For First Half of 2019, Ponzi Scheme Discoveries Remained Steady But Are Red Flags Waving?

Earlier this year, Ponzitracker published a compilation of data and statistics for Ponzi scheme discoveries and sentences from 2008 - 2018.  Believed to be the first time that this data was aggregated in a single setting, it allowed a sobering look into how Ponzi schemes in the United States have flourished since Bernard Madoff’s $65 billion Ponzi scheme shocked the world in 2008.  In cataloguing the over-800 schemes discovered and over-700 sentences handed down since 2008, some of the conclusions were unsurprising including that the populous states of Florida, New York, and California were responsible for the largest number of Ponzi scheme perpetrators.  Yet the data also yielded other eye-raising takeaways including that men were responsible for approximately 90% of those schemes and that Utah had the 6th highest number of Ponzi schemes despite being in the bottom third of U.S. population.

Ponzitracker’s data also showed that the number of Ponzi schemes uncovered in 2018 was the lowest since 2008 - the year that massive schemes operated by Madoff and Tom Petters caused billions of dollars in losses and vaulted the term “Ponzi scheme” into the global lexicon.  The data showed that the average and median Ponzi scheme size during 2018 was largely unchanged from previous years, and taken together these data points offered at least preliminary support for the theory that these positive changes were at least partially attributable to increased regulatory efforts and heightened consumer awareness.  The continually declining number of Ponzi scheme discoveries in the midst of a lengthy positive run in financial markets also supported the hypothesis that Ponzi scheme discoveries were inversely correlated with financial market performance; in other words, the schemes were able to thrive in strong economic times where similar returns were at least theoretically possible with the current market performance and it was only after a market downturn that schemes generally began to be exposed. 

One of the largest questions after compiling the 2018 data was whether the steady decline in Ponzi scheme discoveries - the smallest number in Ponzitracker’s reporting since 2008 - would continue or revert back to the higher numbers previously observed in recent years.  In preliminary data compiled by Ponzitracker for the first half of 2019, the results appear to be mixed.  In a positive takeaway, 23 Ponzi schemes were uncovered during the first six months of 2019, which appears to be similar in frequency to the 42 schemes uncovered during all of 2018.  That data certainly suggests that, absent a large uptick in discoveries during the last six months of 2019, that the possibility of second year of less than 50 Ponzi scheme discoveries is likely.

Yet in a more ominous sign, both metrics concerning scheme size significantly increased for the first six months of 2019 compared to previous years.  While the average scheme size in 2018 was $34.5 million, the average size for the first half of 2019 was roughly double that at $68.5 million.  Similarly, the median scheme size in 2018 was $5.4 million while the median size in the first half of 2019 was nearly triple that figure at $15 million.  Assuming these trends hold, each of these metrics would be the highest number since 2009.  On their face, these figures suggest generally larger schemes are being discovered which is demonstrated by 5 Ponzi schemes of at least $50 million in size during the first half of 2019 - including two over $300 million.  

One likely explanation for the larger scheme sizes is that Ponzi schemes have been able to exist under the radar and attract more investors - and investments - as a result of continuously healthy financial markets.  As markets have generally moved upward over the past several years, there is less of a need for investors to tap their “safe" or “guaranteed” investment which seemingly (and in some cases inexplicably) continues to increase in value.  In turn, the continuing viability and purported prospering of the scheme may lead to an increase in investments through word-of-mouth or additional investments from existing investors.  

Other notable takeaways from the 2019 data include the revelation that more than half of the 33 individuals accused of being involved in a Ponzi scheme hailed from just two states - Florida and California.   The data also marks the highest proportion of females (approximately 15%) accused of operating Ponzi schemes.  

A chart of Ponzi scheme discoveries from the first half of 2019 is below:


Court: Lawsuit Against Lawyer Who Represented Madoff Winners And Losers Can Proceed

“Ms. Chaitman represented both net winners and net losers in a zero-sum game; the more money collected from some of her clients (the net winners), the more available to be distributed to her other clients (the net losers). Ms. Chaitman’s clients, therefore, were in direct conflict with each other.  To make matters worse, Ms. Chaitman herself is a net loser, which means she personally stands to receive money taken from her net winner clients. This conflict cannot be waived.”

In the immediate aftermath of Bernard Madoff’s massive Ponzi scheme, one that resulted in at least $17 billion of losses to thousands of investors, many of those investors turned to an outspoken lawyer who promised to champion their unfortunate situation and resist the efforts of the court-appointed trustee seeking to recoup funds.  Many were drawn to Helen Chaitman’s fiery resistance to trustee Irving Picard’s clawback efforts, which would ultimately result in many later retaining her to defend the trustee’s lawsuits seeking return of the fictitious profits that had been the sustenance of Madoff’s fraud.  A court recently ruled that those same victims can proceed with a class-action lawsuit on allegations that Chaitman had irreconcilable conflicts preventing her from representing various classes of Madoff victims.

According to those victims who had been fortunate enough to withdraw more money than they put into Madoff’s scheme, known as “net winners,” their self-proclaimed “savior” Chairman had an inherent conflict of interest all the while she was supposedly advocating for those net winners - Chaitman herself was a “net loser,” having invested in Madoff’s scheme and failed to recoup all of her original investment before the scheme’s collapse.  Thus, as those victims contended in a class action against Chaitman and her former and current law firms, Chaitman’s efforts in representing those “net winners” and eventually resolving cases by repaying some (or all) of the winners’ false profits would place more and more funds into the trustee’s estate for eventual distribution to net losers - including herself - all the while enriching her with millions of dollars in attorney’s fees for her efforts.  Those investors also claimed that Chaitman’s efforts representing a third class of Madoff victims, the so-called “early investors” who sought to retain their realized profits out of the bankruptcy estate because Madoff’s fraud had not yet started, were in conflict to both the net losers and net winners.

Chaitman allegedly represented those “net winner” and “early investor” victims on an hourly-fee basis while representing the “net loser” victims on a contingency fee basis.  Of particular note, those “net loser” victims would eventually receive significant payments from the bankruptcy trustee and advances by the Securities Investor Protection Corporation which, in many cases, resulted in 100% recoveries for victims with investments under a certain amount. While the exact nature of those contingency fee agreements for “net losers” is unclear, it is interesting to theorize exactly what services besides providing general information and assisting investors with filing proof of claim forms (which are regularly submitted by Ponzi scheme victims without the assistance of counsel) might otherwise entitle Chaitman to a percentage of what could now be 100% recoveries for many investors.  For example, a 30% contingency fee for a victim who lost (and ultimately recovered) $1 million would yield a $300,000 fee.

As to her representation of “net winners,” an Amended Complaint accused Chaitman of continually advocating a strategy of “full-scale litigation” given Trustee Irving Picard’s goal to “make this litigation as expensive and time-consuming as possible because his only goal is to enrich himself at the expense of innocent customers….Picard will not settle for less than [the full two-year exposure].”  As part of this strategy, the Amended Complaint cites a request from Chaitman to her “net winner” clients to advance a $15,000 retainer per case in 2016.  The Amended Complaint alleged that at least one investor was, contrary to Chaitman’s claims, able to settle their claims “for a fraction of its full two-year exposure.”

In late 2018, Chaitman and her current and former law firms sought to dismiss the investors’ claims on grounds that the lawsuit failed to satisfy the numerosity (over 100 potential class members) and amount-in-controversy (over $5 million) requirements imposed on class-action lawsuits under the Class Action Fairness Act.  In July 2019, the Southern District of New York entered an Order affirming a Report and Recommendation which found that the lawsuit satisfied both requirements.  As to the numerosity requirement, the Court found that a June 2012 invoice provided by plaintiffs showing each “net winner” being billed 1/109th of Chaitman’s time spent working on clawback matters was uncontested and also highlighted that Chaitman’s website had claimed she represented over 1,600 investors.  

As to the $5 million amount-in-controversy requirements, the Court first noted the amount of fees each law firm contended it was paid.  Chaitman’s former firm acknowledged receiving $3.2 million in fees during the relevant period while her current firm indicated it had collected over $2.7 million during that same period.  While the Chairman Defendants contended that the amounts could not be aggregated to meet the $5 million requirement, the Court found that CAFA “explicitly” provided for aggregation of the plaintiffs’ claims and that such an interpretation was consistent with “the overall spirit of CAFA.”

At recently as late 2018, Chaitman continued to be involved in litigation with Trustee Picard over his clawback efforts.  Bloomberg reported in September 2018 that “Chaitman has lately been fighting in court for access to Picard’s massive database of trading records and other documents seized from Madoff’s firm to advance a fringe theory that the fraud wasn’t technically a Ponzi scheme.”  That same article referenced Chaitman’s efforts to dismiss an earlier case brought by the lead plaintiff in the class-action, including her position that the lead plaintiff “sued in a bid for press attention after Chaitman sued him for unpaid fees in New Jersey” and Chaitman’s belief that “the suit should be tossed because it’ll never get class-action status.”

The case will now be allowed to proceed to discovery given the Court’s decision.

A copy of the Order is available here.

Rhode Island Woman Arrested For $10 Million House Rehab Ponzi Scheme That Duped Step-Brother, Former Nanny

A Rhode Island woman was arrested on allegations that she ran a Ponzi scheme that raised more than $10 million from investors who thought they would receive half of the purported profits from the renovation and rehabilitation of foreclosed homes. Monique N. Brady, 44, was arrested and charged with a single count of wire fraud, a count which carries a maximum twenty-year prison sentence. The criminal charges come nearly a year after multiple investors sued Brady for the return of their money, including one investor who claimed that Brady “approached him about a new business she was starting to help support her children, including one with special needs.”

Brady formed MNB LLC (“MNB”) in October 2005. Brady told potential investors that MNB often contracted with private and government entities, including Freddie Mac, to perform large-scale rehabilitation projects on foreclosed houses throughout Rhode Island. Those investors were told that they could expect to receive 50% of the expected profits from these projects. In total, Brady raised more than $10 million from at least 32 investors, including Brady’s step-brother, the former nanny for her children, and multiple elderly victims who entrusted most or all of their life savings to Brady.

According to prosecutors, Brady’s claims of realizing significant profits from performing large-scale renovations were simply false. Instead, the work that MNB actually performed on some houses allegedly amounted to nothing more than menial tasks to preserve the value of those houses and prepare for an eventual sale such as snow blowing, electrical and boiler inspections, lawn mowing, and changing locks. boiler inspections. Far from bringing in significant revenues, the complaint alleges that most of those projects were for relatively small dollar amounts ranging from $25 to a few hundred dollars. Despite the menial nature of the work, Brady solicited investors to contribute large sums towards the purported projects - sometimes multiple investors for the same project. For example, the Complaint recaps the following instances of Brady’s solicitation of significant investments for projects that yielded far smaller revenues:

  • Two investors for the 144 Scappa Flow Road Project in Charlestown, RI. Brady received $20 in income for the project and $120,006 in investments.

  • Five investors for the 20 Arlee Road Project in Warwick, RI. Brady received $35 in income for the project and $47,925 in investments.

In other instances, the Complaint alleges that Brady simply solicited investments for projects that did not exist.

The criminal complaint is below:


California Investment Adviser Arrested And Charged With $7 Million Ponzi Scheme

Six months after he filed for bankruptcy, a California investment adviser was arrested and is now facing civil and criminal charges accusing him of operating a $7 million Ponzi scheme that pitched investments in an organic beef ranch, housing projects, and a marijuana cultivation plan. Christopher Dougherty, 45, was arrested by California state authorities yesterday morning on charges of grand theft, elder abuse, and securities fraud and was also the subject of a complaint filed today by the Securities and Exchange Commission accusing him of violating federal securities laws. As of yesterday, Dougherty was being held on $5 million bond.

Dougherty has been in the financial services industry since 1998 as both a registered representative and an investment adviser, acting after 2012 solely as an investment adviser. Dougherty owned and operated several businesses, including C&D Professional Services, Inc. d/b/a C&N Wealth Management (“C&D”), JTA Farm Enterprises, LLC d/b/a JTA Cattle and Hay Broker Services (“JTA Farm”), and JTA Real Estate Holdings, LLC (“JTA Real Estate”). After forming relationships with many San Diego school district employees in the mid-2000s, Dougherty formed C&D and invited many of those contacts to join him at that firm. Dougherty ultimately had 30-40 advisory clients at C&D.

In addition to advising those clients on their third-party investments, he also invited them to invest through him in either (1) various “private placements,” (2) JTA Farm, or (3) JTA Real Estate. For example, clients were told that Dougherty’s “private placements” provided quarterly 5% dividends that were tax-free. For JTA Farm, Dougherty told clients that they were investing in his farm, with some investors being sold “hay contracts,” and that any profits would come from the farm’s operations. Finally, a few clients were told that their funds would be used by JTA Real Estate to renovate and sell a residential property in El Centro, California, and that they would derive profits from the eventual sale of the property. In total, Dougherty raised at least $7 million from his clients.

According to the Commission, Dougherty’s representations regarding the private placements, JTA Farm, and JTA Real Estate were false. Dougherty allegedly did not make a single investment using any funds raised from the “private placements,” his JTA Farm activities were minimal and did not make a profit, and the house touted to JTA Real Estate investors was never finished. Instead, the Commission claims that Dougherty mastermined a typical Ponzi scheme by using new investments to pay returns to existing investors. In addition to paying investors $2.4 million in fictitious interest and principal, Dougherty is also accused of misappropriating millions of dollars in investor funds to sustain a lavish lifestyle that included mortgage payments, cars, vacations, and credit card payments.

Dougherty’s scheme encountered difficulties in 2017 when he was not able to attract enough new investor money to sustain his existing investor obligations. After several investors filed suit against Dougherty in 20187 to recover their investments, Dougherty and his wife filed bankruptcy in October 2018. However, the U.S. Trustee’s review of Dougherty’s finances recently resulted in a March 2019 filing concluding that:

The Debtors’ practice of using new investment money to pay existing investors dividends and principal gave the false impression that the payments received by investors came from earnings and profits or from a return of the principal. This deception is the basis of a Ponzi scheme.

Fox’s San Diego affiliate reports that Dougherty faces up to 35 years in prison if convicted of the criminal charges.