Ten Years After Madoff, Updated Ponzi Database Shows Schemes Are Thriving

December 2018 marked the ten-year anniversary of the collapse of Bernard Madoff's massive Ponzi scheme, a cataclysmic event that catapulted the term "Ponzi scheme" into the everyday lexicon and was the likely impetus for the Associated Press's decision to crown 2009 as “The Year of the Ponzi Scheme.  While the sheer economic destruction of that scheme and $17 billion in losses will likely (and hopefully) never be equaled, many may not realize that Madoff's scheme was literally one of hundreds of Ponzi schemes to collapse in the recent ten-year period that Ponzitracker has termed the "Madoff Era."  Indeed, an extensive and exclusive recent analysis by Ponzitracker shows that over 800 Ponzi schemes were discovered from 2008-2018 that collectively caused nearly $60 billion in losses.  Believed to be the first database compiling Ponzi scheme discoveries and sentences during the "Madoff Era," the analysis provides jaw-dropping context to the continuing destruction caused by these financial schemes.  

“Only When The Tide Goes Out Do You Discover Who’s Been Swimming Naked”

Ponzi schemes can generally be thought of as a lagging economic indicator – the hallmark outsized and consistent gains promised by the fraudsters at least appear more realistic and possible amidst a booming economy, and investors are generally content to watch their accounts steadily climb in the midst of continuing market gains.  As long as these times continue and new investor funds continue rolling in, the scheme stays afloat and is able to meet its obligations to existing investors.  Indeed, from October 2002 to October 2007, the S&P 500 Index gained over 100% – nearly 2% per month.  It is not surprising, then, that very few Ponzi schemes were uncovered during that period.  Many did not realize that they were unwitting participants in what would soon be a staggering loss of wealth.

In 2008, the metaphorical tide began to go out as stock markets plummeted amidst unprecedented market turmoil.  The S&P 500 suffered its largest annual decline that year (-38.49%) since 1937.  Jittery investors began safeguarding their capital, including turning to their “safe” investments that had been touted as impervious to risk and historically delivered consistent returns in any market.  The continuity of new investor funds is the lifeblood of a Ponzi scheme, and schemes began to collapse in droves as both new investor funds dried up and redemption requests soared.  Three of the largest Ponzi schemes in U.S. history (Madoff, Stanford, and Petters) collapsed in the span of ten months and alone involved approximately $25 billion in investor losses.  Those schemes were among more than 150 schemes that were uncovered in 2008 and 2009 - including nearly 120 in 2009 alone.

"Are we at high tide?"

Since the S&P 500 bottomed out in March 2009, it has since posted an increase of nearly 270% by the end of 2018 in one of the longest bull markets in history.  As the bull market picked up steam after the “Great Recession,” the number of schemes uncovered in the immediate aftermath appears to support the hypothesis that Ponzi schemes can be thought of as a lagging economic indicator.  Below is a chart of discovered Ponzi schemes from 2008 - 2018 (generally featuring losses of roughly $1 million or more):

• 2008: 40

• 2009: 118

• 2010: 80

• 2011: 99

• 2012: 103

• 2013: 65

• 2014: 66

• 2015: 73

• 2016: 65

• 2017: 60

• 2018: 42

In total, approximately 811 Ponzi schemes were uncovered from 2008 to 2018.  The actual number is likely higher; Ponzitracker's analysis was generally limited to Ponzi schemes that raised approximately $1 million or more from investors.  Those 811 schemes involved over $58 billion of investor funds, with an average scheme size of $71.8 million and a median size of $8 million.   To put that number in comparison, the $58 billion involved in those Ponzi schemes is just shy of Costa Rica's 2018 gross domestic product.  These figures only account for Ponzi schemes in the United States - a country with one of the most aggressive and proactive regulatory frameworks - and thus the worldwide total is unfortunately most likely a multiple of this number. 

The data shows that Ponzi scheme discoveries peaked from 2009 to 2012 with at least 90 schemes discovered each year during that period.  Several factors can be attributed to this increase.  First, Madoff and other large schemes had a violent ripple effect across the financial industry as jittery investors caused a wave of redemption requests.  These redemption requests quickly overwhelmed Ponzi schemes that had been on the brink of collapse given tumultuous market conditions and the lack of new investors.  Second, regulators began taking a much more aggressive approach to rooting out fraud amidst claims that they had not acted quick enough to detect Madoff and other schemes.  These increased enforcement efforts were successful at rooting out roughly 400 Ponzi schemes from 2009 - 2012 alone. 

After 103 Ponzi schemes were discovered in 2012, the next five years saw a potential post-Recession “new normal” with the number of schemes uncovered each year holding in a range from 60-73.  After 60 schemes were uncovered in 2017, that number dropped by 30% to just 42 in 2018 - the lowest number of discoveries since at least 2008.  The theories for this decrease are both encouraging and ominous.  For example, the decrease could be due to increased regulatory efforts that have corrected previous inefficiencies and succeeded in identifying the schemes before they were able to proliferate.  The Securities and Exchange Commission disclosed in its most recent Regulatory Priorities that it was continuing to focus on increasing its examinations of registered investment advisors and that it now covered 17% of investment advisors - an increase from a 10% coverage rate earlier this decade.  Another positive potential reason could be that efforts to educate investors about spotting fraud are paying dividends.  The rationale could also be ominous if the previous bull market from 2002-2007 is any indicator of what to expect when the current market runs into headwinds; the number of schemes uncovered in 2008 nearly doubled in 2009 in the wake of economic turmoil and it was not for ten years until the number of annual discoveries returned back to 2008 numbers. 

What do we know about our accused Ponzi schemers?  For starters, nearly nine of ten are men.  From 2008 to 2018, men never accounted for less than 84% of all Ponzi schemes and collectively comprised 89% of individuals charged with running Ponzi schemes.  The percentage of women accused in Ponzi schemes hovered at a high of around 15% in 2014 and 2015 but has since decreased to less than 7% in 2018. Each of the 50 states is represented in Ponzitracker’s database, but the majority of schemes were concentrated in a handful of states with large populations (including retirees).  California topped the list, with nearly 20% of the nearly-1,000 individuals accused of masterminding or assisting in Ponzi schemes from 2008-2018 hailing from the state.  Florida, New York, Texas, and Illinois rounded out the top 5, with nearly 60% of all individuals in the database hailing from those five states. In a surprising statistic, Utah had the sixth-highest number of Ponzi schemers despite ranking 31st in population.  The disparate rate of Ponzi schemes in Utah is likely attributable at least in part to the state’s large Mormon population which has been a hotbed for affinity fraud.  Eight states also had collective investor losses of at least $1 billion during the pertinent period.  

One trend has remained constant over the years: Ponzi schemers are often (and some would say rightly) harshly punished by the legal system for their misgivings.  The prospect of a harsh sentence is likely more certain in federal court proceedings where prosecutors have an arsenal of criminal fraud statutes at their disposal that carry lengthy potential sentences.  For example, most Ponzi schemers typically face charges of mail fraud, wire fraud, and/or securities fraud which each carry a maximum twenty-year prison term.  That, coupled with federal sentencing guidelines that heavily emphasize the amount of economic losses, generally makes a federal courtroom an unfriendly place for a Ponzi schemer awaiting his/her fate.

From 2008-2018, Ponzitracker’s database shows that at least 715 individuals were sentenced for their roles in a Ponzi scheme. This equated to nearly 8,000 years of collective prison sentences with an average sentence of 130 months and a median sentence of 97 months.  While the 150-year and 110-year sentences handed down to Madoff and Stanford are not surprising given the billions in losses, some outliers have resulted in lengthy sentences for schemers with considerably smaller losses.  For example, Florida resident James Jackson Jr. saw a judge hand down a 90-year sentence for a scheme with approximately $2 million in losses.  Juan Miguel Lopez, of Texas, received a 79-year sentence for a $4.9 million scheme.  While the rationale for those sentences is uncertain, one certainty is that the disparities are not likely to evoke sympathy from the aggrieved victims. 

 The Full Database is below:

Disclaimer - This database was compiled using publicly available news sources.  As a general rule, the database includes schemes of $1 million or more.  The names and sentences displayed are based off news reports, and are not independently verified.  Please contact Ponzitracker here with any clarifications or comments.

FBI Affidavit Claims California Solar Company Is $800 Million Ponzi Scheme

A California company that purported to build and lease mobile solar generators failed to disclose to investors that it was running a "Ponzi-type arrangement" using new investor money to pay old investors, according to an FBI agent's 60-page affidavit.  The allegations come after DC Solar Inc., owned by California residents Jeff and Paulette Carpoff, had its headquarters raided by FBI agents in December 2018 and filed for Chapter 11 bankruptcy protection earlier this month in a Nevada bankruptcy court.  According to the affidavit, which is embedded below, the company is believed to have raised approximately $810 million from at least 12 investors.

According to the FBI agent's affidavit (the "FBI Affidavit"), the Carpoffs operated two closely held businesses collectively as DC Solar beginning no later than December 2009.  DC Solar purported to be in the business of building, assembling, and leasing mobile solar generators ("MSGs"), which essentially consisted of solar panels placed on a wheeled trailer.  The company told interested investors that MSGs were in high demand from cellular companies to provide emergency power to cellular towers or to power light structures at sporting events. 

DC Solar solicited potential investors to purchase MSGs that would then purportedly be leased out by DC Solar to third parties.  The company touted the favorable tax treatment of the investment and the ability to "finance" nearly 75% of the $150,000 purchase price that would then be repaid through lease payments from third parties.  For example, the federal tax code allowed purchasers of alternative energy sources like an MSG to claim significant tax credits of up to 30% of the purchase price as well as other savings.  Investors were told that they would only have to pay $45,000 in cash of the $150,000 purchase price per MSG, with the remainder financed by a DC Solar subsidiary.  The $45,000 purchase price is also the maximum tax credit a purchaser would be able to claim from the purchase - in essence offsetting the entire initial cash outlay.  That investor would then execute a promissory note to pay the remaining 70% of the purchase price to a DC Solar entity with the understanding that the resulting lease revenues would be sufficient to cover payments on the promissory note.  As the FBI Affidavit explained,

The purported lease revenue from third parties was a critical component of the transaction because the investment funds provided no money other than that initially contributed by the investors that covered only approximately 30% of the transaction. Without some mechanism for payment of the remaining approximately 70% of the sales transaction, the transaction would facially be a sham. As such, the existence of lease revenue from third parties to Company D was required in order for the investors to obtain their tax benefits and to entice investors to make the initial investment of $45,000 per MSG.

At least 12 investors were identified that provided nearly $700 million to DC Solar through the creation of nearly three-dozen investment vehicles.  DC Solar also obtained nearly $100 million in investments from two financial institutions under similar circumstances.

Integral to DC Solar's claims to investors was its ability to generate sufficient MSG lease revenues to cover investors' promissory note payments.  Potential investors were told that DC Solar generated tens of millions of dollars in lease revenues from third parties leases comprised of both long-term and short-term lease arrangements.  

According to the FBI Affidavit, these claims were false.  As the Affidavit explains,

In truth, the evidence developed in the investigation to date demonstrates that over 90% of the money that Company D has claimed as lease revenue, and which it has used to pay the investment funds, was actually the result of transfers from Company S. The money from Company S is investor money as Company S has very little other significant sources of revenue or income other than through the investment funds. The evidence developed so far demonstrates that Company S is the primary source of income for Company D and merely pays obligations due to investors with money raised from that investor and later investors.

Based on my training and experience, I recognize the flow of investor money from Company S to Company D and then from Company D to the investment funds has permitted and continues to permit Individual 1 and others to conceal the absence of third party leases and to create the appearance that the MSGs are generating lease revenue when they are not. In my training and experience, the use of investor money to lull investors into believing the transaction is legitimate and profit making is evidence of a Ponzi-type investment fraud scheme.

In short, the Affidavit claims that more than 90% of the purported lease revenues were simply the result of circular transactions comprised of other investor funds.  The Affidavit also claimed that, in contrast to DC Solar's representations that more than 12,000 MSGs were in use as of March 2018, only 3,000 to 5,000 MSGs were actually in use.  Instead, the Affidavit alleges, the "vast majority of the MSGs that the Company has manufactured and sold to the investment funds are stored in lots throughout California..."

The Affidavit alleges that investor funds were diverted to, among other things, purchase over 20 real estate parcels and 90 vehicles, fund approximately $19 million in private jet travel, and apparently fund an independent baseball team.  That team, the Martinez Clippers, recently indicated to the league commissioner that the Carpoffs "weren’t going to be in a position to operate the team."

Ponzitracker is not aware of any response to date by the Carpoffs or DC Solar.  

The FBI Affidavit is below:

FBI Pleadings DC Solar 

New Jersey Couple Accused Of $5 Million Ponzi Scheme

A Princeton couple has been accused by New Jersey authorities of running a $5 million Ponzi scheme to fund a lavish lifestyle that included "country clubs, private schools, and tropical vacations."  Ford and Katherine Graham were named in a lawsuit filed by the New Jersey Bureau of Securities accusing the couple of numerous violations of the New Jersey Uniform Securities Law.  The complaint seeks disgorgement of any profits, restitution for investors, imposition of civil penalties, and injunctive relief. 

Ford Graham controlled and operated a number of companies including CCC Holdings, Specialty Fuels Americas, LLC, Aries Energy Group Venture, LLC, Rattler Partners, LLC, and Vulcan Energy International, LLC (the "Companies").  Beginning in 2013, Graham solicited investors for the companies through promises that their funds would be used for specific oil and gas projects carrying little to no risk.  For example, one purported project claimed that investor funds would be used to acquire a controlling interest in a company that purportedly had a claim against oil company British Petroleum deriving from the 2010 oil spill in the Gulf of Mexico that was worth between $7 million and $9 million.  Another investment opportunity promised guaranteed 6% annual returns from a "Dominican Republic Oil Transaction," while yet another investment promised that funds would be used to build a tank.  In total, Graham raised more than $5 million from unsuspecting investors.

According to the New Jersey Bureau of Securities, Graham's claims were false and in reality investor funds were used to perpetrate a Ponzi scheme in which new investor funds were used to pay purported returns and distributions to existing investors as well as funding the Grahams' lavish lifestyle.  The complaint details the alleged misappropriation of investor funds from various investments, including transfers to other investors and to Katherine Graham, spending at an Antiguan resort and at the couple's country club, and payments to the private school where the Grahams' child attended.  While Ford Graham is accused of playing a primary role in recruiting investors, the complaint also alleges that Katherine Graham - who received a law degree from Tulane University - encouraged at least one investor to invest based on the safety of the investment, that she was also planning to invest, and that time was of the essence if the investor wanted to realize the promised return. 

A copy of the complaint is below:

Graham Filed Complaint by on Scribd

Ninth Circuit Allows Recovery Of Investor Referral Fees Paid In $120 Million Ponzi Scheme

A federal appeals court has ordered that a receiver can recover referral fees paid to a Ponzi scheme investor who referred friends and family to the scheme because those referral services did not provide value to the scheme.  The U.S. Court of Appeals for the Ninth Circuit issued a decision in Hoffman v. Markowitz affirming the district court's previous award of partial summary judgment in favor of the court-appointed receiver over Nationwide Automated Systems, Inc. (NASI).  While the Ninth Circuit declined to find that the referral fees are "per se voidable" and issued an unpublished opinion, the decision may provide a template for receivers to pursue similar fees in ongoing and future actions.

The Scheme

NASI raised more than $120 million from roughly 2,000 investors with the promise of guaranteed returns of 20% for each automated teller machine (ATM) an investor purportedly purchased and leased back to the company.  Each investor signed a contract memorializing their investment which included the serial number and location of each ATM but also prohibited the investor from "interfering" with the ATM's operation by contacting any location where the ATM was installed or any ATM service provider. 

A bank account analysis showed that NASI raised more than $120 million from January 2013 to August 2014 alone.  After NASI began bouncing checks to investors in August 2014, the Securities and Exchange Commission brought an emergency enforcement action and obtained the appointment of William Hoffman as Receiver.  Gillis and Wishner were later arrested and sentenced to prison terms of ten and nine years, respectively.

The Markowitz Clawback Suit

In addition to the promised sizeable returns, NASI also paid a referral fee of $500 to $1,000 to each investor or non-investor who referred investors to the scheme.  The district court granted the receiver's request to pursue clawback claims against various third parties including those who received referral fees.  The receiver filed suit against Howard Markowitz and alleged that Markowitz received nearly $750,000 in referral fees from NASI.  The district court entered partial summary judgment in the receiver's favor in August 2017 and allowed the recovery of all referral fees paid to Markowitz, and that decision was appealed.  

On appeal, the Ninth Circuit noted that the California Uniform Voidable Transactions Act (CUVTA) made payments from a Ponzi scheme to a third party voidable when made with either actual or constructive intent unless the transferee could show that they received the transfer in good faith and that they provided reasonably equivalent value for the transfer.  Here, the receiver alleged that the referral fees were voidable under CUVTA because Moskowitz's referral services provided no value to NASI investors and instead only served to further deepen the scheme's insolvency through the increase in underlying liabilities. Other courts around the country have split on this issue, but the receiver urged the Ninth Circuit to follow the decision reached by the U.S. Court of Appeals for the Fifth Circuit in Warfield v. Byron, 436 F.3d 551 (5th Cir. 2006) which held that referral services for a Ponzi scheme did not provide any value to the scheme.  

The Ninth Circuit declined to adopt a brightline rule holding that referrals to a Ponzi scheme are "per se voidable because they never provide value," but did observe that Markowitz conceded that the only service he provided in return for the referral fees was the referral of new investors to the scheme. Based on these facts and the reasoning in Warfield, the Court sided with the receiver and affirmed the district court's finding that Markowitz was required to disgorge nearly $750,000 in referral fees to the receiver.  While the decision was not published and cannot serve as binding precedent, it is yet another tool available to receivers seeking to maximize recovery for defrauded victims. 

A copy of the Ninth Circuit's opinion is below:

17-56290 - hoffman v markowitz by on Scribd

Ponzi in Paradise? Florida Keys Men Accused Of $7 Million Ponzi Scheme

Three Florida Keys residents were arrested by state authorities and accused of running a Ponzi scheme that duped investors out of at least $7 million.  Jose Luis Leon, 56, Richard Renner, 56, and Natalie Marie Rogers, 53, were arrested earlier this month on charges of racketeering, conspiracy to commit racketeering, securities fraud, organized fraud, and 1st degree grand theft.  The trio could face significant prison time if convicted of all charges, as the racketeering charges alone carry a maximum 30-year prison sentence.  The charges come after at least five victims filed civil suits against the company and obtained judgments.  

Renner and Leon were the general partners of Strategic Holdings Group Ltd. ("SHG"), a Florida company organized in 2001.  In allegations by authorities and various civil lawsuits against SHG, Leon and Renner purportedly solicited investors through word-of-mouth and advertising by claiming to pay annual returns exceeding 8% (and in some instances 3% quarterly) through various investments including oil-and-gas ventures and the funding of an international bank.  Investors were required to reinvest all purported profits into their account for a one-year "lock up period," after which they could request a withdrawal of any earnings.  While little is known about SHG’s purported victims, one civil suit alleges that Leon's brother-in-law was a victim.  Below is a "Fact Sheet" that was distributed to at least one investor:

While investors were provided with periodic statements showing their account balance and consistent earnings, investors apparently began encountering difficulties in withdrawing their funds beginning no later than 2016.  SGH was administratively dissolved in 2017, and one investor alleged in a civil suit that Leon's father-in-law had called Leon a "crook" and indicated that Leon's house was in foreclosure.  At least five investors sued SGH, Renner, and Leon for their failure to return their funds and have since obtained final judgments totaling more than $2 million.

According to the Florida Office of Financial Regulation, SGH operated a Ponzi scheme whereby investor funds were misappropriated by Leon and Renner for personal expenses including mortgage payments, credit card bills, and cash withdrawals.  

Leon and Renner remain jailed on $1 million bond each while the Miami Herald reports that Rogers is free after posting $30,000 bail.