Ponzi Schemes
Background Now, Dec 19th, 2008
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Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period—and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons.

Decades later, the Ponzi scheme continues to work on the “rob-Peter-to-pay-Paul” principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.

Examples of recent Ponzi schemes:

* SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme
* Preston Pinkett, International Fiduciary Corporation CEO, Pleads Guilty In $40 Million International Ponzi Scheme
* Robert Jennings And Arthur Simburg Sentenced In $32 Million Scam
* SEC v. Biltmore Financial Group, Inc., J. V. Huffman, Jr., Defendants, and Gilda Bolick Huffman, Relief Defendant
* Everett Attorney Barry Hammer Sentenced For Fraud
* Final Judgment Entered Against Veritasiti Corporation d/b/a MediaData Corporation
* Action Against Andres L. Pimstein and His Companies for Conducting a Multi-Million Dollar Ponzi Scheme
* Curtis D. Somoza Pleads Guilty To Charges Of $64 Million Ponzi Scheme
* Andres L. Pimstein, The Bottom Line of South Florida, Inc. and Summit Trading LLC
* Stephen Lee Turpin, Of Pearland, Sentenced In “Ponzi” Schemes
* Next Components, Ltd. And Its Principal, Norman Hsu, Charged With Investment Fraud And Ponzi Scheme
* Jonathan W. Mikula, John B. Craddock, JW&P Consulting, LLC, and Nations Warranty Group, Inc. Accused Of Securities Violations
* Final Judgments Entered As To Relief Defendants Terry Martin, CD2E, Inc., M&M Technologies, Inc., Winchell Corporation, Robert Lowrey, And SZE Coast Operating Corporation
* TERRY HUGH MAHON Sentenced In Fraudulent Investment Scheme
* Jeanne M. Rowzee, James R. Halstead And Robert T. Harvey Charged In $52 Million Ponzi Scheme
* Cornerstone Capital Management, Inc. And Laura J. Kent Charged With A Series Of Ponzi Schemes
* Facts Of The Case Against Joseph Shereshevsky, Steven Byers, Wextrust And Axela
* Marcia Sladich Arrested For $10 Million Ponzi Scheme

Largest Ponzi schemes in history

SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme
Background Now, Dec 12th, 2008
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Now at Amazon.com: “Bernard L. Madoff Charged In Multi-Billion Dollar Ponzi Scheme: Complaint Filed In Federal Court And Application For Emergency Relief”

The Securities and Exchange Commission today charged Bernard L. Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm. The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.

The SEC’s complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was “finished,” that he had “absolutely nothing,” that “it’s all just one big lie,” and that it was “basically, a giant Ponzi scheme.” The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

“We are alleging a massive fraud — both in terms of scope and duration,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable.”

Andrew M. Calamari, Associate Director of Enforcement in the SEC’s New York Regional Office, added, “Our complaint alleges a stunning fraud that appears to be of epic proportions.”

According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

Madoff founded the firm in 1960 and has been a prominent member of the securities industry throughout his career. Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market’s board of governors and its executive committee and served as chairman of its trading committee.

The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. In addition to emergency and interim relief, the SEC seeks a final judgment permanently enjoining the defendants from future violations of the antifraud provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.

The SEC’s investigation is continuing.

Madoff Exposes Double Standard for Ponzi Schemes: Jonathan Weil
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Commentary by Jonathan Weil

Dec. 18 (Bloomberg) -- Bernard Madoff’s amazing Ponzi scheme has put him in a league of his own, for now. He shouldn’t be alone for long.

In the end, as with all the great frauds, Madoff’s undoing was that he ran out of cash. For years, he paid returns to early investors with money he raised from new investors, which is the hallmark of every Ponzi scheme.

When the economy got tough, and his customers sought about $7 billion in redemptions, Madoff didn’t have the funds. It was around this time that he confessed to running a giant scam, the authorities say. The losses, by Madoff’s estimate, might be $50 billion. Heaven knows how many clients of other money managers could meet the same fate as redemption orders pour in.

It’s no great feat to arrest a man who tells a federal agent “there is no innocent explanation” for his actions and that he expects to go to jail. The Securities and Exchange Commission blew many chances over the past decade to uncover his ruse, even after receiving detailed tips.

It’s unclear why the SEC failed to stop Madoff, whether because of corruption, a lack of smarts, a dearth of interest, or some combination. We can say with confidence, though, that many other huge frauds are still operating freely today -- and that the government might not be inclined to intervene, even when it knows all about them.

Business Models

After all, Madoff’s scheme -- at least in spirit, if not in its nefarious intent -- wasn’t much different than the business models at some of the nation’s largest failed financial institutions.

Back in May, four months before it collapsed, American International Group Inc. increased its dividend at the same time it unveiled plans to raise $12.5 billion in capital. Later, when its cash ran out, AIG got a government bailout, the size of which has expanded to about $150 billion.

Whether you call that a Ponzi scheme or something less sinister, AIG was paying old investors with money raised from new investors. The same could be said of many banks that blew through billions of dollars in freshly raised capital the past couple of years, continuing to pay large dividends even as their balance sheets quietly imploded.

So why have other Ponzi-esque operators emerged scot-free (so far) with taxpayer bailouts, while Madoff gets pinched?

The Cox Theory

Sure, there is Madoff’s own confession, plus the sheer brazenness of his conduct. And Madoff’s collapse doesn’t threaten to bring down the global financial system, as far as we know. Yet perhaps the best explanation can be found in a Dec. 4 speech by SEC Chairman Christopher Cox on why the government needs an exit strategy to unwind its myriad bailout commitments.

“From the standpoint of the SEC, the most obvious problem with breaking down the arm’s-length relationship between government, as the regulator, and business, as the regulated, is that it threatens to undermine our enforcement and regulatory regime,” Cox said.

“When the government becomes both referee and player, the game changes rather dramatically for every other participant. Rules that might be rigorously applied to private-sector competitors will not necessarily be applied in the same way to the sovereign who makes the rules.”

Cox failed to mention that the SEC already was a toothless tiger under his watch, long before this year’s bailouts took root. Give him credit for candor, though. The chairman of the SEC is now on record saying the government can’t be expected to enforce the nation’s securities laws even-handedly at companies where its own financial interests are at stake.

Fair Game

He’s right. The government can’t live up to the task, even if it wanted to.

Madoff probably wasn’t the biggest Ponzi-scheme artist out there. He’s just the first of his size to get nailed during the current bear market.

He also knew he was fair game for the government. The people running companies with taxpayer bailout money know there’s an excellent chance they won’t be. As long as that remains true, this crisis of confidence isn’t over by a long shot.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net
Last Updated: December 18, 2008 00:04 EST

Statement Regarding Madoff Investigation
FOR IMMEDIATE RELEASE
2008-297
LINK

Washington, D.C., Dec. 16, 2008 — Securities and Exchange Commission Chairman Christopher Cox issued the following statement today concerning its ongoing investigation in the case of SEC v. Madoff:

Since the Commission first took emergency action against Bernard Madoff and his firm, Bernard L. Madoff Investment Securities, LLC on Thursday, December 11, every necessary resource at the SEC has been dedicated to pursuing the investigation, protecting customer assets and holding both Mr. Madoff and others who may have been involved accountable.

SEC investigators are currently working with the trustee and other law enforcement agencies to review vast amounts of records and information involving Mr. Madoff and his firm. Those records are increasingly exposing the complicated steps that Mr. Madoff took to deceive investors, the public and regulators. Although the information I can share regarding an ongoing investigation is limited, progress to date indicates that Mr. Madoff kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators.

Since Commissioners were first informed of the Madoff investigation last week, the Commission has met multiple times on an emergency basis to seek answers to the question of how Mr. Madoff's vast scheme remained undetected by regulators and law enforcement for so long. Our initial findings have been deeply troubling. The Commission has learned that credible and specific allegations regarding Mr. Madoff’s financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action. I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them. Moreover, a consequence of the failure to seek a formal order of investigation from the Commission is that subpoena power was not used to obtain information, but rather the staff relied upon information voluntarily produced by Mr. Madoff and his firm.

In response, after consultation with the Commission, I have directed a full and immediate review of the past allegations regarding Mr. Madoff and his firm and the reasons they were not found credible, to be led by the SEC's Inspector General. The review will also cover the internal policies at the SEC governing when allegations such as those in this case should be raised to the Commission level, whether those policies were followed, and whether improvements to those policies are necessary. The investigation should also include all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm.

The Commission believes strongly that it is vital that SEC investigators, examiners, and enforcement staff be above reproach while conducting their duties, in order to ensure the integrity and effectiveness of the SEC. In addition to the foregoing investigation, I have therefore directed the mandatory recusal from the ongoing investigation of matters related to SEC v. Madoff of any SEC staff who have had more than insubstantial personal contacts with Mr. Madoff or his family, under guidance to be issued by the Office of the Ethics Counsel. These recusals will be in addition to those currently required by SEC rules and federal law.

PRESS RELEASE
Liquidation Proceeding for Bernard L. Madoff Investment Securities LLC Undertaken by Securities Investor Protection Corporation
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Last update: 6:02 p.m. EST Dec. 15, 2008
WASHINGTON, Dec 15, 2008 /PRNewswire-USNewswire via COMTEX/ -- Trustee Appointed By Court; SIPC Taking Action to Protect Customer Assets.

The Securities Investor Protection Corporation (SIPC), which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, announced today that it is liquidating Bernard L. Madoff Investment Securities LLC of New York, NY, under the Securities Investor Protection Act (SIPA).
SIPC today filed an application with the United States District Court for the Southern District of New York for a declaration that the customers of Bernard L. Madoff Investment Securities LLC are in need of the protections available under the SIPA. The United States District Court for the Southern District of New York granted the application and appointed Irving H. Picard as trustee for the liquidation of the brokerage firm, and further appointed the law firm of Baker & Hostetler LLP as counsel to Mr. Picard.
SIPC President and CEO Stephen Harbeck said: "Upon information provided by the United States Securities and Exchange Commission and the Financial Industry Regulatory Authority, it is clear that the customers of the Madoff firm need the protections available under federal law. Mr. Picard has served as trustee in more brokerage firm liquidations than any other individual. SIPC and the trustee are dedicated to returning assets to customers as promptly as possible."
Mr. Harbeck cautioned, however, that the scope of the misappropriation and the state of the defunct firm's records will make this more difficult than in most prior brokerage firm insolvencies. "It is unlikely that SIPC and the Trustee will be able to transfer the customer accounts of the firm to a solvent brokerage firm. The state of the firm's records may preclude a transfer of customer accounts. Also, because the size of the misappropriation has not yet been established, it is impossible to determine each customer's pro rata share of 'customer property.'"
The trustee is charged with giving notice of the proceeding and mailing claim forms to the customers and other creditors of the firm. Information about the case also will be made available on the Web at www.sipc.org.
Mr. Picard stated that he is acutely aware of the concern of investors who have been caught up in this financial scandal. "I will work with SIPC to do what the law allows to ameliorate the losses to customers."

ABOUT SIPC
The Securities Investor Protection Corporation is the U.S. investor's first line of defense in the event a brokerage firm fails, owing customer cash and securities that are missing from customer accounts. SIPC either acts as trustee or works with an independent court-appointed trustee in a brokerage insolvency case to recover funds.
The statute that created SIPC provides that customers of a failed brokerage firm receive all non-negotiable securities -- such as stocks or bonds -- that are already registered in their names or in the process of being registered. At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000. This figure includes a maximum of $100,000 on claims for cash. From the time Congress created it in 1970 through December 2007, SIPC has advanced $507 million in order to make possible the recovery of $15.7 billion in assets for an estimated 626,000 investors.
For more information about SIPC, see "The Investor's Guide to Brokerage Firm Liquidations" at http://www.sipc.org/pdf/SIPC_brochure_Investors_Guide_To_BD_Liquidations.pdf.

List Of Entities Announcing Exposure To Madoff Investments