It may be surprising to learn that although the multi-billion dollar value of the investment fraud perpetrated by Mr. Madoff was unique, the form of such fraud has a long history. In fact, many investment frauds today are based upon the cunning techniques established nearly one hundred years ago by Charles Ponzi, the grandfather of investment fraud.
Although Ponzi schemes have many derivations, the general principle is that investors are promised substantially higher returns than they would normally receive from other forms of investment. Most often, investors are assured that their principal is safe and secure, and that it will be transferred back to them at the end of a short investment term. Initially, investors receive healthy “returns” on their principal, together with continued assurances of safety.
The reality, however, is that any payments received are not in fact returns or dividends. Rather, these payments merely constitute a portion of the investors’ own principal, as well as the principal of subsequent investors in the same scheme. In other words, a Ponzi scheme is an insolvent enterprise from its inception, with little or no profit being generated or earned by the scheme’s operators. Consequently, the perpetuation of substantial returns within the structure of a Ponzi scheme requires an ever-increasing flow of funds, which is only obtained by inducing new investors to enter the scheme. Inevitably, the operators of the Ponzi scheme will cease making “payments” to the investors, and will quickly abscond with the majority of the remaining principal.
The crux of most investment frauds is the fraudster’s wholesale abuse of trust and reliance. Victim investors will often place their trust and reliance in the fraudster, for example, due to his convincing representations of having highly regarded professional competence, or due to his representations of having sincere cultural or faith affinities with the victims. Because the fraudster carefully cultivates the trust relationship, victims will often neglect to carry out an appropriate level of due diligence on the fraudster prior to transferring their funds into his control. Furthermore, sophisticated fraudsters often employ the assistance of third party individuals and entities in order to re-convey and “substantiate” the fraudsters’ false representations, and to launder and conceal the victims’ assets.
In one such case, an Ontario corporation sought additional funds to expand its operations, but was unable to arrange for the necessary financing through traditional lenders. During its attempts to obtain financing, the corporation was approached by an apparently polished and competent investment advisor who represented that the corporation should invest its capital into a trading program, where the capital would be used as collateral to open a line of credit. According to the investment advisor, the ultimate purpose of the line of credit was to gain access to private medium term note trading. Unfortunately for the victim corporation, this purported investment advisor was actually the agent of a primary fraudster, a financial trader who was directing the fraud, and who was residing and operating internationally.
The medium term note investment was represented as being safe and secure, as the investor’s funds were only to be used as collateral for a line of credit. The scheme was simultaneously perpetrated on multiple investors around the world. The victims had been instructed to make electronic transfers of their principal investments to an account held by the primary fraudster, through one of his alter ego companies domiciled in England.
Once the primary fraudster obtained possession of the victims’ funds, he transferred the funds to concealed accounts in the names of shell companies in England, Switzerland, the Caribbean, and the United States. Through hard-fought tracing orders, we discovered that the primary fraudster had wrongfully diverted the victims’ funds in order to purchase a palatial residence in Southern California, through the agency of yet another offshore corporation. Subsequently, we arranged for lawyers from our legal network in California to obtain a lis pendens order against the property in order to prevent its sale. The fight for the recovery of our client’s investment funds remains before both the Ontario and California courts.
This medium term note story is merely one form of “mini-Madoff” fraud. There is no limit to the variations of schemes utilized by sociopaths who abuse trust in order to deceive and misappropriate. If you suspect that you may have been defrauded by a silver tongued rogue, we welcome you to contact us to discuss an investigation, litigation and recovery plan.