Ponzi

SEC charges green-product company with running a $26 million Ponzi scheme

The Securities and Exchange Commission (SEC) announced today that it obtained an emergency court order to halt a Ponzi scheme that promised investors high returns on water-filtering natural stone pavers but bilked them of approximately $26 million over a four-year period.

Filed in the U.S. District Court for the Southern District of New York, the SEC alleges in its complaint that between 2006 and 2010, convicted felon Eric Aronson and others defrauded about 140 individual investors in PermaPave Companies, a group of firms based on Long Island, NY, and controlled by Aronson. According to the complaint, the investors were told that PermaPave had a tremendous backlog of orders for pavers imported from Australia, which could be sold in the U.S. at a substantial mark-up, yielding monthly returns of 7.8% to 33%. But in reality, the complaint states, there was little demand for the product, and the cost of the pavers far exceeded the revenue from sales.

In their Ponzi scheme, Aronson and two other PermaPave executives, Vincent Buonauro Jr. and Robert Kondratick, used the new funds to make payments to earlier investors and then siphoned off much of the rest for themselves, buying luxury cars, gambling trips, and jewelry, according to the complaint. Aronson also allegedly used the investors’ money to make court-ordered restitution payments to victims of a previous scheme to which he pleaded guilty in 2000.

The complaint further states that when investors began demanding their money, Aronson accused them of committing a felony by lending the PermaPave Companies money at the interest rates he promised them, which he suddenly claimed were usurious. Aronson and his attorney, Fredric Aaron, then allegedly made false statements to persuade investors to convert their securities into ones that deferred payments for several years.

The SEC also charges that the defendants used some of the money raised through the Ponzi scheme to purchase a publicly traded company, Interlink-US-Network, Ltd. Several months later, the SEC said that Interlink issued a Form 8-K, signed by Kondratick, which falsely claimed that LED Capital Corp. had agreed to invest $6 million in Interlink. According to the complaint, LED Capital Corp. did not have $6 million and had no dealings with Interlink.

The U.S. Attorney’s Office for the Eastern District of New York, which conducted a parallel investigation, filed criminal charges against Aronson, Buonauro, and Kondratick.

October 10th, 2011|Green Technology|

Rudiments of a Ponzi scheme

The scheme is named after Charles Ponzi, who duped thousands of New England residents into investing in postage stamp speculation in the 1920s. But Ponzi is not the original mastermind behind the scheme; various reports show that there were several similar scams before he was born. (Charles Dickens’ 1857 novel “Little Dorrit,” for example, described such a scheme whereby the fraudulent dealings of Mr. Merdle led to the collapse of his bank.) Ponzi’s operation, however, took in so much money that it was the first to become widely known in the United States. Ponzi promised investors that he could provide a 50% return in just 90 days, at a time when the annual interest rate for bank accounts was 5%. Based on the arbitrage of international reply coupons for postage stamps, Ponzi quickly diverted investors’ money to support payments to earlier investors and to himself.

As originally designed, a Ponzi scheme remains a fraudulent operation that pays returns to separate investors, not from an actual profit earned but from the investors’ own money or money paid by subsequent investors. The scheme typically entices new investors by offering returns that other investments cannot guarantee, in the form of short-term yields that are either extraordinarily high or unusually consistent.
The main reason why the scheme initially works is that the early investors, those who actually got paid the large returns (from the investments of new entrants) reinvest their money in the scheme. Meanwhile, the fraudsters gain the investors’ confidence, maintaining the deception of high profits. Claims of a “proprietary” investment strategy, which must be kept secret to ensure a competitive edge, frequently is touted to hide the fraudulent operation.

The fraudsters also try to minimize withdrawals by offering new plans to investors, often freezing their money for a long time in exchange for higher returns. If a few investors do wish to withdraw their money in accordance with the strict terms, the requests are usually promptly processed, giving the illusion to other investors that the fund is solvent.

But once the required continuous stream of investors slows down, the scheme begins to collapse as the fraudsters start to have problems paying the promised returns (the higher the returns, the greater the risk of collapsing). Such liquidity crises often trigger panics, as more people start asking for their money, similar to a bank run. (A bank run, also known as a “run on the bank” occurs when a large number of customers withdraw deposits because they believe the bank is, or might become, insolvent.)

External market forces, such as the global economy decline in 2008, also cause many investors to withdraw part or all of their funds, not necessarily because of fraud suspicions, but simply due to underlying market conditions. (In Madoff’s case, the fund could no longer appear legitimate after investors attempted to withdraw $7 billion in late 2008.)

And of course, there is rarely a happy ending to this story as fraudsters attempt to vanish, taking the remaining investment money with them.

August 10th, 2011|Educational Series, Fraud|

Historical investment fraud sweep compels numerous civil and criminal actions

On December 6, 2010, the Financial Fraud Enforcement Task Force announced the conclusion of Operation Broken Trust, the largest investment fraud sweep ever conducted in the United Stated. Started August 16, 2010, the operation captured 343 criminal defendants and 189 civil defendants who were involved in fraud schemes that harmed more than 120,000 victims throughout the country. The criminal cases involved more than $8.3 billion in estimated losses and the civil cases more than $2.1 billion. Eighty-seven defendants have been sentenced to prison, including several who will serve more than 20 years.

The sweep focused on fraudsters who offered “investment opportunities” that were either completely fictitious or not structured as advertised. An overwhelming number of these were high-yield investment frauds and Ponzi schemes. Others involved commodities fraud, foreign exchange fraud, market manipulation (pump-and-dump schemes), real estate investment fraud, business opportunity fraud, and affinity fraud. Some of the perpetrators filed for bankruptcy in an attempt to avoid claims by victimized investors. In many instances, the criminals were trusted people within their communities—neighbors, co-workers, fellow church members—who betrayed that trust in order to line their own pockets.

December 10th, 2010|Criminal Activity, Fraud|

Green-energy scams put portfolios in the red

The emerging green-energy market has created a horde of fraudsters. So many, in fact, that late last year, the Financial Industry Regulatory Authority (FINRA) warned about schemes that promise large gains from investments in companies that pitch alternative, renewable or waste-to-energy products. And in May of this year, the Securities & Exchange Commission (SEC) followed with its own alert about potential scams that exploit the Gulf oil spill and related cleanup efforts.

The green-energy get-rich-quick schemes are showing up in blog posts, e-mail, infomercials, Internet message boards, text messages, and Twitter. As with most investment scams, all promise unrealistic returns, such a 200 percent stock gain by a solar panel company, a one-in-a-million deal to get a “51 times” return on current stock value from a China wind-power enterprise, and a 500 percent one week stock gain by a hydrogen-based energy outfit.

Of course, the regulators are on the lookout for the scammers. In one recently filed case, the SEC charged that promoters of eco-friendly investment opportunities lured 300 investors into a $30 million Ponzi scheme, encouraging the participants to finance “green” initiatives of Mantria Corporation, including a purported “carbon negative” housing community in rural Tennessee and a “bio-char” charcoal substitute made from organic waste. Investors were promised returns ranging from 17 percent to “hundreds of percent” annually. But, according to the SEC’s complaint, Mantria did not generate any income from which such extraordinary returns could be paid.

As cautioned by the SEC, the oil spill in the Gulf of Mexico brought additional scam opportunities for cons promising financial gains from investments in companies that claim to be involved in the cleanup operations. In May and June 2010, the SEC suspended the trading in shares of ACT Clean Technologies Inc. of Huntington Beach, CA, and Green Energy Resources, Inc. of New York, NY, because, among other issues, questions arose about the accuracy and adequacy of the publicly disseminated information by the companies.

To dodge green-energy investment scams (and other frauds) investigate before investing! And:

Never rely solely on information contained in an unsolicited communication.
Find out who sent the investment recommendations; many companies and individuals that tout stocks are paid by the company being promoted.
Examine the fine print for any statements indicating payments in cash or in stock for issuing the report or message.
Find out where the stock trades. Most unsolicited recommendations involve stocks that do not meet the listing requirements of the major stock exchanges; they are usually quoted on the OTC Bulletin Board or in the Pink Sheets, which do not impose minimum qualitative standards. Many of the OTC or Pink Sheets stocks trade infrequently which can make shares difficult to sell. When these stocks do trade, they may fluctuate in price very rapidly.
Read the company’s SEC filings to verify information.
Exercise skepticism and be wary of any pitch that suggests immediate pay-offs, especially if the investment involves a start-up company or a product or service that is still in development.

October 19th, 2010|Educational Series, Green Technology|