The Frequency of Ponzi Schemes
Not every Ponzi scheme—a fraudulent financial operation where the operator pays returns on old investments from new investors—makes the national news. Certainly, the implosion of Bernie Madoff’s scheme in 2009 was uniquely destructive. Investors with Madoff lost approximately $17 billion (the next worst Ponzi scheme of all time also unraveled in 2009, with $7 billion in investor losses). But fraudulent operations like Madoff’s have been, and continue to be, regular destroyers of wealth.
Earlier this year, a Forbes editorialist published his findings from a study of all Ponzi schemes discovered between 2008 and 2013. In that period, over 500 Ponzi schemes were prosecuted—totaling investor losses of over $50 billion.
Ponzi Schemes More Prevalent in Rising Markets
As the Forbes article noted, Ponzi schemes tend to remain viable and hidden during good years. Investors accept the too-good-to-be-true returns and do not seek the withdrawal of their principal.
During subsequent economic downturns, however, this changes. As was the case in 2008–2009 (the years in which $40 billion out of the above mentioned $50 billion was lost), investors become uncomfortable and skeptical. They redeem their investments just as the supply of new investors dries up. And because Ponzi schemes require regular inflows of funds to cover payments, when the operator of the scheme can no longer afford to pay the returns, the scheme collapses.
A Widespread Problem
In the 2008–2013 period, every single state in the nation saw the discovery of a Ponzi scheme being operated inside its borders. As the New York Times recently reported, in 2012, Ponzi schemes were the third-most-frequently prosecuted type of state enforcement action.
Still, the problem is not evenly distributed. Unsurprisingly, being the largest state by population, California saw the largest number of schemes uncovered (more than 70). Florida, though, came in second (more than 50), suffering approximately 10% of the total investor losses. The Times cited several examples of Ponzi schemes taking place in the state, including a $400 million, Fort Lauderdale-centered scheme and a $350 million scheme operated by a hedge fund manager in Sarasota.
The Securities and Exchange Commission also has a dedicated website to reporting on and summarizing enforcement actions taken against Ponzi schemers—in which Florida markets regularly appear.
Schemers Seek Victims in Unlikely Places
The Times warned that Ponzi schemers target investors at relatively innocuous locations where visitors and guests lower their guard in favor of a trusting attitude. As the SEC reported in May, charges were recently filed against one alleged Florida Ponzi schemer that met his investors through church, where he promised high returns while using the incoming money to make mortgage payments on his own house.
“Individuals who promise Ponzi schemes can be very adept and convincing,” said a Nevada securities agency administrator. “They live in a nice house and drive nice cars and appear to be very successful. I can’t think of a case where there weren’t some trappings of success.”
If you believe that you may have been the victim of a Ponzi scheme or any other type of securities fraud, please do not hesitate to contact attorney Gregory Tendrich, P.A. to discuss your legal options today.