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.

CFTC Alleges Florida Forex Venture Offering 12% Guaranteed Returns Was $75 Million Ponzi Scheme

The Commodity Futures Trading Commission recently unsealed an action in Florida federal court accusing five men of operating a Ponzi scheme that raised at least $75 million from at least 650 investors nationwide.  The action, filed in the Middle District of Florida, charges Michael DaCorta, Joseph S. Anile, II, Raymond P. Montie III, Francisco “Frank” Duran, John Haas, and various entities with violations of the Commodity Exchange Act and seeks various relief including a permanent injunction, disgorgement of ill-gotten gains, restitution, and imposition of civil monetary penalties.  A temporary receiver was also appointed at the Commission’s request to marshal assets for the benefit of defrauded victims.

The Complaint alleges that the Defendants operated several entities, Oasis International Group Ltd., Oasis Management LLC, and Satellite Holdings Company, collectively as “Oasis” and  began soliciting victims in mid-2014 to invest in two commodity pools - Oasis Global FX, Limited (“Oasis Pool 1”) and Oasis Global FX, SA (“Oasis Pool 2” (collectively, the “Oasis Pools”) with promises of minimum 12% annual returns derived from trading forex.  Potential “lenders,” as investors were called in an apparent effort to avoid implicating federal securities laws, were told that the Oasis Pools had never had a losing month (indeed, one Defendant allegedly claimed the operation had never had a down day), that there was no risk of loss, and that the only way forex trading could be a bad investment was “if all the banks in the world closed.”  Oasis also allegedly offered a referral program designed to incentivize the recruitment of new investors.

Potential investors were told that DaCorta was the “brains of the operation” who was able to obtain consistent returns by trading forex, with the Oasis Pools purportedly returning 22% in 2017 and 21% in 2018.  Investors were also told that the guaranteed annual return of 12% was a minimum return, as investors would also be entitled to share the daily profits their funds purportedly generated from trading.  Oasis also allegedly made numerous representations concerning the safety of investor funds, including Defendant Duran’s purported statements that Oasis owned at least $15 million in real estate and precious metals that served as collateral for its investments and that “the Oasis Pools’ trading platform could not lose money unless there was a bigger problem in the financial markets and people were going to supermarkets with shotguns.”  Investors were received regular account statements showing the purported growth of their account.  Oasis ultimately raised roughly $75 million from at least 650 investors nationwide (despite claiming on its website that it was not open to U.S. investors). 

According to the Commission, however, all of these claims were false and designed to conceal Oasis’s operation of a classic Ponzi scheme by paying fictitious returns using investor funds.  For starters, the Commission alleges that potential investors were not told that DaCorta was effectively permanently banned from the forex trading industry in 2010 after several rules violations during his time as President of a forex trading firm.  While Oasis did engage in some legitimate trading, the Commission alleges that it suffered near total losses of investor funds (and not the consistent above-20% returns in 2017-2018).  For example, Oasis’s actual returns in 2017 and 2018 were -45% and -96%, respectively.  And contrary to Defendants’ representations regarding the safety of investor funds, the Commission alleges that the forex trades in the Oasis accounts had a 100:1 leverage ratio.  

Of the approximately $47 million that was not invested as promised, the Commission claims that Defendants misappropriated those funds to, among other things, make $28 million in Ponzi payments, purchase nearly $8 million of real estate, live a luxurious lifestyle, and make transfers to related third parties.  

A copy of the complaint is below:

Madoff Recoveries Top $10 Billion After $497 Million Settlement

The court-appointed trustee tasked with recovering assets for victims of Bernard Madoff's massive Ponzi scheme announced a $497 million settlement with two Cayman Islands hedge funds that brings the total amount recovered to approximately $10.3 billion.  Irving Picard, the bankruptcy trustee for Madoff's now-defunct broker-dealer, filed a Motion to Approve Settlement (the "Motion") with Herald Fund SPC and Primeo Fund (the "Funds"), two "feeder" funds that had funnelled investor funds to Madoff.  With the settlement, Picard has now recovered approximately 59% of the estimated $17.5 billion in losses attributable to Madoff's fraud; with the inclusion of funds paid to victims from Madoff's membership in the Securities Investor Protection Corporation, all investors with losses of $925,000 or less have been fully paid back.

The Funds maintained various accounts with Madoff's firm, investing both directly and through other funds that also had exposure to Madoff.  In the six years preceding the collapse of Madoff's scheme, the Funds withdrew more than $700 million in invested principal from Madoff's firm.  Picard filed lawsuits against Herald and Primeo in July 2009, and subsequently filed an amended complaint on December 5, 2010.  As a protective measure, Picard also filed a proceeding against Primeo in the Cayman Islands.

Under New York law, transfers within six years of the filing of a bankruptcy petition may be recovered as proceeds of a fraudulent transfer.  Because Madoff admitted to running a Ponzi scheme, these transfers are considered to be made with the actual intent to hinder, delay, or defraud.

While settlement negotiations had been ongoing for several years, the Motion implied that a Cayman court's 2013 placement of Herald into official liquidation - which replaced the fund's board of directors with a court-ordered slate - may have been the turning point.  Picard entered into mediation with the Funds earlier this year, and recently reached an agreement.

The agreement calls for Herald to pay approximately $467 million to Picard, which includes a $100 million credit relating to an investment in Herald by JP Morgan that Herald had long maintained should be factored into any amount it purportedly owed.  In addition, Primeo would pay approximately $29 million, which brings the total settlement by the funds to approximately $497 million.

The settlement also includes the allowance of a customer claim filed by Herald of approximately $1.64 billion, which Picard indicated represents Herald's net equity of $1.172 billion and the $467 million paid into the estate as part of the settlement.  Notably, this claim amount would likely place Herald as among one of the largest investors in Madoff's scheme.  As part of the settlement, Picard will make a "catch-up" distribution to Herald, since it was not allowed to receive distributions made to victims over the past few years due to the pending litigation, representing 46.059% of its allowed losses of $755,320,133 - of which Herald will use a portion to contribute its settlement amount with Picard.

Interestingly, while Herald filed a claim with Madoff's bankruptcy estate claiming scheme-related losses, Primeo did not.  While the Motion for Approval of Settlement does not disclose the amount of Primeo's losses, it does disclose that all transfers made by Primeo during the six-year period preceding the bankruptcy filing were withdrawals of principal.  Thus, it is entirely possible that Primeo's failure to file a proof of claim may have prevented it from recovering a significant portion of its losses, as Herald was able to do.

A hearing is scheduled for December 17, 2014 to present the settlement for court approval.

A copy of the Motion is below:

Madoff Settlement

Maine Woman Receives 80-Year Sentence For $4.7 Million Ponzi Scheme

In what is likely the stiffest sentence for a female Ponzi schemer, a Maine woman was sentenced to serve eighty years in prison for her role in a $4.7 million Ponzi scheme.  Karen Bowie, 61, received the sentence after being convicted at a week-long trial in Austin, Texas of property theft.  While Bowie was not charged with masterminding the scheme, authorities accused her of playing a focal role in promoting the scheme, in which she received over $2 million that was diverted from investors.  While Bowie would be eligible for parole due to her conviction on state crimes, the sentence will likely be a life sentence.

Bowie was part of Titan Wealth Management, LLC ("Titan"), which was in the business of recommending European mid-term notes ("MTN's") to clients.  Potential investors were told that the notes were low risk and offered outstanding short-term returns ranging from 10% to 50%.  Additionally, Titan's owner, Thomas Lester Irby, told investors that Titan would receive no fees or compensation from selling the notes, and in the event of emergency, Irby could easily liquidate a $10 million MTN that he personally owned.  Irby and Titan would eventually raise over $3 million from more than 30 investors.

However, investor funds were not pooled to purchase MTN's or even any interest in MTN's.  Instead, millions of dollars in investor funds were used to pay putative MTN 'profits', as well as diverted for Irby's personal benefit.  Bowie, who did not deal directly with investors but instead directed Irby to make false representations, also received nearly $2 million without providing any apparent consideration.  Irby was sentenced in 2010 to 24 years in prison after being charged with money laundering.

Bowie's 80-year sentence should serve as a stark reminder of the perils of proceeding to trial rather than accepting a guilty plea. The severity of Bowie's sentence is not only grossly disproportional to the relatively meager amount of funds involved, but is also easily one of the highest handed down to a Ponzi schemer - man or woman. (While women have been convicted of operating Ponzi schemes, they are handily outnumbered by men.)  Indeed, the 30-year sentence handed down to a Florida woman for orchestrating a $100 million Ponzi scheme pales in comparison to Bowie's sentence.  Other examples of women being sentenced for Ponzi schemes are here, here, here, here, and here.

SEC: Secretive 'Trust' With World War II Ties That Promised 38% Annual Returns Was $15 Million Ponzi Scheme

The Securities and Exchange Commission ("SEC") instituted a civil enforcement action against a Florida man and a California woman, alleging that the investment opportunity promising 38% annual returns and requiring strict secrecy was, in reality, a Ponzi scheme that raised more than $15 million from unsuspecting investors.  Billy W. McClintock, 70, and Diane Alexander, also 70, were charged with multiple violations of federal securities laws in connection with the alleged scheme, which promised lucrative gains through a highly-secretive entity known as the "Trust".  The SEC is seeking injunctive relief, an asset freeze, disgorgement of all ill-gotten gains, and civil monetary penalties.

According to the SEC, McClintock was a resident of Bradenton, Florida, and had previously served time in prison due to a cocaine trafficking conviction.  McClintock and Alexander apparently shared a long-time friendship, and sometime before 2002, McClintock confided to Alexander that he was associated with a secretive investment club known as the "Trust".  Apparently, while on a trip to London, McClintock had happened upon a man named "John" who was a member of the Trust and disclosed to McClintock that he could lend money to the Trust and receive a 38% annual return.  The "Trust" was allegedly formed after World War II by several wealthy European families, with offices in Luxembourg and Zurich, and had the power to create money "through fractional banking and the sale of banking debentures"

The "Trust" was shrouded by heavy secrecy, with McClintock being told that the communication of any details about the trust to any third person, such as an attorney, certified financial accountant, or financial planner, would result in that person's permanent ban from participating in the Trust.  After hearing McClintock's story, Alexander accepted McClintock's offer to serve as United States Regional Director for the Trust, in addition to three other unnamed Regional Directors.  Along with McClintock - the 'United States National Director' - the two relayed the same story to potential investors, along with the promise of steady annual returns of 38%.  The two also appealed to investors' religious beliefs, telling them to "put your money in the Trust and your trust in God.” In total, approximately 220 investors contributed over $15 million to the "Trust".

However, contrary to their representations, there is no evidence that any secretive Trust ever existed, and neither Alexander nor McClintock ever sent any investor funds to any Trust.  Rather, according to the SEC, investor funds were simply pooled together in classic Ponzi scheme fashion, and the regular interest payments made to investors were in fact comprised of these commingled funds.  Additionally, investors were not told that, in return for referring investors to the "Trust", Alexander received a 'management' fee of 5%, which she also received for every investor that 'rolled over' their principal investment upon expiration. As the SEC stated, 

the Trust is a Ponzi scheme in which new investor funds, not Trust profits, pay the purported fees  and interest owed to earlier investors. 

Ironically, Alexander sought to convince investors to disregard the old agage that  'If it sounds too good to be true, it probably is,' claiming that it was simply 'a lie that came from the pit of hell.' 

A copy of the SEC complaint is here.