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Recent SEC Releases

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.


SEC Changes Course and Urges SIPC to Compensate Stanford Victims

In a change of course, the SEC exercised its discretionary authority granted under the Securities Investor Protection Act of 1970 ("SIPA") to hold that investors in Allen Stanford's Stanford Group Company that later was revealed to be a giant Ponzi scheme are entitled to compensation from the Securities Investor Protection Corporation ("SIPC").

While this is a victory for investors in Stanford's alleged scheme, such a ruling should not be interpreted as an across-the-board policy change or additional avenue of compensation for others affected by Ponzi schemes.  In Stanford's case, the presence of a Broker-Dealer brought the scheme under the auspices of the SIPC, which, according to its website, operates to compensate investors of failed brokerage firms.  Similar to the FDIC's mission in insuring consumer deposit accounts, SIPC aims to allow customers of troubled brokerage firms to recover portions of their losses without being forced to wait during the pendency of legal proceedings.

Should the SIPC follow the SEC's ruling, a trustee would likely be appointed who would function similarly to a court-appointed Receivership.  Investors would be able to file Proof of Claim forms, whose merit would then be determined by the trustee.  Funds would then be paid out of the SIPC's reserve fund, which is funded entirely by its member securities broker-dealers.

While a promising step for Stanford investors, who have seen the alleged mastermind deny the SEC's claims and seek to take the matter to trial as early as September, the larger effect of the SEC's ruling provides little precedential effect for other similarly-situated Ponzi victims, as the existence of the broker-dealer in Stanford's case has not been widely replicated.  The primary vehicle for many other Ponzi schemes has largely been Hedge Funds, which have historically not fallen under the auspices of SIPC.


Source - Some (But Not All) Ponzi Scheme Investors Entitled to Protections of SIPA


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