The Enduring Appeal of Ponzi Schemes
Regulators are already calling the $50 billion Ponzi scheme allegedly perpetrated by storied Wall Street giant Bernard L. Madoff the largest in history. Madoff's high-profile clients apparently suffered staggering losses.
Among Madoff's duped clientele: real estate magnate Mortimer Zuckerman, the foundation of Nobel laureate Elie Wiesel, a charity of movie director Steven Spielberg and the charitable foundation of Sen. Frank Lautenberg (D-N.J.), plus a host of prominent Jewish charities.
At its core, a Ponzi scheme is a simple scam: The first investors get paid, but the initial high returns are financed not by profits from real economic activity but by money flowing in from subsequent investors. The term "Ponzi scheme" is named after Charles Ponzi, a Boston scammer who briefly became a millionaire in 1920 with a fraud involving the Italian lira.
Here's a breakdown of other notable Ponzi schemes uncovered in recent years:
Democratic fundraiser Norman Hsu was charged in October for allegedly running a $60 million Ponzi scheme.
Securities regulators say Hsu and his company, Next Components, raised money from investors by promising 14 to 24 percent returns every 70 to 130 days for using the money to make short-term loans to businesses.
In reality, prosecutors say, Hsu used the money to support his luxurious lifestlye, make political donations and pay early returns to investors. (Hsu is also awaiting trial on criminal charges related to the case and that he made illegal campaign contributions to Sen. Hillary Rodham Clinton (D-N.Y.) and others.)
Lou Pearlman, the former boy-band promoter who created the Backstreet Boys and 'N Sync, allegedly stole at least $300 million from investors in a decades-long Ponzi scheme. He is serving a 25-year prison sentence.
Samuel Israel III, a co-founder of the Connecticut hedge-fund firm Bayou Group, was sentenced to 20 years in prison in April after a $400 million Ponzi scheme was uncovered following the hedge fund's collapse in May 2006. Investors sued Israel, claiming he was paying old investors with money from new ones.
Lance K. Poulsen, who founded National Century Financial Enterprises, was convicted in November on conspiracy and securities fraud charges in connection with more than $3 billion in questionable debt his company issued before it folded in 2002.
The case, which authorities likened to a massive Ponzi scheme, amounted to one of the largest investigations of a private company, securities regulators said at the time.
Two Baptist Foundation of Arizona executives were accused of fraudulently conducting a mammoth real estate Ponzi scheme while claiming to do God's work. William P. Crotts, the former president of the foundation and Thomas D. Grabinski, the former chief counsel of the foundation, were sentenced to eight and six years in prison, respectively. Each was ordered to pay $159 million in restitution after being convicted of one count of fraud and one count of conducting an illegal enterprise.
When the foundation collapsed in 1999, 11,000 victims collectively lost $585 million.
Martin Armstrong, a former director of Princeton Economics International, a money-management firm, was charged with cheating Japanese investors in a multibillion-dollar Ponzi scheme. More than $3 billion worth of notes were sold, prosecutors alleged.
Kenneth P. Kasarjian, a former executive of the Bennett Funding Group Inc., which regulators described more than a year ago as a "massive, ongoing Ponzi scheme" that cost investors $1.5 billion, pleaded guilty to criminal securities fraud, bankruptcy fraud, perjury and obstructing justice. He admitting that he was responsible for selling $850 million worth of the contracts on leases -- many of which didn't really exist.
Steven Hoffenberg, who built a debt-collection agency into a New York financial empire and unsuccessfully attempted to buy the New York Post last year, was charged with fraudulently selling almost 3,000 investors $450 million in securities over a six-year period.
And New York car dealer John McNamara of Port Jefferson, N.Y., allegedly was routinely allowed to borrow hundreds of millions of dollars from General Motors Corp. from 1980 to 1991 for the purchase of 70,000 vehicles, mostly vans, which didn't exist. The tab: $436 million.
By Derek Kravitz |
December 15, 2008; 12:39 PM ET
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