November 15, 2011
It is an honor and pleasure to be here with you this afternoon. Thanks particularly to Professor Ron Filler for his extraordinary efforts in setting this up.
There is a fairly recent movie out called “Contagion.” Steven Soderbergh directed the film which has a large ensemble cast including Matt Damon, Jude Law, Gwyneth Paltrow and Kate Winslet, among others. I haven’t seen the movie, but it follows the progress of a virus that results in a pandemic. The movie sounds similar to a book I read over a dozen years ago—pre-9/11—called “The Cobra Event.” It’s a thriller and this single man, a terrorist, creates an incurable virus called “Cobra” that is a combination of smallpox and the common cold. The story starts right here in New York and a pandemic ensues.
The thing is—the theoretical possibility of such pandemics as Contagion and Cobra Event seem all too close to home.
When I worked at the United States Department of Agriculture around the same time I read Cobra Event, I became familiar with biosafety levels—or BSL—and the facilities that exist to contain these deadly things and to do research to find a vaccine or antidote. At the time, there were four BSL tiers, ranging from a biosafety level 1 which were facilities where the staff would isolate whatever it was they were trying to contain and they’d use some minimal protective garments. The BSL tiers became progressively more secure through BSL 4. A BSL 4 was reserved for dealing with pathogens and lethal agents—like smallpox, cholera, measles, etc…—exceptionally dangerous and infectious materials that if released could become pandemics. A BSL 4 is a super secure facility for dealing with these things. Staff wears what are essentially space suits with hoods. The buildings have self-contained oxygen and the air is all internally filtered. The entrance and exits have multiple showers, a vacuum room, ultraviolet rooms and a bunch of other safety precautions. Let’s just say it is pretty secure because it handles the most dangerous stuff on earth—things that could become pandemic. And guess what? There is a facility a mile and a half off of Long’s Island’s Orient Point. It is called Plum Island and it is 840 acres. It is, or at least it was, the only BSL 4 facility authorized to handle diseases that are communicable between humans and animals for which there is no known cure.
The Pandemic of Ponzimonium
To me, all of this stuff seemed, and still seems, pretty scary. However, as an individual, there isn’t much we can do about it. Knowing Plum Island exists and knowing there is this dangerous stuff there doesn’t enable any of us as individuals to be better protected. At the same time, there is another pandemic taking place, in this country and around the world that deals with something for which we can address. We can develop our own biosafety measures for financial scams, and in particular Ponzi schemes. And let me be clear, there is a pandemic of Ponzimonium going on out there.
You might initially think, health pandemics versus a pandemic of Ponzi and financial scams, the health stuff is more serious. Well, look at it this way, financial crimes are ruining peoples' lives. We are talking scams that over the years have impacted tens of thousands of people by ripping them off for hundreds of millions of dollars.
Every day, people are scammed by con artists. It’s occurring more than ever according to government data—data that I’ll talk about for the first time here, today.
There are slick fraudsters, masters of illusion and deception, and outright criminals at work every day, all day, 24/7/365, trying to get our green.
A Fortunate Fellow
For example, according to emails I receive recently, you’d think I’m one very fortunate fellow. You see, I’m told a large inheritance from a distant relative, I didn't even know I had, is coming my way. Also, my email address won a lottery worth several million (although I've not entered any contest). It is a good thing I’ll be getting all that cash because a woman wrote about her botched surgery in Peru. She is in tremendous pain and needs cash to have another surgery and get healthy. She says she will be forever indebted to me once I help out, so it sounds like a good trade.
I thought these and other emails seemed suspicious, but as it turns out, I'm also a beneficiary of a scam fraud fund for folks who have been robbed by schemers of one sort or another. They just need a bunch of personal information and my bank account numbers and I’ll get the money due to me. So, I've got that going for me.
The thing is: none of these ever work out, yet people fall for the cons all the time. While these examples may not be classic Ponzi scams, they are nevertheless financial scams that take place all the time.
For the Ponzi scam itself, we have to go back to the namesake: Charles Ponzi. He was born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi. He died in 1949. In addition to his extensive name, he had, as many con artists do, several aliases: Charles Ponei, Charles P. Bianchi, Carl and Carlos. You can see why it has been shortened simply, to: Ponzi.
The name Ponzi, however, now refers to swindles which pay early investors from investments made by subsequent investors/victims. Ponzi himself worked (and that is a kind term) in the U.S. and Canada.
While he had several scams, here is the one he is best known for: He promised his clients returns of 50 percent within 45 days, or within 90 days a 100% profit by “investing” in what were called postal reply coupons. Here was the scam. The purpose of a postal reply coupon was to allow someone in one nation to send something to someone in another nation and the foreign recipient could reply using that coupon. Even if the postage in the other nation was more than the value in the original nation, the postage would be furnished to the recipient. The coupons could also be used to actually purchase stamps to cover the cost of the return postage from the other nation to the original nation. So the scam was this: the coupons were turned in for actual stamps that were in excess of the face value of the coupons at the original nation. Then, those stamps would be redeemed in the original nation—at a profit. In Ponzi’s case, he would buy in the U.S. and acquire more valuable stamps in Italy. He used his relatives back in the old country. Then, when he received the stamps back in U.S. of A., he’d redeem them for cash.
The scam was essentially a version of foreign currency arbitrage. That in itself, while sleazy, was not illegal. I’ll call it “sleazgle” for short. The problem is that when Ponzi tried to redeem the stamps, he had a lot of difficulty in redeeming them for cash. The government figured out what he was trying to do. They didn’t call it sleazgle, but they made it nearly impossible to succeed in his efforts. But the idea, the concept of that plan, was what Ponzi “sold” to his clients. So, he took their money and ran the actual scam by simply paying older investors with newer investors’ money. That, wasn’t sleazgle, it was purely illegal. It was also categorically sleazy. Since some folks were receiving cash, his scam continued for a long time.
Scams like these can go on for years because some of the folks are seeing purported returns. Most of these rip-offs are brought down by two things: The first downfall is education. When people are educated, they become curious consumers. Second: redemptions are bad things for Ponzi scams. When the economic collapse began in 2008, for example, we saw more and more of these houses of cards scams start to falter because folks needed their money back. When folks saw Madoff, boy did they want to check on their investments.
Ponzi’s investors/victims lost roughly $20 million—hundreds of millions in 2011 dollars. While he conducted that largest scam back then, he didn’t hold a candle to a more recent Ponzi swindle.
Enter Bernie Madoff. In 2008, we learned that for years he had essentially made off with an estimated $50 billion—in what has been termed the mother of all Ponzi schemes. This even included significant sums from this very institution—New York Law School. Others that were scammed included actors Kevin Bacon and Kyra Sedgwick, Larry King, the master of illusion himself—Steven Spielberg, and hundreds of others. In addition, there were multiple international banks that were caught in the Madoff mesh of lies. You would certainly think that international banks would do proper due diligence. The point here is this: scam artists, like Madoff, can be very convincing in their ruse.
I spent a little bit of time talking with Marc Litt, the exceptional lead prosecutor in the United States v. Bernard L. Madoff. Counselor Litt did a fantastic job on that case for the government. Instead of a Manhattan penthouse, Madoff is spending the next 150 years in a cell in the big house—prison—that is. Marc has said the only way we can deal with these Ponzi scams is through educating investors about how to spot the signs of a fraud scheme before they put even one hard-earned dollar at risk. He is absolutely correct.
Full Tilt Poker
Another interesting and recent Ponzi scam is the one being prosecuted by the U.S. Department of Justice (DOJ). The Full Tilt Poker Ponzi scam, that is. DOJ alleges a massive Ponzi scheme fraud amounting to more than $440 million.
Full Tilt has constantly assured players that their accounts were safe and secure and wouldn't be touched. However, DOJ says that as of March of this year, Full Tilt had only $60 million left in its bank books to cover the $390 million payable to players. DOJ says that Full Tilt regularly co-mingled player funds with company finances and took monies from some customers to pay out winnings due to other players. This is certainly a variation on the classic Ponzi, since it isn’t necessarily the new clients whose money is being used to make phantom payments to older clients, but it is still a Ponzi scam in that it uses customer funds to falsely pay others. Oh, and they allegedly blew the money on themselves and there isn’t enough left to cover the dough that is supposed to be in accounts. There is that.
But, it’s not just the Madoffs and the Full Tilts that folks need to worry about. There are plenty of smaller Ponzi rip-offs going on all across the country and in fact, throughout the world.
Scam artists are ripping off Americans more than ever before. I mentioned new government statistics earlier. Here they are: at our Agency, we have been keeping track of these Ponzi cases since 1998 when we had 13. The lowest point was in 2001 when we had seven. In 2009, just after Madoff, we had a new record of 26 cases. It went down in 2010 to 22. This year (fiscal year ending September 30th) we had 32 cases—a new historic high. And that’s just our little Agency. In fiscal years 2010 and 2009, the Securities and Exchange Commission (SEC) filed more than twice as many Ponzi cases as it filed in fiscal 2008 and recently put up a web page just on Ponzi’s. The Federal Bureau of Investigation (FBI) has opened more than 1,000 new investigations on Ponzi schemes. That is roughly a 150 percent increase since 2008. Tim Gallagher, the new Section Chief for the Financial Crimes Division at the FBI is doing superlative work in trying to bring attention to these frauds and alerting consumers.
We thought all the frauds and Ponzi scams were horrific in the wake of the Madoff scandal, but it is even worse now. It is Ponzimonium out there. Individuals need to be more vigilant than ever about their investments.
Ponzimonium—How Scam Artists are Ripping Off America
In that vein, I’ve tried to bring attention to these scams. This week, a new book is being released. This is a government publication and neither I, nor my Agency, make anything from it. The book, Ponzimonium—How Scam Artists are Ripping Off America, tells the tales of ten such Ponzi scams that took place in 2009, in the wake of Madoff. These are real cases, real fraudsters, with unfortunately, very real victims. I also capture, in words and pictures, a behind-the-scenes look at the lifestyles of the schemers. It is amazing what these jerks did with other peoples’ money.
One con artist purchased a fleet of luxury vehicles in colors like lime green and “blue & cream,” including multiple Ferraris, Lamborghinis, Porsches, a Bentley, a Maserati, a Lincoln Limousine, and a metallic burnt orange Hummer golf cart. That guy took hard-working peoples’ money and used it for a mansion, nearly 20 plasma televisions, sports and rock and roll memorabilia, and a contingent of body guards. These crooks have no shame. Another fraudster bought a 269-acre ranch, a fleet of classic sports cars, two airplanes and massive diamonds for ladies he was wooing right here in New York, Toronto and St. Louis.
What We Know
Here is what we know; many of the fraudsters are preying upon people through the use of “affinity fraud,” where they use personal contacts to swindle family, friends, coworkers or even fellow church parishioners. For example, and this is a recent case, not in the book, From May 1, 2010 to May 3, 2011, when the CFTC filed its complaint, Jeffery L. Groendyke, allegedly fraudulently solicited and accepted at least $953,000 from at least 54 individuals. He allegedly misappropriated at least $600,000 of that by transferring the funds to earlier victims, falsely characterizing such payments as “returns.” Our CFTC complaint alleges that he solicited and accepted funds primarily from individuals he knows through his church—his church! We are still in litigation on this case in Michigan, so I can’t say much more, but man-oh-man-oh-man, his church. So, that’s affinity fraud.
I write about another affinity fraud Ponzi in the book. This one fellow, Marvin Cooper, is deaf. So, you guessed it, his victims were deaf people.
Here is another one that’s more recent and not in the book. In late October, we obtained a federal court order against Queen Shoals and the owners, the Hansons. The Hansons, Sidney and Charlotte, are husband and wife. The amount allegedly solicited was $24 million, and the amount allegedly misappropriated was $22 million. This is a particular concern because of the fact that they targeted older citizens, and convinced them to invest retirement funds held in self-directed IRAs. We say the Hansons defrauded customers and misappropriated millions of dollars in this foreign currency (forex) Ponzi scheme. Of the funds solicited, only a small amount were used to trade forex, and nearly all of the money deposited into the Hanson’s various bank accounts, and later used to pay “quarterly interest payments” to existing customers, came from deposits of IRA rollovers from new customers. We also contend that the Hansons used the stolen funds for luxury resort vacations, private plane rentals, daily living expenses, and to purchase multiple parcels of real property. What a disgrace.
These mini-Madoff cons took place, and are taking place still, all across the nation. The consequences for the investors-turned-victims can be pretty horrific—people losing money for their kids’ college funds, for needed health care expenses, or for their own retirement. Some lose their entire life savings, and others invest for family members, acting as a custodian, thinking they are doing them a favor. It is a tremendous shame because in almost every instance, it was preventable with a little education and some due diligence fact checking.
Education and Red Flags of Fraud
That’s why in Ponzimonium, I’ve included a chapter containing the “Red Flags of Fraud” to help people avoid being scammed. The Red Flags are tips like checking to make sure a company is legitimately registered and other due diligence “to do” items before an investment is made.
Here are a just few of those Red Flags:
1. If it sounds too good to be true, it is.
2. The investment promises little or no risk of loss or promises you won't lose money.
3. Profits or rates of return on an investment are guaranteed regardless of the direction of markets.
4. The investment is difficult to understand or incomprehensible, and
5. There is a need for secrecy. Not being able to get written information about a potential investment should raise suspicions.
The bottom line is this: be super suspicious and exceptionally careful. It is your hard-earned money.
The book also contains an “Investor Checklist” designed to help people ask the right questions prior to investing. Some of the Red Flags and the Investors’ checklist will be available at CFTC.gov.
There is also a great government website for financial education called mymoney.gov. Folks should check it out. In a line: stop the Ponzimonium.
Let me say a final thing about law students and about lawyers. I’m not going to ask for a show of hands, but for those of you who are going to law school primarily interested in money, you are going into a very lucrative profession. However, I hope there is more to it than bread. I rely on lawyers every day. And in saying that, I don’t mean just lawyers I work with at the Agency. I depend upon lawyers who work with others to let me know about what their businesses might do. The system couldn’t function without lawyers. That said there is an old saying in Washington. It is really said about lobbyists, but it goes for lawyers, too. If you aren’t part of the solution, there is plenty of money to be made being part of the problem. That is, unfortunately, very true. I see that all the time.
When folks initially go to law school they may have great ideas about what it is and what the profession of law is all about. They may a have a view about justice in society. As you go forward, you come to understand that there are flaws in the system. There are some defects. I’ll just say, that doesn’t mean the system isn’t great. It is. Don’t lose that idealism. And, by the way, government is a super place to work as a lawyer. But, believe me, if you end up in the world of billable hours where you must account for every 15 minutes of your time, it will be tough to keep an eye on what is right. What if you encounter something that is sleazgle? If you remember nothing else from my talk, in the next day nor two, think about what your core value is now. Months or years later, when in doubt about what you are doing, go back to that core value. Remember it. Treasure it. Revere it. That core value will guide you well. As lawyers, in particular, you are going to need it.
Princess in Distress
Thanks for having me. Again, thanks especially to Professor Filler. I also want to thank Clay Pederson who came from Colorado to work in Washington with me. Also, thanks to my attorney and Chief of Staff, Elizabeth Ritter. Counselor Ritter is also Professor Ritter and teaches about derivatives in Washington. She jumps around from the American University, to George Washington to Georgetown. I’m lucky to work with both Clay and Elizabeth. I also want to thank my wife Sherry who is with us today. She gets big props for putting up with me and for helping to edit the book.
It has been a pleasure to be with you. I've got to run here. Another email just arrived. It appears a rich princess is in distress and needs my assistance. She seems nice and calls me “Dear Beloved.”
Thank you for your attention and your interest in helping to make our society a better place in which to live.
Last Updated: November 15, 2011