How Do Ponzi Schemes Get Started?

The Financial Times recently published a fascinating prison interview with Bernie Madoff.  Of course he spins the story, attempts to justify his actions and it wasn’t really his fault.  He claims that his company was legitimately earning profits until the early 1990, and that in the 1980’s he was “making plenty of legitimate trades.”

But then in 1992, he admits it became a Ponzi scheme when he began using money from new deposits to pay some returns.  As he told the reporter:

“The turning point was really about 1992 onwards. From then on, it started getting worse and worse.  I spend a lot of time thinking about it – it is almost like a blank to me now. I try to piece it together; why didn’t I say, ‘I cannot do it?’  Why didn’t I return the money to those four or five clients – and the others – and say, ‘I can’t do it.’  Why?”

Since 1994 when I began handling securities cases, I have been involved in many many lawsuits and receiverships involving Ponzi schemes.  I also have on occasion represented people who perpetuated these schemes.  As a result, people often ask me how they get started and whether I think people set out to run a Ponzi scheme.  I don’t think they do, at least not in my experience.  Ponzi schemes usually start when people promise unachievable minimum returns to investors, pay returns even when the profits are not coming in, or try to shield their investors from losses. Continue reading “How Do Ponzi Schemes Get Started?”

Thinking of investing in a hedge fund? Here are some tips for sniffing out potential fraud.

This is the text of a terrific article that appeared in the Wall Street Journal yesterday about how to sniff out potential fraud in a hedge fund:

Danger! Danger!

Thinking of investing in a hedge fund? Here are some tips for sniffing out potential fraud.

By ROB CURRAN

In the age of Madoff, small investors are rightfully leery of hedge funds with eye-popping returns and a low profile. But how do you size up the risk of fraud?

You might take some advice from professional investigators, who dig into hedge funds on behalf of potential institutional investors, searching for irregularities and trying to tell if the managers are trustworthy.

So, what warning signs do these investigators say you should watch for? Here are some of the biggest. Continue reading “Thinking of investing in a hedge fund? Here are some tips for sniffing out potential fraud.”

The Dangers of Being a “Finder” – Another Conviction in the VesCor Ponzi Scheme

Yesterday William J. Hammons, 66, was convicted of seven of nine criminal charges by a jury in St. George, Utah.   Hammons was one of the largest finders or feeders of investors to Val Southwick and his company VesCor, which is now known as the largest Ponzi scheme in Utah history.  He recommended the investment to members of The Church of Jesus Christ of Latter-day Saints in Las Vegas, where Hammons served as a bishop, and in St. George, Utah.  The St. George investors included neighbors, church members, Hammons’ partner and his parents-in-law.   What he did not tell these people was that in exchange for these referrals he received substantial “referral fees” or commissions from Val Southwick.

In his defense, one of the Fresno defense attorney, Clifford Dunn tried to convince the jury that Mr. Hammons was just an innocent bystander.  According to the Salt Lake Tribune, Hammons testified “that he was unaware that VesCor was a fraud, that he didn’t seek out investors and never officially worked for the company.  Instead, he cast himself as just another investor who was paid only referral fees.”   Continue reading “The Dangers of Being a “Finder” – Another Conviction in the VesCor Ponzi Scheme”

Brett Tolman and Ben McAdams discuss Utah’s problems with affinity fraud on KSL

In an interview on KSL’s weekly program “Sunday Edition” on January 30, contributor and former U.S. Attorney Brett Tolman spoke about two proposed bills to punish those who victimize family and friends as proposed by Sen. Ben McAdams, D-Salt Lake City. This is worth watching.

The Risks of Investing in Gold Mines

This week a British judge entered a court order freezing the global assets of a Utah-based gold mining company called Sinaloa Gold Plc. The court concluded that the mining company may have engaged in fraud when it sold shares to U.K. investors.  The judge found that one of Sinaloa’s officers, Glen Lawrence Hoover, a Utah resident, failed to explain to the court how investor money was spent.  Mr. Hoover is one of the defendants in the case.

Recently I have seen an increase in inquiries from individuals who are interested in investing in gold mining operations, and from some who have lost money in this investments.  I assume much of this is driven by the skyrocketing price of  gold, but the challenge for investors is that this is a highly specialized area that requires significant technical expertise.  Investors can be misled by complex technical descriptions, faked or doctored assay tests, and spectacularly high mine valuations.

Continue reading “The Risks of Investing in Gold Mines”

New SEC Lawsuit Against Raymond P. Morris, E&R Holdings and Wise Financial Holdings (among others)

Today the Salt Lake City office of the Securities and Exchange Commission filed a lawsuit against Raymond P. Morris, E&R Holdings, LLC, Wise Financial Holdings, LLC, Momentum Leasing, LLC, James L. Haley, Cornerstone Capital Fund, LLC, Vantage Point Capital, LLC, Jay J. Linford, Freedom group, LLC, and Luc D. Nguyen (an attorney). The suit alleges that the named individuals ran a Ponzi scheme that bilked scores of investors out of “no less than $60 million.”

The complaint alleges that from March 2007 through January 2009, Raymond Morris offered and sold unregistered promissory notes to investors. In the course of soliciting these loans the SEC alleges that he and the other defendants made misrepresentations to investors to convince them that they were purchasing high yield notes that were risk free. Morris allegedly told investors that their funds would be deposited into a secure account and would be used only to verify deposits.

However, instead of using the funds as represented Morris allegedly used investor funds “for personal expenses, including a luxurious home and several sports cars, and for making Ponzi payments to create an illusion of a successful investment.” Continue reading “New SEC Lawsuit Against Raymond P. Morris, E&R Holdings and Wise Financial Holdings (among others)”