Anatomy of a Ponzi Scheme in a Post-Madoff World

The Ponzi scheme expired with the arrest of Bernie Madoff, right? Absolutely not. Ponzi schemes are alive and well.  Many of these scams are reported but presumably many go unnoticed as criminals target the unsuspecting of millions.  Apparently, Madoff’s 2008 arrest did little to dissuade others from engaging in similar crimes, although on a lesser scale. According to the SEC, which compiles Ponzi scheme data, these crimes continue at a disheartening rate. 

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. According to the SEC, one of the entities responsible for curtailing this scams, its enforcement program brought more than 100 actions arising from Ponzi schemes since 2010.  

For example, in January of this year the SEC charged five former real estate executives who defrauded investors into believing they were funding the development of five-star destination resorts when they were actually buying into a Ponzi scheme.  According to the SEC complaint, the executives raised more than $300 million from nearly 1,400 investors nationwide through a network of hundreds of sales agents that touted the profitability of purchasing units at various resort locations.  Investors were promised a guaranteed 15% return.  But instead of using investor funds to develop resort properties and units, the executives used new deposits to pay leaseback returns to earlier investors and paid themselves salaries and commissions totaling more than $30 million. This is a classic Ponzi scheme.

Professionals are often targeted following the discovery of a Ponzi scheme.  Accountants, financial advisors, real estate professionals and others may face professional malpractice suits arising from a Ponzi fallout.  While the next Ponzi scheme cannot be prevented, as always, the professional with a well-written engagement letter, adequate insurance, appropriate communication and other risk management tools is in a better position to defend or avoid a lawsuit.

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