Managers Funds Fees Silent Partners2

Ponzi Schemes Continue to Proliferate

Managers Funds Fees Silent Partners2

I recently discovered a fascinating Website that tracks Ponzi Schemes all over the world. It is appropriately named, and here is what it says for the first half of 2014:

"In the first six months of 2014, at least 37 Ponzi schemes were uncovered, with a total of more than $1 billion in potential losses. This equated to the discovery of a Ponzi scheme (1) more than once per week, (2) every 4.9 days, or (3) every 118 hours. This included at least three Ponzi schemes with estimated losses of at least $100,000,000 or more."

The above list does not include the $1 billion Ponzi scheme by the ironically named Secure Investment. As explained in these Bloomberg articles (here and here), Secure Investment claimed that through its currency trading skills clients would receive 1% profits per day with a guarantee against losses. Their Website was filled with video testimonials that turned out to be nothing more than actors who were given a script and a ridiculously small paycheck (one actor did it for $20 and another for $4). One of the actors rationalized his decision by claiming, "I'm an actor; actors lie for a living." Yes, and so do Ponzi scheme operators. By the way, the Securities and Exchange Commission strictly prohibits registered investment advisors from using client testimonials, in accordance with the Investment Advisers Act of 1940. Although Secure Investment claimed to have offices around the world, it was nothing more than a Website which simply vanished along with its CEO, Michael Sterling. Since the initial deposits were held offshore in places like Latvia, Lithuania, and Cyprus, the victim's hope of recovery is essentially non-existent. Despite all the red flags that screamed Ponzi scheme, many of the victims of Secure Investment were highly educated and should have known better. They included several doctors. Perhaps the most gut-wrenching account was given by a fast-food worker who lost his life savings of over $21,000.

The largest Ponzi scheme uncovered in the first half of 2014 was the $300 million TelexFree pyramid scheme that targeted Dominican and Brazilian immigrants. According to the SEC's complaint, the Massachusetts-based operators sold securities in the form of TelexFree "memberships" that promised annual returns of 200% or more for those who promoted TelexFree by recruiting new members and placing advertisements on free Internet ad sites. In classic pyramid scheme fashion, TelexFree ended up paying earlier investors not with revenue from selling its VoIP product but with money received from newer investors. As with many Ponzi Schemes, TelexFree targeted an affinity-based group because members of such groups tend to highly trust each other and do not apply the appropriate due diligence when presented with offers that sound too good to be true.

A book that I highly recommend is No One Would Listen by Harry Markopolos, the man who uncovered Madoff’s Ponzi scheme. For him, one of the red flags of Madoff was not the size of his reported returns (which were approximately stock market returns) but the fact that they had no volatility. From his knowledge and expertise as a CFA charterholder, Markopolos knew that this was simply not achievable. Unfortunately, he was unable to convince the SEC, and hence the title of his book. To summarize, anytime investors see an offer of a "guaranteed" return that is substantially higher than a bank CD or Treasury rate, they should run not walk. Educated investors will understand that stock market investments will have periods of positive and negative returns. There is no such thing as returns without risk.