Investment fraud committed through Ponzi schemes causes untold financial loss and heartbreaking consequences for those who lose their life savings. Many people assume that they could detect such fraud and would never become the victim of such a scheme. But Ponzi perpetrators are expert manipulators. Many victims feel shame and embarrassment about their loss; consequently the crime goes unreported, and victims may not pursue compensation claims. Perpetrators use the invested funds as their own, financing and growing the scheme by paying returns to existing investors with money raised from new ones. The schemes can sometimes run undetected for decades.
Below is some background on Ponzi schemes, suggestions on how to detect and avoid such schemes, and options if you are a victim.
Charles Ponzi operated a ploy in the 1920s based on purported arbitrage in postage stamps. He was not the first to perpetrate such a scheme. But his scheme became famous in the early heyday of American finance, and the name stuck.
Ponzi promised a 50% return in 45 days or 100% in 90 days. He conducted little or no such trading and instead used the money to finance a luxurious lifestyle. He even bought a bank. He raised new money to repay investors their principal plus astronomical returns. When a Boston writer wrote that there was no way Ponzi could legally deliver such returns, Ponzi sued for libel and won, which highlighted how successful his con had become.
But, as with all such schemes, eventually the flow of new funds did not keep pace with withdrawals, and the scheme collapsed.
The biggest known Ponzi was operated for decades in New York by Bernard Madoff, a former non-executive chairman of the Nasdaq stock market. Beginning no later than the early 1990s, it took in $36 billion. When it collapsed in 2010, it resulted in investor losses of $18 billion.
B.C.’s largest known Ponzi scheme was operated by “roving” notary Rashida Samji. In 2014, the BC Securities Commission (BCSC) found her guilty of operating a scheme that took in more than $100 million in investor funds. In an era of low interest rates, she offered annual returns of around 12%, according to the BCSC decision. She promised the investments would be safe and investors’ money kept in her notary trust account. But she did not invest any of the funds as promised, or at all, and the BCSC discovered she had no notary trust account.
In January, the BCSC fined Samji $33 million and banned her permanently from B.C.’s capital markets.
Criminal prosecution is likely; bankruptcy proceedings and multiple lawsuits relating to the scheme are ongoing. The financial and emotional consequences to individuals, communities and our resources are enormous.
Here are some tips for avoiding Ponzi schemes.
•There is no substitute for financial education and thorough due diligence before investing. Check on the licensure and discipline history of investment professionals advising you. Even if you hire a professional adviser, make sure you understand the investments and why you are investing in them.
•Beware of investments purporting to offer high returns for zero to little risk. If it sounds too good to be true, it probably is. Ponzi perpetrators use the facade of being in an exclusive group with access to the investment or having access to exclusive information to explain the high return/no risk combination.
•The mere fact that friends and family are investing in and may have made money from the investment is not a reason for you to invest in it. Many perpetrators of Ponzi schemes focus on ethnic or religious communities, in part because investors will rely on the participation of others in the group as a form of assurance.
•Perpetrators of Ponzi schemes often rely on lingo their intended victims do not understand. Businesses that can’t clearly explain how they make money or expect to and those with undue secrecy around their operations should set off alarm bells.
•Elderly people are often targeted by fraudsters, and their circumstances are often tragic because they are least able to recover from the financial loss.
When they collapse, Ponzi schemes leave in their wake a morass of legal and financial issues. They often result in criminal and administrative prosecution, bankruptcies and civil litigation involving investors, financial and legal advisers and promoters. Due to the range of legal issues and the fact that moving early may have advantages, Ponzi victims should contact a lawyer as soon as possible. Some losses may be recovered, but the costs of recovery in the form of professional fees and delay can be high.
Early legal advice can be helpful.•
Hakemi & Ridgedale LLP (www.hakemiridgedale.com) is a Vancouver law firm that advises clients in commercial disputes and regulatory proceedings. Tom Hakemi advises individuals, companies and professional organizations in a broad range of commercial civil litigation and regulatory proceedings.
