Compliance December 29, 2009

AP: 2009 was the Year of the Ponzi

Ponzi was a huge buzz word in 2009, during which we saw almost four times as many investment scams fall apart as in 2008, the AP reported.
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Tens of thousands of investors watched more than $16.5 billion evaporate in 2009 as Ponzi schemes unraveled, according to an Associated Press analysis of scams in the 50 states. That number doesn’t include the year’s star Ponzi schemer, Bernard Madoff, whose Ponzi scheme counts toward 2008 numbers (see “Madoff Gets Life—and Then Some”).

In 2009, 150 Ponzi schemes collapsed, compared to 40 in 2008, according to the AP’s analysis of criminal cases at all U.S. attorney’s offices and the FBI, as well as criminal and civil actions taken by state prosecutors and regulators at both the federal and state level.

The Ponzi scheme has come a long way since Charles Ponzi concocted a postal investment scam in 1919. The Italian immigrant bilked investors out of $10 million before he was caught and jailed (see “Ponzi Schemes: Side by Side”).

Ponzi schemes both big and small have graced the financial news this year, including the $7-billion fraud from Allen Stanford (see “Another Billion-Dollar Investment Advisor Fraud Unfolds”). Experts said the recession was the main reason for the exposure of so many Ponzi schemes, the AP reported (see “Recession Foils Ponzi Schemers’ Game”).

Since Madoff’s scheme rocked the world, enforcement efforts and public awareness has ramped up. Although some might say it’s too late, the Securities and Exchange Commission (SEC) has taken steps to make it harder for Ponzi schemes to exist in the future (see “SEC Tightens Adviser Custody Rules”).

Ponzi scheme investigations now make up 21% of the SEC’s enforcement workload, compared with 17% in 2008 and 9% in 2005, according to the AP. Furthermore, the SEC issued 82% more restraining orders against Ponzi schemes and other securities fraud cases this year than in 2008, and it opened about 6% more investigations.

The FBI opened more than 2,100 securities fraud investigations in 2009, up from 1,750 in 2008, according to the AP. 

Compliance December 29, 2009

Going Green Can be Investment Scam, FINRA Warns

The Financial Industry Regulatory Authority (FINRA) is telling investors to watch out for green energy investment scams.
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FINRA issued an Investor Alert today warning investors to be wary of green energy investments promising large gains from investing in companies purportedly involved in developing or producing alternative, renewable or waste energy products. The alert helps investors distinguish what might be a green scheme.

The alert also explains how green energy scams typically work. In some schemes, con artists are using everything from tweets and text messages to Webinars and faxes to lure investors with very aggressive, optimistic, and potentially false and misleading statements that create unwarranted demand for shares of a small, thinly traded company, FINRA said. That is a classic “pump and dump” fraud in which con artists behind the scheme then sell off their shares, leaving investors with worthless stock.

FINRA gave the examples of a solar stock touting 200% gains. In another instance, a fraudster suggested stock in a company involved with green patents could rise 1,000% or more.

Green investing can also be tied to Ponzi schemes, in which a scammer uses incoming funds from new investors to pay purported returns to earlier stage investors.

FINRA said that investors should ignore unsolicited investment recommendations and question the source of investment information. Furthermore, they should be wary of investments providing exponential returns. Another red flag is investment initiative that pushes investors to go all in, such as encouraging them to liquidate retirement accounts.

“Right now there are a lot of legitimate stories in the news about green energy initiatives, and con artists want to leverage people’s interest in green energy to make a quick buck at investors’ expense,” said John Gannon, FINRA senior vice President for Investor Education, in a statement. “There is a lot of interest in companies that claim to provide green energy, but we issued this Alert to remind investors to be vigilant about avoiding investment scams, no matter how they are packaged.”

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