PONZI SCHEMES: INFAMOUS PERPETRATORS - Part 8

AVOID IT

No one is completely immune to Ponzi pitfalls, but there are several suggestions you can follow in order to avoid them. If something sounds too good to be true then it probably is. Listen to your instincts and decline to invest in anything that offers an unusually high return. Maintain a healthy level of skepticism by doing your homework before entrusting anyone with your money. Finally, diversifying your investments will help keep you protected from Ponzi traps.

PONZI SCHEMES: INFAMOUS PERPETRATORS - Part 7

ROTHSTEIN’S RECENT WRONGS

Scott Rothstein is a recent case of Ponzi scheme perpetration. Rothstein is accused of covertly running a scam out of his law office where he embezzled from investor trust accounts. As a lawyer at Rothstein Rosenfeldt Adler, he forged documents and funded his philanthropy, political contributions and law firm salaries through a $1.2 billion Ponzi scheme. Rothstein’s scam involved him fabricating pre-settlement structures, which were sold in legal cases for large sums of money. Investors offered Rothstein up-front cash payments that would go towards paying individuals owed money from court cases so they may buy the right to collect the full amount of the settlements later. Under this scenario, investors in Rothstein’s scheme would be guaranteed to receive a minimum of 20% investment returns in as short as three months. When the jig was up, Rothstein fled to Casablanca, Morocco, hoping to avoid extradition. Rothstein had a change of heart and returned to Ft. Lauderdale, FL, in a private chartered jet.

PONZI SCHEMES: INFAMOUS PERPETRATORS - Part 6

BERNIE’S BAD BUSINESS

Many news organizations covered and continue to cover the schemes of Bernard “Bernie” Madoff, as they are still unfolding. We are currently aware that throughout decades Madoff built the biggest Ponzi scheme in history. He offered investors the chance to steadily earn a higher-than-average return on the securities he traded, year after year. He would forge documents indicating a securities purchase made months earlier than they were actually bought. Truthfully, the investments made by Madoff were legally and mathematically impossible. Madoff’s scam ran during an economic boom, which was people’s normal sense of skepticism is set aside. Investors were simply blinded by “easy money.” He cheated banks, various nonprofit organizations, funds, celebrities and numerous other individuals out of approximately $65 billion.

PONZI SCHEMES: INFAMOUS PERPETRATORS - Part 5

RETIREE RIPOFF

Michael Eugene Kelly owned a resort in Mexico and scammed $428 million from senior citizens and retirees. Kelly offered his prey the opportunity to make timeshare investments in Cancun hotels, which he referred to as “universal leases.” With the timeshare, investors received rental agreements that promised them a nice fixed rate of return. Many of the people that invested into Kelly’s scam thought the venture appeared to be solid with a low-risk return so they invested their retirement savings. According to the SEC, “more than $136 million of the funds invested (came) from IRA accounts.” While investors were losing their money, Kelly was buying a private jet, four yachts and a racetrack.

PONZI SCHEMES: INFAMOUS PERPETRATORS - Part 4

PONZI PRODUCER

Lou Pearlman was a name you’d hear quite often during the 1990’s. Not only is he Art Gunfunkel’s cousin, but he is also the former manger of boy band acts ‘N Sync, Backstreet Boys and O-Town. What many didn’t know was that he was also involved in a Ponzi scheme. His Federal Deposit Insurance Corporation (“FDIC”)-insured Trans Continental Savings Program would offer investors a very attractive return to gain their confidence. Much to the investors’ dismay, the scheme Pearlman was perpetrating was neither FDIC approved nor was it part of a savings and loan. This didn’t stop Pearlman from continuing to bilk his investors out of close to $500 million. Pearlman’s plan was to use the funds for three shows for MTV and to build an entertainment complex.

PONZI SCHEMES: INFAMOUS PERPETRATORS - Part 3

HAITIAN HOTBED

The residents of Haiti became victims of Ponzi schemers in 2001 when outfits referred to as “cooperatives” were offering rates up to 15%. The cooperatives gave the impression that they were government backed. They were quick to become rampant amongst inhabitants. Individuals also felt comfortable since the coops were actively promoted through radio and TV advertisements. Even Haitian pop stars were spokespeople! Unfortunately, it is estimated that residents lost more than $240 million in these scams, which is comparable to 50% of Haiti’s Gross Domestic Product.

PONZI SCHEMES: INFAMOUS PERPETRATORS - Part 2

SCIENTOLOGY SNEAK

Reed Slatkin was a co-founder of the internet service provider Earthlink and a Scientology minister. He established himself as a savvy investment advisor for many A-list celebrities and wealthy heads of corporations. Unbeknownst to these individuals was that Slatkin was working out of his garage on a scheme that defrauded these individuals out of roughly $593 million. In order to work his scam, he produced fake statements that referred back to various nonexistent brokerage firms. The Church of Scientology received millions of Slatkin’s winnings; however, in 2000, the SEC caught on to him and discovered that he wasn’t even licensed.

PONZI SCHEMES: INFAMOUS PERPETRATORS - Part 1

A Ponzi scheme, by definition, is a method created to defraud an individual out of their money. Throughout history, many people have been found guilty of perpetrating this heinous act. This article will explore some of the most infamous individuals accused of carrying out Ponzi schemes.

COSTA RICAN RICHES

In the late 1980’s, three Costa Rican brothers swindled American and Canadian retirees out of approximately $400 million dollars through an unregulated loan scheme that lasted around 20 years. Osvaldo, Enrique and Freddy Villalobos promised an interest rate of 3% per month to their clients on a $10,000 minimum investment. The brothers would then move the money through various shell companies before they would return funds to their investors. The scam lasted as long as it did due to the fact that margins were low. Also, the brothers were so disciplined that they narrowly escaped laws.

PONZI SCHEMES: HOW TO DETECT AND AVOID THEM - Part 5

BEING ACCOUNTABLE

A red flag should go up with there has been unauthorized trades, missing funds or other issues on your account statements. True, this could be the result of a genuine error; however, it could also indicate the occurrence of fraud. Be sure to keep a close eye on your account statements in order to make sure it is consistent and is in alignment with your instructions.

Also, be sure to know exactly who is in charge of your assets. Note if the investment advisor is working as the custodian as well, which would make it easier for fraudulent actions to be commissioned. Confirm that your investment is being held with a reputable financial institution and that your money is, in fact, being held by them. Furthermore, verify that all of your accounts with the firm list your name and a specific account number.

Give a long look to the account statements being provided to you by the salesperson. It is to your benefit to be supplied with statements from the brokerage firm, third-party custodian or mutual fund company as well. The statements you receive from your promoter will offer some clarification on your investments, but should never be relied upon as the sole source for performance and trading information.

CONCLUSION

The tips in this article will greatly improve your chances of detecting and avoiding Ponzi scheme pitfalls. Truly take the time to research the investment transaction opportunity being offered and the individuals promoting them. Make sure that your funds are in good hands and be wary of anything that sounds too good. Protect yourself and your pocket from poisonous Ponzi promoters.

Gary Opper, CPA is the Managing Member of Levie-Opper, LLC, Weston, Florida. He is a member of the American Institute of CPAs and the Florida Institute of CPAs. He has written over 500 published articles in over 20 magazines. Mr. Opper has been the National Association of Mortgage Broker’s “Writer of the Year” and “Featured Writer of the Year.” He has spoken to many groups including the Florida Bar Association, the Florida Institute of CPAs, the Mortgage Bankers Association and Northern Trust Bank. He has lectured at four colleges including University of Florida and Florida International University. Opper has an Accounting degree from UF and a Master of Science in Taxation from FIU. Opper is Past President of the Florida Association of Mortgage Professionals - Miami Chapter and the FICPA - Gold Coast Chapter. Levie-Opper, LLC focuses on forensic accounting and fraud auditing. They handle state and federal cases including civil, commercial and criminal. Mr. Opper is available to speak to your group. He may be reached at (954) 384-4557, fax: (954) 384-5483, or e mail: Gary@Levie-Opper.com.

© Gary Opper. All Rights Reserved.

PONZI SCHEMES: HOW TO DETECT AND AVOID THEM - Part 4

PARTICIPATION

If you have already given a salesperson your money for an investment, do not provide additional funds or reinvest without seeing an initial return on your investments. Promoters easily keep their scams continuously going by convincing their investors to simply roll-over their preliminary profits with the promise of an even greater return. While it does make sense to follow through with the investment for a certain period of time, be suspicious of salespeople that are reluctant to let you cash out after the first sign of success.

A product that offers an overly consistent return is a cause for concern. Also, an investment with a rising return or that gives remarkably steady returns, regardless of the current market conditions, should be a cause for concern. Especially during these economic times, it is common for even the most solid investments to experience fluctuation from time to time. Be aware even if you receive funds back, they may be from other investors.

PONZI SCHEMES: HOW TO DETECT AND AVOID THEM - Part 3

WHO CAN YOU TRUST

A pushy salesman could indicate a less than reputable individual. No trusted salesperson should ever try and push you to make a quick decision about making an investment. The words “act now” are a clear indicator of something with which you should not be involved. If the investment is truly without fraud, there would be no reason to pressure you into getting involved.

The company that manages your investment should not be custodian of your investments. With this arrangement, you will receive periodic statements from a source independent from the manager/promoter.

PONZI SCHEMES: HOW TO DETECT AND AVOID THEM - Part 2

RESEARCH RIGHT

Do your homework! Spend some time investigating the background of the promoter. Ask the promoter which regulator has issued their license and if it has ever been suspended or revoked. Follow up on their response by speaking with your state, county or city securities office to locate the licensing/registration documents. The number for your state securities regulator can be found in the government section of your local phone book or by speaking with the North American Securities Administrators Association at (202) 737-0900.

It is important to know that anyone selling a security must have a license. A legitimate salesperson will be registered with the Financial Industry Regulatory Authority (“FINRA”), The Securities and Exchange Commission (“SEC”) or a state securities regulator. If the person claims to be exempt, you may follow up with your regulator’s office, but more than likely it is best to thank them for their time and walk away. The Financial Industry Regulatory Authority even offers a Scam Rating and Risk Rating Questionnaire at http://www.finra.org to assist in fraud evaluation. To verify a broker’s license and registration, including whether or not they have ever had a complaint filed against them, contact BrokerCheck at (800) 289-9999. Investment advisors can be verified by the SEC’s Investment Advisor Public Disclosure website at http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_OrgSearch.aspx. Additionally, to check on an insurance agent, you can speak with your state’s insurance department, which can be located through the National Association of Insurance Commissioners (“NAIC”) at http://www.NAIC.org. Individuals that are sellers should be investigated through your state securities regulator.

Request an onsite visit to the advisor to see the company’s operations and meet with their employees. A Ponzi scheme promoter will not want his fraudulent behavior exposed so they will most likely have very few to no employees. Be wary of someone that opens their own mail and answers their own calls, as it lessens their likelihood of being caught in a scam. Also, note that when the perpetrator is close to being exposed, it will be more difficult to get in touch with them.

PONZI SCHEMES: HOW TO DETECT AND AVOID THEM - Part 1

Knowing how to detect and avoid Ponzi Schemes will help you to avoid fraudsters’ clutches. With more and more scams occurring in our society, it is wise to be aware of how to avoid their traps. By following the tips in this article, you will have a greater chance at sidestepping the Ponzi pitfalls.

THE BIG BAD WOLF

Be wary of any financial transaction that sounds too good to be true. Donald Trump has said, “Some of my best investments were ones I didn’t make.” The easiest way to spot a Ponzi scheme is if you are being offered lofty promises that come with guaranteed profits. With any legitimate business investment there is a degree of risk that makes it impossible to be assured of a profit, let alone one that comes with such a high rate of return as Ponzi Schemes do.

The promoter should be able to provide you with clear and easily explainable details. Anyone that claims there is no simple explanation for their investment is to be avoided. Many individuals that commonly fall into these scams do not have a basic understanding of the subject transaction.

Ask the promoter for a detailed clarification of the investment in writing. As an investor, of course you have the right to receive information on the venture since you will be placing a substantial amount of money in it. Inquire about receiving information on the company, the officers and their financial records. For the product being offered, ask the salesperson for documents regarding cost, fair market value and the existing and potential markets.

Often times a Ponzi promoter will solely rely on their ability to speak quickly and offer documents that appear to be official. Anyone that is reluctant to provide you with the requested data should indicate to you to be very cautious.

THE MORTGAGE FRAUD TRIANGLE: Pressure, Opportunity and Rationalization - Part 5

RATIONALIZATION

Of course, in the broker’s mind, he is not seeing himself as a criminal. He feels like he was simply allowing a borrower to realize the American dream of homeownership. Yes, the broker financially benefited from the transaction; however, he feels he is entitled to the compensation for his technical skill in closing the loan.

After fraud has been committed on a frequent basis, it becomes easier. The individual is no longer bothered by their ethics or morals. It just becomes a continuous activity and feels normal. In fact, it may become enjoyable for them to find new ways to close loans and defraud their employers. They may even rationalize things by believing that if they weren’t the ones to do it then it would simply have been done by another broker. It then becomes an expectation to them.

CONCLUSION

Mortgage fraud can be viewed in a triangular pattern. Through pressure, the broker feels like there is the opportunity to commit fraud because it is a necessary action. Due to the frequency of the commission of fraud, a greater number of avenues must be explored to put an end to this terrible plague.




Gary Opper, CPA is the Managing Member of Levie-Opper, LLC, Weston, Florida. He is a member of the American Institute of CPAs and the Florida Institute of CPAs. He has written over 500 published articles in over 20 magazines. Mr. Opper has been the National Association of Mortgage Broker’s “Writer of the Year” and “Featured Writer of the Year.” He has spoken to many groups including the Florida Bar Association, the Florida Institute of CPAs, the Mortgage Bankers Association and Northern Trust Bank. He has lectured at four colleges including University of Florida and Florida International University. Opper has an Accounting degree from UF and a Master of Science in Taxation from FIU. Opper is Past President of the Florida Association of Mortgage Professionals - Miami Chapter and the FICPA - Gold Coast Chapter. Levie-Opper, LLC focuses on forensic accounting and fraud auditing. They handle state and federal cases including civil, commercial and criminal. Mr. Opper is available to speak to your group. He may be reached at (954) 384-4557, fax: (954) 384-5483, or e mail: Gary@Levie-Opper.com.

© Gary Opper. All Rights Reserved.

THE MORTGAGE FRAUD TRIANGLE: Pressure, Opportunity and Rationalization - Part 4

OPPORTUNITY

The opportunity to commit and conceal fraud exists when employees are given access to assets and information. These individuals are given access to firm records and valuables that are ordinary aspects of their jobs. Unfortunately, it is this access that permits them the ability to commit fraud. To these “unprofessionals,” committing fraud is available and easy.

These individuals feel that they are unlikely to be caught. Therefore, they think of all the opportunities that will arise for them to handle money at their business. Many lenders easily provide the many ramps needed for brokers and others to commit fraud due to little monitoring and sloppy business practices. These individuals are also provided the knowledge needed to commit fraud through seminars and various educational programs. This readily gives them technical skills that can be utilized to commit fraud.

THE MORTGAGE FRAUD TRIANGLE: Pressure, Opportunity and Rationalization - Part 3

PRESSURE

There are many pressures in today’s society thanks to the recession that is currently taking place in our economy. Many people are suffering financially with such issues as debts or high medical bills. There is also a perceived financial need when you are surrounded by numerous individuals rich in material goods. In the mortgage industry, there is pressure put on brokers from the system. Managers will place tremendous pressure for production on their brokers to close. Therefore, there is additional pressure to compete, keep up with fellow brokers and earn. Unfortunately, these were great enough incentives for fraud to establish itself and grow.

Brokers have that pressure to close put on them by their supervisors, but they also feel it coming from their borrowers. They are looking to quickly close a file to benefit their borrowers. So, some individuals cave and commit fraud in order to get their clients into a home as fast as possible. Other brokers might also commit fraud in order to get their clients a lower rate in a refinance.

THE MORTGAGE FRAUD TRIANGLE: Pressure, Opportunity and Rationalization - Part 2

CRESSEY’S THEORY

In 1953, Donald R. Cressey theorized that there were two components needed to commit a crime: general information and technical skill. According to Cressey, general information is the knowledge that fraud could be committed. In a mortgage fraud circumstance, the information could be derived from hearing that other mortgage brokers (either in the same mortgage entity or another mortgage entity) are committing fraud. It could also come from observing fraudulent behavior or even supervisors, managers and employers. Even the newspapers provide information on fraudulent behavior by mortgage brokers.

With technical skill, it is the abilities needed in order to commit fraud. Dishonest mortgage brokers have many cohorts. These individuals can include colleagues, mangers and lender’s account representatives. They are then abusing the trust that is placed in them.

In Cressey’s theory, the three components of fraud then form a triangle made up of opportunity, means and motive. Here, the points of the fraud triangle consist of a perceived financial need (pressure), perceived opportunity and rationalization. It was his belief that these three issues are present to some extent in all white collar criminal cases.

THE MORTGAGE FRAUD TRIANGLE: Pressure, Opportunity and Rationalization - Part 1

Fraud has become a rampant occurrence in the mortgage industry. It has become such a common practice that many people are getting away with it. There are numerous reasons why an individual would commit this illegal act. By utilizing the mortgage fraud triangle, we can explore the pressure, opportunity and rationalization.

COMITTING FRAUD

Unfortunately, many mortgage companies create a corporate culture that allows for corruption to occur. Techniques to commit fraud were taught to their new employees as part of instructing them in mortgage processing. Lenders have also created programs on how to detect fraud, which were then used by dishonest brokers as ways to actually conduct it. Through the combination of financial pressures, employer pressures and a lack of ethics there was too great a temptation created and brokers have begun to take the risk and commit fraud.

PONZI SCHEMES: AN OVERVIEW - Part 2

THE ELEMENTS

There are five key elements to a Ponzi scheme: 1) benefits, 2) the understanding, 3) initial trustworthiness, 4) investors receive initial return and 5) communication of success. At the beginning, a promise will be made to the investors that their participation will receive a greater rate of return. The scammer will often indicate the rate of return, which will be a significant enough amount to make it worth an investment. It can’t be too high though or the investor will get suspicious.

The set up for the scam will need to possess a plausible explanation to investors as to how their investing will achieve the promised greater rate. A typical Ponzi schemer will utilize an explanation that claims they have a special skill or additional inside information that will be to the investors’ benefit. Another possible explanation offered by a Ponzi perpetrator is that they possess a business opportunity that is not available to the public. That way, the investor feels they are getting preferential treatment.

The fraudster must be believable to the investor in order to establish a connection with them that encourages participation in their scam. The investment must also payoff to the investors at the promised rate of return, if not better.

Finally, the scammer will inform the investors of their potential payoffs. They will try and convince them of the budding opportunity for exponential growth. In order to convince the investors, at the very least, they will need to hear that more money will be coming in than is being paid back to them.

HOW IT WORKS

Once the arm has been twisted and an investment made, the Ponzi schemer sets to work on creating the façade. When the specified return time period is reached, they will receive their funds plus the expressed interest rate or return. Next, the scammer will point out to the investors various historical successes of the scheme so they will convince them to place further money into the system. It is common that the initial investors will return to the scam since they have already received such great benefits.

With all their ducks in a row, the fraudster continues to promote his scheme a number of times. They will; however, break the pattern during the second step of the cycle. Rather than repaying the investment money and their promised rate of return, the Ponzi schemer will run off with the money and begin a brand new life.

PONZI SCHEMES: AN OVERVIEW - Part 1

The words “Ponzi scheme” can be found quite easily throughout the world of media these days. What exactly is a Ponzi scheme though? It’s something to be forewarned about so that you don’t fall into its deadly trap.


DEFINITION

First things first, according to the American Bar Association, a Ponzi scheme is:

“…a type of securities fraud where the promoter makes some sort of false or misleading statement about an investment (often including a guaranteed high rate of return) and pays off older investors with newer investor’s monies. Eventually, when the promoter can’t find any new investors, the scheme collapses.”

The difference between a Ponzi scheme and a pyramid scheme is that a Ponzi scheme the promoter handles the new recruits and the new money. Within a pyramid scheme, people within the scam recruit new participants. In both of these traps, the early investors receive an income from the subsequent individuals taking part in the scam; however, only in a Ponzi scheme does the organizer handle all of the recruitment.

COINING THE TERM

Charles Ponzi came to the United States at the turn of the century from Italy. He was an Italian swindler that went by many different aliases to con his prey and had been jailed many times. In 1918, he began offering his investors a choice between receiving a fifty percent return on a simple forty-five day investment and receiving one hundred percent return on a ninety day investment. Ponzi promoted that this was a possibility due to a special circumstance with the international postal reply coupon system. Back then, due to an international agreement, postal reply coupons were accepted by all countries despite the fact there were varying cost from country to country (depending on their economy).

As legal as Ponzi’s idea was (the cost for an IPRC in the US could have been a dime while a nickel in Germany), he full well knew that his idea would not be a success. It was impossible due to importation restrictions. The idea was too tempting though and Ponzi pushed it well.

Unfortunately for Ponzi, suspicions grew when investors would not receive the interest on their investments. The scheme had no underlying business so it couldn’t possibly generate any revenue! In 1920, Ponzi’s brilliant idea came crashing around when investors began requesting their money be returned during a growing governmental inquest into his company.