Silver Lining Department: The Ponzi Pileup

If there is any upside to the market meltdown of the past seven months, it might be that so many fraudsters operating Ponzi schemes have been dragged into the light. There seems to be a new Ponzi crackdown every few weeks. On Wednesday, April 1, the Securities Exchange Commission announced it had halted its 14th Ponzi scheme in the four months since December.

If there is any upside to the market meltdown of the past seven months, it might be that so many fraudsters operating Ponzi schemes have been dragged into the light. There seems to be a new Ponzi crackdown every few weeks. On Wednesday, April 1, the Securities Exchange Commission announced it had halted its 14th Ponzi scheme in the four months since December. Without the floods of redemptions from clients made nervous by a lousy stock market and economy, many of these schemes might have operated indefinitely, under the safe cover of rising share prices. After all, redemptions are what sank Bernie Madoff’s Ponzi pirate ship.

In the SEC’s latest case, Long Island-based investment adviser Edward T. Stein allegedly “preyed on long-time friends and acquaintances” to shuffle over $55 million through his investment funds Gemini and DISP, and sold interests in those funds to more than 80 investors. Stein described Gemini to investors as a feeder fund for investments in arbitrage and hedge trading portfolios, according to the SEC release. He then created bogus statements that showed healthy returns, while using the investor money to pay off previous investors, to fund a failed fashion magazine called Detour and to cover his own expenses, including the purchase of a million dollar condominium in Manhattan.

There are surely more Ponzi crackdowns to come. In a March 20 testimony before the House of Representatives Committee on Financial Services, SEC commissioner Elisse B. Walter told legislators that the SEC has an enforcement program to combat Ponzi schemes. “Our enforcement and examination programs work closely together to detect Ponzi schemes that involve registered investment advisers and broker-dealers. For example, our examination staff currently is conducting a sweep examining the custody practices of investment advisers,” Walter said. State regulators have also been pursuing an increased number of Ponzi schemes, she said in that testimony. SEC officials were not immediately available for further comment about the regulator’s Ponzi enforcement efforts.

Over the past two years, the SEC has filed enforcement cases against more than 75 Ponzi schemes, including twelve such cases since December 2008. Since 2002, the SEC has sued over 300 individuals in enforcement actions related to Ponzi schemes, including more than a dozen cases in which the alleged fraud involved $50 million or more.

Here’s a list of some recent Ponzi scheme crackdowns:

  • Mar. 26, 2009 SEC halts $68 million Ponzi scheme involving Caribbean- based bank and Swiss affiliate
  • Mar. 11, 2009 SEC charges two Northern California residents in $40 million Ponzi scheme
  • Feb. 19, 2009 SEC halts Ponzi scheme targeting Deaf investors
  • Jan. 15, 2009 SEC charges CRE Capital Corporation and James G. Ossie with conducting multi-million dollar Ponzi scheme
  • Jan. 8, 2009 SEC charges Joseph F. Forte for conducting multi-million dollar Ponzi scheme
  • Dec. 30, 2008 SEC halts $23 million Ponzi scheme and affinity fraud targeting Hatian-American investors
  • Dec. 11, 2008 SEC charges Bernard L. Madoff for multi-billion dollar Ponzi scheme
  • Nov. 12, 2008 SEC charges N.C. resident, Biltmore Financial Group for operating multi-million dollar Ponzi scheme
  • Oct. 30, 2008 SEC sues Miami resident for conducting multi-million dollar Ponzi scheme
  • Oct. 6, 2008 SEC charges Norman Hsu with defrauding investors in $60 million Ponzi scheme
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