In the Decade Since Madoff, Ponzi Schemers Try New Tactics

EDITOR’S NOTE: This is an excellent article that appeared in the New York Times today. I am posting it here because it contains some information about some of the new tactics that perpetrators of these schemes are using to avoid detection. They are offering products not typically associated with a Ponzi, such as financial services, insurance and real estate, and offering lower returns in order to avoid detection.

But some things haven’t changed at all. Schemers still raise money through friends, family and acquaintances, and victims still rarely get their money back. The good news is that the SEC is bringing more Ponzi cases and prosecuting them more aggressively.


In the Decade Since Madoff, Ponzi Schemers Try New Tactics

The S.E.C. has prosecuted 50 percent more Ponzi cases in the last 10 years. Those scams cost their victims $31 billion.

By Angela Wang. Published Sept. 22, 2019

Jaleen Dambrosio, left, and Jane Naylon were caught up in what the Securities and Exchange Commission said was a $100 million Ponzi scheme.
Jaleen Dambrosio, left, and Jane Naylon were caught up in what the Securities and Exchange Commission said was a $100 million Ponzi scheme.CreditCreditJoshua McFadden for The New York Times

It has been more than 10 years since Bernard L. Madoff was caught running the biggest Ponzi scheme in history, a case that became a cautionary tale for investors and a call to action for regulators. The Securities and Exchange Commission made changes in its enforcement division to better detect fraud, established specialized teams and even revamped its system for handling tips from the public.

But the prosecution of Mr. Madoff — who took investors for more than $50 billion — was not the Ponzi case to end all Ponzi cases. The S.E.C. brought 50 percent more Ponzi prosecutions in the decade after Mr. Madoff’s arrest than in the 10 years before, according to a New York Times analysis of the agency’s enforcement announcements.

Whether the increase is the result of enhanced enforcement or a proliferation of scammers, records show that Ponzi victims lost $31 billion in the decade beginning 2009, more than three times the amount lost in non-Madoff schemes in the previous decade. (The figures are not adjusted for inflation.)

Sioux Schaefer was one of those millions of victims, and her case demonstrates one of the ways scammers have changed tactics in hopes of ensnaring unwary investors: Instead of pitching secretive, market-beating stock strategies as Mr. Madoff did, schemers are more frequently selling esoteric investments like natural resource mining and cryptocurrencies.

Ms. Schaefer, a horse trainer and photographer from Santa Cruz, Calif., was recently widowed and wondered how to leave an inheritance to her daughter and grandson. A friend told her about investing in gold mines with Daniel Christian Stanley Powell, a gregarious Cornell graduate and the founder of a Los Angeles investment company, Christian Stanley.

As she spoke with Mr. Powell on the phone, they bonded over a shared love of horses. He promised her a 10 percent return on her money, and she gave him $175,000.

The payments Mr. Powell promised never came. Federal prosecutors said he had victimized Ms. Schaefer and dozens of other investors through false promises of profits from gold mines, coal leases and a business for which he had trademarked the term “reverse life insurance.” Instead, they said, Mr. Powell used new investors’ money to pay the old — skimming off a healthy cut to buy a luxury apartment, sports cars and other items — including $5,000 for cowboy boots.

“In my mind, in my spirit, it just knocked everything out of me,” Ms. Schaefer said. “How could I be so gullible?”

Bernard L. Madoff was accused of running a $50 billion Ponzi scheme on Dec. 19, 2008, a fraud so enormous that it prompted the Securities and Exchange Commission to reorganize its enforcement division. Since the start of 2009, Ponzi scheme prosecutions have increased by nearly 50 percent, with much greater losses.

PRE-MADOFF

301,000 investors in 195 cases

POST-MADOFF

4.3 million investors in 291 cases


The S.E.C.’s enforcement announcements demonstrate how scammers’ offerings have evolved to take in people, like Ms. Schaefer, who might otherwise be wary of a pitch involving traditional investment funds. Half the 291 cases brought in the past decade involved schemes promoting untraditional products. In the decade before the Madoff case, about 38 percent did.

“Fraudsters are trying to wrap themselves in new products to garner the attention of investors,” said Jeff Boujoukos, director of the S.E.C.’s Philadelphia regional office.

It’s not the only way that scammers have sought to distinguish themselves. Some victims said they had been fooled by pitches offering modest returns, which made them seem more believable than promises of astronomical profits.

The scheme that Christopher Parris has been accused of running leaned on more traditional Ponzi pitch tactics; the investments were said to be in businesses including financial services, insurance and real estate. Jaleen Dambrosio of Rochester entrusted to him her life savings — $600,000 — and for a few years received steady returns that assured her that she had made the right investment.

But Mr. Parris and an associate, Perry Santillo, were actually running a Ponzi scheme that defrauded more than 600 investors, the commission said. The money Ms. Dambrosio had given him was gone, along with about $100 million that others had invested.

The men had spent lavishly on themselves, including commissioning a song that Mr. Santillo had performed at a party he threw at a Las Vegas nightclub, according to the commission. “Ten-thousand-dollar suits everywhere he rides,” the song went. “Pop the champagne in L.A., New York to Florida; buy another bottle just to spray it all over ya.”

“It was like somebody punched me in the face,” said Ms. Dambrosio, who had retired from Kodak, where she was a purchasing manager. “Everything stopped.”

Ms. Dambrosio — who has gone back to work, at a Walmart deli counter — lost an unusually large amount for a Ponzi victim. The average loss for Ponzi victims in the decade after Madoff was $150,000, according to an analysis of S.E.C. data, compared with $80,000 in the previous decade for non-Madoff scams.

Jane Naylon, who had taken music lessons from Mr. Parris’s father while growing up in the same Rochester neighborhood, contacted the S.E.C. after growing suspicious of Mr. Parris and Mr. Santillo. Some of the accusers have spoken to the F.B.I.

“Why are these guys walking around free?” asked Ms. Naylon, who declared bankruptcy after losing her $105,000 investment. “They froze their assets, but they still seem to have money.”

Lawyers for Mr. Santillo did not respond to repeated requests for comment. Court records do not list an attorney for Mr. Parris; messages and emails to him were not returned.

All Ponzi schemes — whether they make international headlines or minor headaches for a handful of investors — have the same basic shape: They use new investors to pay the old ones. That type of scheme long predates its current name, which comes from Charles Ponzi, whose 1920 investment scam brought in millions of dollars.

Perpetrators’ outreach methods are still often the same as they were in the days of Ponzi. Friends, family and acquaintances are common targets, and word of mouth helps recruit new investors — a trait that was on display in the cases involving Mr. Powell as well as Mr. Santillo and Mr. Parris.

“These are investors who didn’t even know where to begin doing due diligence,” said Scott Silver, a Florida lawyer who has assisted dozens of people who contend they were victims of Mr. Santillo and Mr. Parris. “A lot of the traits of this scheme have become very typical of what we’ve seen over the last decade.”

Another thing that hasn’t changed: Victims rarely get their money back.

Some accusers of Mr. Parris and Mr. Santillo — although not Ms. Dambrosio and Ms. Naylon — have sued Bank of America. They claim that the bank enabled the fraud by providing the defendants with dozens of accounts and facilitating transactions between them. The bank has asked a judge to dismiss the case, calling it “a misguided attempt to hold Bank of America responsible for the misdeeds of its customers.”

Ms. Schaefer, who was caught up in the gold-mine scheme, has less reason for hope. In 2015, Mr. Powell was sentenced to 10 years in prison and ordered to pay $4.4 million in restitution to his victims — a judgment that has yet to be fulfilled.

“He could have stayed out, for all I care,” Ms. Schaefer said. “Just as long as we got our money back.”

Mark Pugsley and Aaron Hinton Prevail on Fraud Case in Third District Court

RQN lawyers Mark Pugsley and Aaron Hinton, together with their co-counsel Kevin Simonof Strachan Strachan & Simon, P.C, won a significant victory after a 5-day trial in Utah State Court.  In a detailed opinion issued last week Judge Matthew Bates awarded their clients compensatory damages in excess of $3 million, $2 million in punitive damages, and attorney’s fees. 

The case, tried in Third District Court for the State of Utah, involved allegations of fraud, constructive fraud, breach of fiduciary duty, negligent misrepresentation, promissory estoppel and unjust enrichment against the clients’ tax advisor.

In ruling in their favor, Judge Bates found that the Defendant “took Plaintiffs’ money under false pretenses, invested it in a way that benefited him substantially, and kept all the proceeds when the loan defaulted.  He bore no risk and kept most of the benefit. Then at trial, he attempted to change the terms of the agreement. Despite the plain and unambiguous language of the emails he sent to Plaintiffs, [Defendant] claimed that Plaintiffs were purchasing property in Minden, Nevada, not investing in a secured construction loan. The torts that [Defendant] committed in this case were willful and malicious, and his conduct was intentionally fraudulent.”

Mark Pugsley said, “This case represents a vindication of our client’s position after many years of litigation.  We appreciate Judge Bates’ professionalism and attention to the details of the case.  We are thrilled that our clients have finally been able to obtain justice.”

Kevin Simon said, “I echo my co-counsel’s sentiments in every regard and I am thankful for Judge Bates’ hard work.  This is a deeply satisfying result and goes a long way in correcting a devastating wrong.”

Former Salt Lake City councilman Eric Jergensen Sentenced to 59 Months in Prison

This is an update to my earlier stories about former Salt Lake City councilman and former LDS Stake President Eric Jergensen.  In October of 2017 he and an accomplice were convicted of conspiring to defraud an aerospace company of $2.5 million.  A Syracuse, New York jury returned the guilty verdict after a seven-day trial in U.S. District Court.  And finally today, after several delays, Mr. Jergensen was sentenced to 59 months in federal prison and was ordered to pay $2.5 million in restitution to the aerospace company he defrauded.

If you attended the sentencing hearing please post any additional details about how it went in the comments below.

Four tips to avoid getting fleeced by your broker

The-Wolf-Of-Wall-Street-Stockbroker-665x385This is a brief but helpful article from the Associated Press that appeared in the Salt Lake Tribune today.  I would add that although the majority of stock brokers are honest and straightforward, there are some out there who are not so it pays to do your homework online before you hire someone to manage your accounts.  And always make sure you understand what fees and commissions you will be paying when you purchase of financial products and services.

-Mark Pugsley


 

Can your broker or adviser be trusted? There is no way to be 100 percent certain, but far too many investors don’t even take a few simple steps to protect themselves. Start by asking questions. Here are four key ones, and tips for finding the answers.

• WHO’S PAYING YOU? If a broker or adviser is pushing a specific investment, maybe it’s because they’re getting paid to do so. Many mutual funds charge one-time “sales loads” or annual “12b-1” fees that come out of your pocket and go into theirs. Cheaper, equally good funds may be available, but they may not tell you.

Make sure to also ask about commissions, markups or hidden fees they may get for selling stocks, bonds and insurance products.

• ARE YOU A FIDUCIARY? You’re in safer hands if the broker or adviser is held to a fiduciary standard. That requires them to put your interest ahead of their own, so they must tell you about cheaper alternatives. They also must monitor your investment.

That’s not the case for many brokers now. They are required only to limit recommendations to products that are “suitable” based on your financial situation, age and appetite for risk, which critics say gives too much room for foul play.

• WHAT DO THOSE LETTERS MEAN?: The number of professional designations and acronyms has jumped in recent years, but don’t be fooled. Regulators say some reflect higher standards than others. If you’re confused, best to insist that your adviser has a well-known one, like certified financial planner, which has strict requirements and carries the weight of the fiduciary standard.

• WHAT’S ON YOUR RAP SHEET?: Client complaints and regulatory action against brokers can be found at a database maintained at industry regulator FINRA. Type in the name of the broker at BrokerCheck. But the site isn’t foolproof. Much of the information depends on brokers updating information themselves, and older complaints are purged regularly.

You may also want to check out your broker or adviser’s so-called ADV form filed with the SEC at adviserinfo.sec.gov. It may help to Google the broker, too.

5 ways fraudsters trick investors

This is a repost of an article by Matt Egan that appeared on CNN Money last week.

NEW YORK (CNNMoney)
Fraudsters use sleights of hand and other trickery that even magicians would be envious of.  Americans lose an estimated $50 billion a year to fraud, including Ponzi schemes, pyramid schemes and other types of investment fraud.

“People fall for fraud because fraudsters are that good with special effects. It seems that real,” Michael Hendon, a representative from the Commodity Futures Trading Commission.

Here are tricks that regulators and former fraudsters cited at a recent New Jersey securities fraud summit:

1. All the cool kids are doing it!  Drug dealers aren’t the only ones resorting to peer pressure. 

Fraudsters try to push their victims into shady deals by attracting people from within the same social group like a church organization or an alumni association.

Such affinity fraud attempts to lower victims’ defenses and is very difficult for regulators to identify.  “They prey upon the trust of that group to make them feel like this is something they want to be involved with,” said Brian McGuire, AARP New Jersey associate state director for advocacy.

2. Promising the moon: If it sounds too good to be true, it probably is too good to be true.

Forty-two percent of respondents in a FINRA poll found an annual return of 110% for an investment “appealing,” and 43% said the same about fully guaranteed investments.

“If someone tells you your investment is guaranteed, that’s when your spidey sense should come on,” says Peter Cole, director of special investigations at the New Jersey Bureau of Securities.

3. False sense of urgency: Just like pushy car sales people, fraudsters try to pressure their victims into making decisions before they can do their homework.

They’ll say the offer must be made on the spot because the deal closes soon or supply is running low.  “There are very few once in a lifetime opportunities. Real investments, the real deals, will be there tomorrow,” said Gerri Walsh, president of the FINRA Investor Education Foundation.

4. Pretenders: Fraudsters capitalize on people’s willingness to trust them.

While they may claim to be registered investment advisers or certified financial planners,that’s not always the case.  Investors can easily check the status of a purported broker or investment adviser by logging into FINRA’s BrokerCheck website.  Look for obvious red flags like securities violations.

5.Cooking the books: Some fraudsters exploit the system by finding weaknesses in the auditing process.

“Want to trust audited numbers? I used to brag about them all the time,” said Sam E. Antar, former CFO of Crazy Eddie, the electronics chain that became a symbol for corporate fraud in the 1980s.

Antar pointed to a report by the Association of Certified Fraud Examiners that shows external audits rarely uncover fraud.

UPDATE: Criminal Charges Against Rick Koerber Dismissed

UPDATE:  Five years after the initial indictment charging Rick Koerber with one of the biggest financial frauds in Utah history, last week United States District Court Judge  Clark Waddoups ruled that he will dismiss the case because federal prosecutors failed to follow speedy trial requirements.  This is a blow to the U.S. Attorneys Office’s efforts to prosecute Mr. Koerber, not to mention all of the hundreds of victims who were hoping to recover some of their lost funds through a possible plea deal or conviction that would likely include a requirement that Mr. Koerber provide some restitution to the victims of his Ponzi Scheme.

According to the Salt Lake Tribune, Judge Waddoups has not yet decided whether the charges can be refiled.

 


 

The U.S. Attorneys has office filed a new indictment against Rick Koerber, who is alleged to have run a Ponzi scheme that took in more than $100 million from Utah investors.  Last week a federal grand jury returned a new 20-count indictment alleging that Koerber engaged in widespread investment and tax fraud.

According to an article in the Salt Lake Tribune last week, this new indictment follows a federal judge’s decision in July to throw out a key piece of evidence in Koerber’s case.  “Assistant U.S. Attorney Stewart Walz previously said the ruling by U.S. District Judge Clark Waddoups affected a “significant” part of an existing 22-count indictment alleging fraud, money laundering and tax evasion by Koerber in his operation of FranklinSquires Cos. and related real-estate investment businesses.”  This ruling meant that prosecutors had to file a new indictment containing small changes to a section of the indictment describing the alleged scheme and artifice to defraud. Continue reading “UPDATE: Criminal Charges Against Rick Koerber Dismissed”