fraud describes an investment scam that preys upon members of a specific group. Examples of these groups may be religious or ethnic communities, the elderly, or even professional groups. The swindlers frequently pretend to be a member of the group and persuade the leader to assist in spreading the word to his constituents.

These frauds exploit the friendship and trust inherent in groups of people with common interests. The difficulty for law enforcement is that, when the scam unravels, members and leaders of the group are too embarrassed to alert authorities of the crime. They try to work things out amongst themselves. Crooks understand the human psychology of group thinking and the tight-knit structure of these groups. The probability of prosecution is lower, thus enhancing the appeal for attracting the criminal element. Occasionally, the word gets out, and arrests are made as in the following two instances.

In Florida a man turned himself in

In Miami, a South Florida man actually turned himself in to face charges of investment fraud. His Ponzi scheme preyed upon the Hispanic community to the tune of $40 million. His investors handed over millions to Luis Felipe Perez to be invested in his various jewelry and pawnshop businesses. In this case, the perpetrator used fake diamonds to assure his potential clients that their money was safe, as the jewels were collateral behind their loans. Mr. Perez also promised that his low-risk investments would return as much as 10% per month. The scam started back in 2006, and according to SEC court documents, at least $6 million went to supporting the lavish lifestyle of the con artist, including a $3.2 million home, $1 million in jewelry, and exotic vacations.

Back in New York, another Affinity Ponzi scheme bit the dust. In this instance, the targeted investors lived in the Caribbean and the African-American communities of Brooklyn. The SEC complaint alleges that Gedrey Thompson and his firm, GTF Enterprises Inc., raised more than $800,000 from 20 customers, primarily for his own personal use, although a few actual investments were consummated that all lost money. Although the level of loss is not in the millions, the script still sounds the same. David Rosenfeld, Associate Director of the SEC’s New York Regional Office, stated, “Thompson and his cohorts exploited members of their own community by using phony trading credentials and bogus account statements to legitimize their fraud.”

The FBI estimates that annual losses from investment fraud are $400 billion. Ponzi schemes continue to account for a considerable portion of these frauds, regardless of the concerted efforts by law enforcement officials to stamp them out. As long as greed exceeds caution in our society, it appears that Ponzi schemes will persist.

If you are promised returns that sound too good to be true, beware, as the promise almost always is too good to be true!

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