A Ponzi By Any Other Name

Ever since the name Bernard Madoff became a household one last December, there has been a veritable parade of Ponzi fraudsters doing virtual perp walks, if not real ones. New frauds are popping up at such a rapid pace it's hard to keep up in the business pages.


But are there really more Ponzi schemes now than there were last year, or the year before? As it turns out, no.

Since Madoff's arrest on December 11, there have been five cases of Ponzi schemes brought by the Securities and Exchange Commission. The agency doesn't formally track such types of fraud, but an unscientific plumbing of its general search engine turned up some 70 cases since 2006. An SEC spokesman confirmed that's the best figure it has.

The real truth, though, is semantically tricky. The word "Ponzi" is sometimes synonymous with "pyramid," or it can turn out to be a vanilla case of fraud. We can thank Charles Ponzi, a charlatan who tricked thousands into investing in a postage-stamp speculation scheme back in the 1920s, for the coining of the phrase. In modern times, the general idea is that a Ponzi scheme "robs Peter to pay Paul," as money from new investors is used to bankroll earlier investors until the whole scheme folds.

And now the heightened sensitivity to financial fraud in general has created the unsettling feeling that mini-Madoffs are lurking everywhere, when in fact, the opposite is true. When the SEC busts a Ponzi scheme now, it makes headlines. Before Madoff, it went largely ignored.


"Enforcement authorities focus on proof and punishment, and the name of a fraud scheme is not important—what's important is how to prove the alleged offense and what the punishment might be," said Robert Bittman, a defense attorney at White and Case who represents institutions and individuals alleged to have participated in various frauds, including Ponzi schemes.

The five specific post-Madoff Ponzi cases brought by the SEC include a $23 million Ponzi scheme and affinity fraud targeting Haitian-American investors on December 30. Then, on January 8, the government charged investment fund manager Joseph S. Forte of masterminding a $50 million Ponzi scheme since 1995. On January 15, the SEC charged CRE Capital and James Ossie with running a $25 million Ponzi scheme. On February 19, the SEC accused Hawaii-based Billion Coupons with siphoning $4.4 million from deaf investors in a Ponzi scheme.

And just last week, the SEC went after Los Angeles-based Diversified Lending Group (DLG), Applied Equities Inc. (AEI), and their principal, Bruce Friedman, alleging that they ran an ongoing $216 million real estate investment fraud.

Outside of Madoff, of course, the case of Sir Allen Stanford has captured the most attention. But his alleged fraud—at least what we know of it so far—doesn't fit under the Ponzi umbrella. Stanford allegedly masterminded an $8 billion fraud selling various high-yield certificates of deposit and falsifying investment returns. As of yet, he doesn't face criminal charges like Madoff does, and the SEC brought civil charges against him for investment fraud.

"The media has focused on Madoff and Stanford for two principal reasons: the media—and the average citizen—want a villain, and they often prefer that villain to be a person rather than an institution," Bittman said.

But there is reason to believe the market would breed more fraudsters today than in the recent past. It becomes increasingly difficult for fraudsters to hide under the guise of their fake returns when the market craters, as it has recently. Moreover, the tangled investment landscape and weak regulatory oversight exacerbates the government's inability to pinpoint specific Ponzi schemes. In 2002, there were 7,547 registered investment advisers. But as of January 27, there were 11,300, a 50 percent increase.

"I don't think so-called Ponzi schemes are numerous and widespread, but when there are serious lapses in regulation and oversight over a long duration of time, then de facto the magnitude of the existing ones increase," said Bill Cline, founder of the Cline Consulting Group and former global capital markets managing partner at Accenture.

There's no doubt that the Madoff scandal was extraordinary in its far-reaching devastation. Many otherwise sophisticated and intelligent investors were duped into the fraudulent scheme.

With the markets in disarray, it's understandable from a psychological perspective that people want to place the blame somewhere and have a heightened sensitivity to anything even tangentially related to pyramid plans, Ponzi schemes, and outright fraud.

"Saying that someone participated in a Ponzi scheme may mean something to a TV audience, but it does not necessarily help with proving a violation," Bittman said. "Although, I suppose, I could see that it might make it easier for a jury to understand."