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Recent SEC Releases

More Arrests Expected in Rothstein Scheme

The investigation of the $1.2 billion Ponzi Scheme run by Scott Rothstein, a former Florida lawyer who pled guilty in January 2010, continues to move forward, with prosecutors disclosing in a filing late last week that a fresh round of indictments is expected in the coming months.

Rothstein, who admitted using the pretense of selling nonexistent legal settlements to investors to rake in over $1 billion, has been cooperating extensively with investigators since his arrest and guilty plea.  He was sentenced to 50 years in prison for his role, although prosecutors are expected to ask for a reduction based on the fruits of Rothstein's efforts in cooperating.

The latest disclosure comes as the trustee marshalling assets for the benefit of defrauded investors seeks to depose Rothstein, after receiving approval from United States Bankruptcy Judge Raymond Ray.  The decision will ultimately be up to District Judge James Cohn, who will take up the matter at a hearing on July 1st.   Prosecutors said in a filing opposing the deposition that

"It is anticipated that a deposition of Rothstein would disclose the evidence which forms the basis of the government’s proposed case to putative defendants and other targets of the criminal investigation, some of whom are parties to this action. It is further feared that such a disclosure of information, at the present time, would enable coconspirators to obstruct the grand jury’s investigation and to corruptly tailor their statements and statements of other witnesses to falsely exculpate themselves."

In lieu of deposing Rothstein, prosecutors have offered to provide the trustee, Herbert Stettin, with information he may need to go forward with pursuing clawback lawsuits, in light of the two-year statute of limitations applicable in bankruptcy proceedings.

Already, five Rothstein associates have been charged, including the chief operating officer of the now-defunct firm.  According to the recent filing, prosecutors expect to file indictments for a broad array of crimes, including mail and wire fraud, campaign finance fraud, tax fraud, extortion, payments of unlawful gratuities, bank fraud, and money laundering.


'Brooklyn Madoff' Ponzi Schemer Sentenced to 20 Years

A New York man convicted of running a $45 million Ponzi Scheme over three decades was sentenced to twenty years in federal prison on Friday, June 17th, 2011.  Philip Barry faced up to 34 years under federal sentencing guidelines.  According to prosecutors, the scheme is believed to be the longest in history. 

Philip Barry began soliciting investors in 1978 to invest in the Leverage Group, which he claimed focused on stock options.  Over the course of the next thirty years, more than 800 investors entrusted $45 million to Barry.  The scheme functioned by 'promising' a guaranteed rate of return to investors each December ranging from 12.55 to 16 percent.  At least some of the money was diverted to purchasing property that Barry planned to develop but could not later obtain permits.  Barry used funds from new investors to pay distributions to older investors, the classic hallmark of a Ponzi Scheme.

It was Barry himself who voluntarily approached authorities in 2008 to inform them he owed investors $50 million.  He would later that year declare bankruptcy, and would be formally charged in late 2009.  Barry settled a related SEC proceeding by agreeing to pay disgorgement of ill-gotten gains, a penalty, and pre-judgment interest.  

Barry's sentence is more severe than those Ponzi Schemers sentenced in similar situations, which may be the result of several factors.  First, Barry elected to go to trial rather than seek a plea deal, and was subsequently convicted of thirty-four federal charges.  Second, Barry's scheme spanned over three decades, making it the longest known Ponzi Scheme - including Madoff.  As part of his sentence, Barry is barred from seeking employment in the financial sector when he is released.



Ponzi Scheme Uncovered in China; Sign of Things to Come?

As reported by Xinhua News Agency, fourteen people have been arrested in China's Zheijang Province for "unscrupulous speculative practices" and later charged with illegally absorbing public deposits in association with investment in a supposed tea company.

According to prosecutors, from June 2007 to May 2011, the suspects solicited what investors thought were initial offerings of a listed company in the hopes of realizing substantial returns, eventually raising almost twenty million dollars.  Prosecutors say that nearly 1,000 investors were duped into investing with the suspects, who used several companies including the Hongru Tea Industry Co. Ltd. and the Hongru Cultural Development Holding Group to raise the money.

 While this scheme pales in comparison to the much larger Ponzi Schemes uncovered lately in the United States, it raises an important question: will a slowdown in the Chinese economy result in the unmasking of Ponzi Schemes as happened in the United States?  As a result of the slowing of the US economy from 2007 to 2009, a large number of Ponzi Schemes imploded due to the drying up of new investors needed to sustain the distributions.  Yet, while the US economy sustained negative GDP growth during this period, Chinese GDP growth remained positive, dipping to a low of 6% GDP growth in early 2009.  As the global economy has recovered, the Chinese economy has rocketed back to double-digit GDP growth.

While economic growth has remained constant in China, a deflating bubble in real estate prices that have increased substantially in the past two decades presents serious implications for future growth.  In the United States, the uncovering of numerous Ponzi Schemes began occurring towards the last half of the Great Recession, presumably when new investor funds began drying up and preventing investors from receiving regularly scheduled distributions.  Common sense dictates that such a situation could certainly occur in China should a similar economic slowdown occur, especially in light of the incredible growth in the Chinese economy over the past decade.


Secondary Market for Investor Claims Gaining in Popularity

Investors in now-infamous Ponzi Schemes run by those such as Bernard Madoff are now seeing renewed interest by financial institutions interested in buying any rights to proceeds eventually recovered and distributed by the court-appointed receiver or trustee.  These offers essentially represent both an opportunity for an investor to immediately receive a mutually-agreed amount for any future claim to proceeds in the Ponzi scheme and also a bet by the buying financial institution that the recovered proceeds will return an amount greater than for what the investor is willing to part with their claim.

The financial institutions rumored to be bidding for investor claims include Goldman Sachs, Deutsche Bank, UBS, and Royal Bank of Scotland.  Particularly noteworthy is the fact that the latter two are currently embroiled in litigation with the Madoff Trustee, Irving Picard, as a result of their alleged connections with Bernard Madoff Investment Securities, the broker-dealer utilized by Madoff to perpetrate the scheme.  As one commenter has noted, those banks facing litigation from Picard may be seeking to hedge any potential litigation losses by buying claims.  

The prospect of receiving a lump-sum payment in return for relinquishing any legal claim to future proceeds may entice investors who lost a substantial portion of their assets and may not have the financial stability to wait out the lengthy legal process of unraveling the scheme.  Interestingly enough, when the practice first began in early 2010, investors were offered an average of around 20-25 cents on the dollar for their claim to whatever Picard finally recovered.  However, when the estate of Jeffrey Picower settled with Picard in December 2010 for $7 billion and bringing Picard's then-total recovery to $10 billion, the offer to investors shot up to a range of 70% - 75% per allowed claim.  Of course, it goes without saying that those institutions now offering that amount have even more faith that Picard can continue to negotiate hefty settlements.

Additionally, the dynamics of distributions from recovered Ponzi assets may also favor banks in enticing investors to accept these offers.  Because the process of recovering funds is an ongoing procedure and is dependent on the conclusion of pending litigation, distributions are often made on a yearly or bi-yearly basis depending on the availability of funds.  Thus, it is not at all uncommon to have 3-5 distributions over the course of a Receivership, with a final distribution often coinciding with the official conclusion of the process.  The prospect of receiving an up-front payment will particularly appeal to those who are unable to wait out the lengthy process.



Launched on June 19, 2011, Ponzitracker is the result of the simple realization that no website exists to chronicle the increasing frequency and pervasiveness of the Ponzi Scheme. The market turmoil during 2007 - 2009 spared few, including those financial firms that promised extraordinary gains to unsuspecting investors that later turned out to be too good to be true. This site aims to provide transparency to those schemes.
A Ponzi Scheme can be thought of as a lagging indicator of economic malaise, in that decreasing market prospects increase investor redemption requests that cause the unraveling of the scheme when those requests deplete the funds needed to make regular distributions to investors. As a result of the severity of the recent financial crisis not seen in over a generation, an incredible amount of hedge funds and financial entities thought to be legitimate have instead become unmasked as simple Ponzi schemes.
Much has been made of the the schemes involving tens-of-billions of dollars of losses perpetrated by the likes of Bernard Madoff and Allen Stanford. Yet, for every one of these massive Ponzi schemes, there are tens or hundreds of much lesser severity that seem to be overlooked or ignored. But regardless of the size of the scheme, each still involves the deception of countless individuals and the total or near-total loss of principal. This website aims to provide the larger picture and the true pervasiveness of Ponzi schemes. For, regardless of the dollar amount, each scheme involves the loss of investor funds, the ever-increasing toll on those tasked to investigate such losses, and the decreasing confidence in the legitimacy and posterity of the financial markets.