Ponzi Schemes Contemporary Commentary By:
Bill E. Branscum
These are surely troubling, tremulous, economic times,
and we can expect to see the system to continue to be overwhelmed
with cases involving Ponzi schemes, and their multi-level marketed
brethren, Pyramid schemes, but let us not be too quick to rush to
I say that for a number of reasons.
First, as investigators pursuing financial cases,
we must all keep in mind that economic down-turns do not foster
new schemes - they expose existing schemes. The reasoning for this
should be intuitively obvious. For those who do not investigate
these schemes for a living, the explanation lies in the essential
elements common to them all. Specifically, these schemes need two
things in order to remain viable; the influx of new investor capital,
and previously invested capital left on deposit to continue to "grow."
When the economy begins circling the bowl, two things
happen. New investors become harder to find, and existing investors
who were previously content to "let it ride," begin making
demands upon their accounts. Without in-flowing funds, the promoters
are unable to meet their obligations, investors become unhappy,
they get suspicious, and they begin filing complaints. Think about
the cases that are dominating the news these days. Bernard Madoff
and R. Allen Stanford did not launch into new undertakings in an
effort to cope with a crumbling economy; whatever they are ultimately
proved to have done, Madoff and Stanford had each been doing it
for a very long time.
Second, let us all be very clear in our minds that
the "robbing Peter to pay Paul"
concept does not define a fraudulent scheme. Just because a business
develops cash flow issues, does not make it a criminal enterprise.
Remember, Ponzi/Pyramid schemes are, by definition, insolvent from
their inception. That is not to say that an otherwise legitimate
enterprise could not transmogrify into an investment scheme, but
proof that an enterprise was struggling to stay afloat by using
today's income to pay yesterday's obligation does not make that
case - if it did, the government could indict nearly everyone out
there these days.
Consider your situation, whomever you happen to be.
Let's say you are like most of us - house payment, car payments,
and maybe a boat payment, as well as the ubiquitous bills for groceries,
utilities, insurance, alimony, child support . . . and the list
goes on. Things have slowed down for you, it isn't raining money
for you the way it was, and money is tight -- but the phone rings,
you have a new Client, and they send you a $5,000 retainer. You
knew it was coming, you knew things had to turn around, and there
it is. My question to you is, "Are you going to
leave that money in your trust account against future billing, or
are you going to make that overdue house payment?"
I know we are talking apples and oranges here, but
I hope to help you visualize my point. Remember, the people out
there behind the various investment related enterprises depend upon
those undertakings for the income necessary to pay their bills.
The larger the investment related enterprise, the larger the bills.
When you see an Indictment that reads, "Investigation
reveals that Joe Schmoe used the proceeds of this undertaking to
finance an affluent lifestyle . . ." you should
say to yourself, "So what? Of course he did."
As a high profile investment advisor, or whatever
he portrayed himself to be, his undertakings were the source of
his income, and he had to use that income to finance an affluent
lifestyle if he wanted to play in the game. What billionaire is
going to entrust his investment capital to a guy wearing a suit
from JC Penny's, who drives a Kia, and lives in a mobile home? I
suspect that Warren Buffett drives a nice car - assuming he actually
drives himself anywhere these days.
Third, losers howl, no matter how they come to lose.
Just as, "Everybody loves a winner," "Everybody
hates a loser," and that is especially true of
their investors. The guy who loses other people's money can expect
to be dealing with an angry crowd. When a loud enough mob demands
crucifixion, things become political, and anybody can be nailed
to a cross.
Considering the way these cases typically develop,
a misguided prosecution would be profoundly disturbing; a good argument
could be made that the entrepreneur running an investment related
undertaking would be better off accused of murder, than running
a Ponzi scheme.
Suppose, for example, that your Client was running
an apparently legitimate investment related undertaking that was
genuinely realizing double-digit returns . . . say 10-12%, and had
been for years - one of the legitimate feeder funds that invested
with Madoff might be a good example. Further suppose that when things
went bad, the government misinterpreted the facts and erroneously
concluded that your Client was running a Ponzi scheme, as opposed
to being the victim of one. You could expect the government to open
their attack with a stiff left in the form of an SEC Complaint,
followed immediately by a wicked right in the form of a Temporary
Restraining Order, and the Appointment of a Receiver, divesting
your Client of the ability to manage his business, control over
his assets, and the resources necessary to defend
You've seen motions, responsive pleadings, memoranda
of law, etc., and based upon your experience, you might expect that
your Client could be divested of his assets, and control of his
investment related undertaking in a matter of months . . . but it
doesn't work that way in these cases. This "one-two" punch
is generally an instant knock-out.
For example, look what happened in the Madoff case.
On December 11, 2008, the SEC filed their Complaint and requested
that assets be frozen, and a Receiver be appointed. The following
day, on December 12, 2008, the Court ruled accordingly. Overnight,
Bernard Madoff was divested of enormous wealth, and control of a
financial empire. Shortly thereafter, the Office of the United States
Attorney filed criminal charges.
The case of Robert Allen Stanford is another good example. On February
17, 2009, the SEC filed a Complaint, accompanied by a Motion for
the Appointment of a Receiver and a Motion for a Temporary Restraining
Order. The responsive Orders were filed later that same day. Shortly
thereafter, the Office of the United States Attorney filed criminal
These are not isolated incidents; this is the way you can expect
this to work in these cases. Your Client is likely to see his entire
world come to a screeching halt - and if that is the worst of it,
he's lucky. Once criminal charges are filed, you can expect the
government to fight for pretrial detention. I have attached the
dockets for both previously referenced cases, so you can see the
battle that was waged on this issue.
It is hard to effectively defend yourself, while locked
in a cell, separated from your financial resources. Even if the
Client can marshal the funds necessary to finance an effective defense,
the attorneys involved need to be cautious lest they be forced to
disgorge the funds thus received. Receivers, Bankruptcy Trustees,
and government forfeiture potential serve to make defense funding
in these cases problematic.
To be clear, I am not suggesting that there is anything
wrong with this system. In my view, based upon my experience working
with fraud victims, the way the SEC works with the DOJ in shutting
down massive investment schemes is almost
as brutal, aggressive and effective as it needs to be. The people
who promote investment scams destroy people; they destroy entire
families. They get no sympathy from me.
If anyone is holding out any hope that Madoff was
misunderstood, or the unfortunate victim of the economy, I have
included Madoff's own statement, in the form of his Plea Allocution,
and the Sentencing Order that followed, as exhibits.
On the other hand, when I read allegations leveling
Ponzi accusations at someone, I am invariably reminded of the RICO
Act prosecution of Arnold Strom by the Florida Office of the Statewide
Prosecutor. This was back in 1997, one of my first cases as a Private
Investigator, and it was immediately apparent that Strom was the
devil incarnate, a real low-life degenerate, who preyed upon the
hapless, hopeless masses . . . if you could believe
the daily drivel in the government's press releases.
The government press crusade was relentless; they
blathered on, and on, and on.
I was retained by Naples Attorneys Michael McDonnell,
and Charles Murray, to investigate the matter for the defense, and
provide expert testimony as to what a Ponzi scheme actually was.
The fact is, this was the most egregious prosecution I have ever
been involved in, and the government had no clue - as evidenced
by the ultimate Directed Judgment of Acquittal. The government spent
more than a week presenting their "case," the defense
destroyed it as they presented it, and the Court ruled that the
prosecution did not present evidence upon which a guilty verdict
For me, it was an outstanding introduction to the
world of criminal defense, as presented by a couple of attorneys
who were exceptionally good at it.
That sort of government witch hunt, "Ponzi Scheme"
prosecution, was a scenario that I hope to never see again.
In the vast majority of these cases, the government
deserves a lot of credit for the work they do, and have done, in
protecting the public from those who promote investment fraud. The
enormous power that the government can bring to bear notwithstanding,
these cases are not easy to make. The major Ponzi/Pyramid Scheme
cases are potentially winnable by either side, if for no other reason
than their inherent complexity. It has been my experience, working
for the government and without, that any case of sufficient complexity
is up for grabs - the Wesley
Snipes Tax Case is a perfect example.
Widely touted as the "unwinnable case, in the
unwinnable place," it fell to a defense team that mastered
the evidence, and gifted attorneys who very effectively put the
Internal Revenue Service on trial. To participate in a masterfully
orchestrated winning defense is a rewarding thing.