INVESTIGATING PONZI SCHEMES

Transcription

1 INVESTIGATING PONZI SCHEMES May 6, 2015 M. Ali Ansari Director Forensics & Valuation Services 1

2 TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days of live webinar LEARNING OBJECTIVES Describe the basics of Ponzi schemes Explain the dynamics of Ponzi scheme investigations Identify common traits among Ponzi schemes Discuss recent cases & lessons learned from them 2

3 WHAT IS A PONZI SCHEME? The Ponzi scheme, named after the 1920s swindler Charles Ponzi or Carlo Ponzi, is an illegal business practice in which new investor s money is used to make payments to earlier investors. In accounting terms, money paid to Ponzi investors, described as income, is actually a distribution of capital Source: ACFE KEY ELEMENTS OF A PONZI SCHEME Above-market or guaranteed return Appearance of legitimacy or impeccable reputation Marketing & exclusivity Investor greed 3

4 HOW A PONZI SCHEME WORKS Source: NASSA Securities 101: Handbook For Law Enforcement Officials HOW A PONZI SCHEME WORKS (CON T) Source: NASSA Securities 101: Handbook For Law Enforcement Officials 4

5 HOW A PONZI SCHEME WORKS (CON T) Source: NASSA Securities 101: Handbook For Law Enforcement Officials PONZI SCHEME EXAMPLE Investors Year 1 Year 2 Year 3 Year 4 Year 5 A $ 10,000 $ 20,000 $ 40,000 $0 $0 B 15,000 30,000 60, ,000 C 20,000 40,000 80,000 D 80, ,000 Ponzi Company (85,000) Prior Year Total 0 10,000 25,000 45,000 85,000 New Investments Total 10,000 15,000 20,000 80,000 0 Withdrawal Total (40,000) (85,000) Total Actual Value $ 10,000 $ 25,000 $ 45,000 $ 85,000 $0 Total Perceived Value $ 10,000 $ 35,000 $ 90,000 $ 180,000 $ 360,000 5

6 THE END RESULT UNIQUE CHARACTERISTICS OF A PONZI SCHEME Taking from Peter to pay Paul Typically no legitimate business revenue Typically involves securities investments Built on consistent new money coming in from new or existing investors Involves a material misrepresentation of the investment Investors may or may not have to recruit new investors Promises extraordinary rate of returns The first investors get big returns to help entice new investors Takes advantage of the investors greed 6

7 RECENT PONZI SCHEME STATISTICS In 2014, at least 70 Ponzi schemes were uncovered A total of $2.2 billion was at issue or considered losses At least 136 prison sentences for those convicted for their role in Ponzi schemes in 2014 SEC & NASAA report that phony securities cost U.S. investors between $10 & $15 billion a year North American Securities Administrators Association (NASAA) Securities and Exchange Commission (SEC) RECENT PONZI SCHEME STATISTICS (CON T) Most Reported Products & Schemes 2013 (In order of frequency reported by states) 1. Ponzi schemes 2. Real estate investments, including promissory notes 3. Internet fraud, including social media & crowdfunding 4. Regulation D, Rule 506 offerings 5. Affinity frauds 6. Oil & gas offerings Source: NASSA Enforcement Report 2014 on 2013 Data 7

8 RED FLAGS OF A PONZI SCHEME Promises of high investment returns with little or no risk Investment statements show growth or performance contrary to market trends Unlicensed seller or dealer Overly consistent returns Unregistered investments Secretive, complex strategies Issues with paperwork RED FLAGS OF A PONZI SCHEME (CON T) Difficulty receiving payments Unusual or no fee structure No answers to your concerns or questions Your advisor claims you are now part of an exclusive club Money managers that maintain custody of client assets Monthly brokerage statements are sent by the advisor & not the custodian Undersized auditing firm 8

9 HOW A PONZI SCHEME COLLAPSES There is little to no legitimate earnings involved Inconsistent flow of new money from new & current investors Difficulty recruiting new investors A large number of investors cash out The investment is lost A purported high lifestyle of the Ponzi schemer PONZI ENFORCEMENT Securities Exchange Commission (SEC) Civil & criminal complaints Federal Trade Commission (FTC) Civil complaints State Authorities Attorney generals, state-level regulatory agencies National Regulatory Agencies 9

10 HOW TO INVESTIGATE A PONZI SCHEME Conduct background/asset checks Ask Ask Ask!!! Identify the source of the funds Investors, creditors, business revenue Identify the use of the funds Distributions to investors, cash in bank accounts, safety deposit boxes, investments, real estate, kickbacks, family members Recovery of the funds Liquidation of assets, insurance policies, net winners, promoters & insiders, related parties HOW TO INVESTIGATE A PONZI SCHEME (CON T) Tracing the Assets Explore all companies & shell companies for existence of assets Look into the orchestrator, family members & close friends Identify bank & investment accounts Interview the orchestrator s accountant Look into third parties such as aiders & abettors to the Ponzi scheme 10

11 HOW TO AVOID PONZI SCHEMES TRAPS Is the seller licensed? Is the investment registered? How do the risks compare with the potential rewards? Do I understand the investment? Where can I turn for help? Securities and Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) North American Securities Administrators Association (NASAA) HOW TO PROTECT YOURSELF FROM PONZI SCHEMES If it seems too good to be true, then it probably is Compare the interest rate being offered to the current market conditions There is no such thing as a risk-free investment. High returns come with high risk Watch for vague technical jargon High-yield investment Do your homework & exercise due diligence Check to see if they are registered 11

12 BERNIE MADOFF DISCUSSION Common elements to the Ponzi scheme Background/reputation High returns Guarded Family Clawback provisions Litigation 12

13 SCOTT ROTHSTEIN DISCUSSION Rothstein Rosenfeldt Adler law firm in Ft. Lauderdale, FL 70 lawyers & 150 employees Structured settlements Downturn in the economy Decrease in new investors Totaling $1.2 billion Sentenced to a 50-year prison term KL HEDGE FUND SCAM DISCUSSION Palm Beach, FL Promised 100% annualized returns $194 million scam John Kim, Yung Kim, Won Lee 18 years, 6 years, 25 years in prison 13

14 THE PAST THE PRESENT THE FUTURE Charles Ponzi $10 million 1920 Bernie Madoff $65 billion 2008 Who s Next? How Much? When? LESSONS TO BE LEARNED Demand that assets be held at reputable custodian Diversify your investments/savings Ask questions & demand answers Funds, books & records should be maintained by major accounting firms If investments or strategy can t be readily explained, don t invest If it sounds too good to be true Is it all in the family? 14

15 QUESTIONS? CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars. 15

16 CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at THANK YOU! FOR MORE INFORMATION M. Ali Ansari Director BKD, LLP Forensics & Valuation Services

17 17