Ponzi Schemes Continued To Proliferate In 2014

Despite a burgeoning economy, increased regulation, and heightening scrutiny on financial crime, data compiled by Ponzitracker shows that Ponzi schemes continued to be uncovered at a steady pace in 2014 and result in numerous and lengthy prison sentences for the perpetrators.  In 2014, at least 70 Ponzi schemes involving more than $1.5 billion in investor funds were uncovered - equating to the discovery of a new scheme every five days.  Additionally, nearly 1,500 years in prison sentences were handed down in 2014 to at least 136 individuals for their involvement in Ponzi schemes.  Analysis of this data, illustrated in the below database and assembled with the assistance of Alison Jimenez at Dynamic Securities Analytics, suggests that the era of the Ponzi scheme is unfortunately here to stay for at least the near future.

The Madoff Era: Unprecedented And Devastating

The collapse of Bernard Madoff's massive Ponzi scheme in late December 2008 heralded the start of a likely-unprecedented period of time during which over 500 schemes have since been discovered.  This onslaught was not gradual but rather sudden and violent; in the 14-month period from October 2008 to December 2009, the three largest Ponzi schemes in history collapsed in stunning fashion (with losses from the largest, Madoff's fraud, more than doubling those of the second-largest scheme)  Yet, while the number of schemes discovered annually has decreased since peaking at 113 in 2009, the proposition that increased regulation and heightened public awareness might significantly curb the number and severity of schemes going forward has not been borne out by the data.  Rather, the ensuing years showed an alarming consistency in both the number and magnitude of schemes uncovered. As the graphic (right) illustrates, the number of schemes uncovered from 2010 to 2014 has ranged from a low of 67 in 2013 to a high of 100 in 2012.  

The increased prosecution of these schemes has resulted in a corresponding increase in prison sentences handed down to Ponzi scheme perpetrators and their accomplices, with more than 5,000 years in prison sentences handed down to more than 400 individuals in the past six years.

2014 Data Shows Positive, Alarming Trends

An analysis of Ponzi scheme discoveries and prison sentences in 2014 points to both positive and alarming trends.  On the one hand, the average Ponzi scheme discovered in 2014 was approximately $21.8 million - an approximately 50% decrease from an average size of nearly $43 million in 2013 and the lowest average size since 2011.   Coupled with a modest increase in the median Ponzi scheme size, the data suggests that the number of large schemes that had previously boosted the average scheme size appears to be on the decline.  However, any comfort from that statistic is negated by the fact that both the number of schemes uncovered and accompanying prison sentences increased in 2014 (albeit modestly) compared to 2013. 

There was also a notable increase in the role of women in Ponzi schemes discovered in 2014. During the 2008 to 2013 time period, males comprised 90% of the individuals arrested and sentenced for Ponzi schemes.  While that percentage remained constant for Ponzi scheme sentencing in 2014, women made up over 16% of individuals implicated in Ponzi schemes discoveries in 2014 - a 240% increase from the same time period in 2013 and a 181% increase from the 2008 - 2013 average.  While the sample size is much too small to draw any substantial or permanent conclusions, the sudden increase in schemes involving females may be a trend worth further scrutiny.  

Finally, the data shows that California significantly outpaced the rest of the United States in terms of discovered Ponzi schemes.  Of the 70 Ponzi schemes uncovered in 2014, an astounding 13 - or nearly  20% - were based in or had ties to California and had a collective total of nearly $370 million of investor funds at stake.  Florida was a distant second with seven schemes discovered.   

In closing, any hopes that 2014 might finally signal the final curtain on the "Madoff Era" are belied by the data.  While authorities have done an admirable job in rooting out Ponzi schemes over the better half of the past decade, it simply appears that new fraudsters have been more than willing to take the place of their fallen brethren.  The result has been a continued evaporation of investor wealth, which serves not only to decrease legitimate investments but continues to breed mistrust in the financial markets for those slighted victims.  While significant strides have been made in increasing regulation and educating the investing public, more must be done.

For a comprehensive database of Ponzi schemes spanning the last six years, visit the Ponzi Database.