Posts Tagged ‘ponzi’

Recession Creating More Work for Defense Attorneys — But Not More Criminals

Monday, March 9th, 2009

 

A couple of weeks ago, we were at a luncheon with some white-collar defense attorneys, listening to a presentation by the acting U.S. Attorney, Lev Dassin. Mr. Dassin let us know that, although he couldn’t spill any particulars, there are a number of ongoing investigations at the Southern District of New York right now, which he expected to provide a lot of work for us later this year.

He also confirmed our impression that there is a lot of political pressure right now, causing prosecutors and law enforcement to focus more assets on white-collar crime. Many see the current economic downturn as the result of Wall Street skullduggery, so law enforcement is being tasked with doing something about it.

Our biggest fear is that people who did nothing illegal may get caught up in the frenzy to blame people for the recession. A federal criminal investigation is a serious matter, and even people who did nothing wrong can wind up in prison because of how they behaved during the investigation.

Still, a lot of white-collar crime is now coming to light these days, because of the hurting economy. Ponzi schemes and other fraudulent investments are being caught out left and right, as investors start trying to pay bills by cashing out their accounts, only to discover that their money isn’t there.

Furthermore, PricewaterhouseCoopers today published a white paper, “Boom Time for White Collar Crime,” predicting that the economy will cause greater numbers of people to commit white-collar crimes, such as embezzlement and fraud.

PwC partner Andrew Gordon told GAAP web that “sales targets seem ever more out of reach, bonuses are under threat, and people’s reputations and livelihoods are at stake. Together, these can be powerful motives for individuals to cross the line.”

The white paper predicts an increase in specific types of fraud: data theft by criminal organizations, “rogue traders” in corporate finance departments, and fraudulent mis-reporting of business numbers to make companies appear better to investors. The paper also sees more Ponzi schemes and fraudulent investment schemes collapsing as investors try to cash out.

So criminals caused a bad economy which is causing more criminals? That sounds a little simplistic.

Of course, the economy didn’t go south because a few Wall Streeters went around defrauding investors. The economy tanked for a lot of reasons, but mostly because lenders stopped believing they’d get paid back. Institutions with the most leverage — financial institutions particularly — got their margins called and couldn’t get new credit, a deadly combination. No amount of government stimulus would change that, without a condition that capital infusions to lenders must turn into loans. The government didn’t make such conditions, so lenders just hoarded their cash to sit out the storm. The credit market, already dying, was pretty much killed. The U.S. Congress and the new Administration have since then acted fairly consistently to prevent lenders from regaining sufficient confidence to start lubricating the economy again. In modern economics, perception is everything — if you are perceived to have liquidity, even if you are at risk, you will have liquidity (see JPMorgan Chase this time last year), but if you are perceived to be at risk even though you aren’t, your liquidity dries up (see Bear Stearns this time last year). Once lenders start perceiving that they will get their money back, things will start picking up. This crisis of confidence was caused, not by white-collar criminals, but by Clinton-era directives to make mortgages to people who can’t pay them, by borrowers and lending agents who cashed in on the resulting laxness, and by an ever growing house of cards that was destined to collapse.

So the economy didn’t go south because of criminals. Similarly, a worse economy doesn’t necessarily translate into more crimes being committed. People who would steal in bad times would have stolen in good times, too. White-collar types aren’t exactly Jean Valjean, stealing a crust of bread so their families don’t starve. No, white-collar crime requires a combination of opportunity and character traits, neither of which correlate with economic pressures.

What is true, however, is that more white-collar prosecutions are going to happen because an under-informed public and its politicians are screaming for blood. Unfortunately, we do not believe that all prosecutors out there understand the complexities and realities of the financial world well enough to accurately sift the guilty from the merely unlucky. Some innocent people are going to get caught in this ever-widening net.

We’re Not Alone

Wednesday, January 28th, 2009

 

Yesterday, we observed that there have been a lot of Ponzi schemes coming down lately, and asked what gives? Today, the Wall Street Journal made the same observation, and asked the same question.

Here are some points from the article:

* In 2007, the SEC had brought civil actions from 15 alleged Ponzi schemes. In 2008, they brought 23 such cases. So far this month, they’ve already brought 9. And that doesn’t include all the state-level fraud cases that have come down.

* On the criminal side, there have already been 6 multimillion-dollar fraud cases brought this month.

* Experts say these schemes are being discovered now because of the economic downturn. Investors try to cash out their investments, only to learn that the money’s gone. There’s also less money out there being invested, so the source of cash for these schemes dries up, and the house of cards comes crashing down.

The New York Times also had some similar observations:

* “What is causing them to surface now appears to be a combination of a deteriorating economy and heightened skepticism about outsize returns after the revelations about [Bernie Madoff]. That can scare off new clients and cause longtime investors to demand their money back, which brings the charade tumbling down.”

* The Commodities Futures Trading Association has also experienced a doubling of reported Ponzi schemes in the last year.

* On Thursday last week, Senators Chuck Schumer and Richard Shelby introduced a bill to hire 500 new FBI agents, 50 new AUSAs, and 100 new SEC officials to crack down on these crimes.

Yet Another Massive Ponzi Scheme Alleged. What’s that tell you?

Tuesday, January 27th, 2009

Agape World screenshot

Nick Cosmo, the 37-year-old head of Agape World Inc. and Agape Merchant Advance, was arraigned today on charges that he ran a Ponzi scheme that cheated investors out of $370 million since 2006.

The feds allege that about 1,500 investors were promised annual returns of as much as 80%. These huge profits were to come from short-term loans to businesses. Instead of coming from actual profits, however, the complaint states that returns paid to investors actually came from the outlays of subsequent investors.

Investor money went mostly to pay other investors, in a rob-Peter-to-pay-Paul setup similar to the Bernie Madoff and seemingly countless other Ponzi schemes hitting the news these days. About $55 million went to pay brokers who brought in the investors. A bunch of cash was allegedly spent on expensive luxuries for Cosmo himself, as well as to pay the restitution ordered in a previous mail fraud conviction. Only about $10 million actually went to the loans that were supposed to be the core investment. The firm also transferred $100 million since 2003 into Cosmo’s futures-trading accounts, of which $80 million was lost. As of last Thursday, said prosecutors, Cosmo’s firms had less than $750,000 in the bank.

Agape World was listed as #73 in Entrepreneur Magazine’s Hot 100 fastest-growing businesses in America. (See its listing, screenshotted above.)

This is just one more in a series of prosecutions that have been coming down lately. Prosecutors are clearly ramping up their focus on financial crimes in the wake of the Bear Stearns meltdown — it’s definitely the sexy crime of the moment, where the press is throwing a lot of ink, where reputations stand to be made. Of course, crime is only found where it’s looked for, and right now this is a hot (and relatively easy) crime to prosecute. So it makes sense that this is where prosecutors are focusing lots of assets.

But apart from that, what does it mean about the rest of us? Almost all of these Ponzi schemes promised investors stupid-high returns. Wasn’t it obvious to the investors what was going on? Were they just blinded by the go-go stock market, while it was hot? Were they desperate for a winning number after the market soured? Lots of the alleged victims out there were sophisticated investors — one would think they at least would have known the meaning of “too good to be true.” We’d like to hear what you think is going on.

We guess people’s common sense just gets blinded by the prospect of easy gains. And it happens often enough, to enough people who ought to know better, that this crime continues to proliferate nearly a hundred years after it became part of the common lingo.

Oh well, more work for us defense attorneys.

“Not With Me, They Don’t” – Race Not a Factor in Sentence, Says Judge

Thursday, January 22nd, 2009

 

District Court Judge Percy Anderson sentenced Jeanetta Standefor to more than 12 years in prison on Tuesday, for running an $18 million Ponzi scheme that preyed on middle-class black investors.

Standefor, who is also black, solicited investments from 650 people around Pasadena who thought the money would go to buying properties about to go into foreclosure. To maintain the illusion of profits, Standefor transferred $14 million of the invested money to early investors. She also spent about a million per year on herself, according to AUSA Stephanie Yonekura-McCaffery. The operation was run through her company Accelerated Funding Group — a name that is practically probable cause in itself.

At the sentencing hearing in the Central District of California, victims told Judge Anderson how they had trusted Standefor with their savings, often their life savings, after she first befriended them. Investors were told that they could make 50% profits in the first month.

Standefor’s attorney, federal defender Charles Brown, argued for leniency. “She is not a serial killer,” he said. “She is not a drug dealer. This is not a person who needs to be thrown in jail and locked up to learn her lesson.” He added that she was a foster child “who worked her entire life to prove her worth. . . [but] she took shortcuts, and started taking from Peter to pay Paul, and that’s how we got here.”

Judge Anderson disagreed with the defense attorney’s characterization, telling Standefor that even if this was just a white-collar crime, she was just as guilty “as if you’d taken a gun out and held it to the victims’ heads.”

Judge Anderson then ruled on sentence. Shortly before he imposed the sentence, however, Brown made one last attempt for leniency. Urging the judge to reconsider, Brown pointed out that the sentence was not consistent with those for similar cases around the country. Brown argued that it seemed to him that blacks get harsher sentences, even when they are convicted of white-collar crimes.

“Not with me, they don’t,” interrupted the judge, who is also black. “This isn’t about being black.”

Standefor was then sentenced to 151 months in prison and almost $9 million in restitution.