Ponzi Schemes: More Ugly Revelations On The Way

In Financial Armageddon, I warned that a great deal of ugliness would come to light once the Great Unraveling was underway (from Chapter 10, “Financial”):

Newfound transparency in the wake of the unfolding financial crisis will expose a scale of fraud, corruption, and self dealing that many will find almost impossible to comprehend. Day in and day out, reports will surface about hidden losses, false accounting, inflated appraisals, sizable off-balance-sheet obligations, valuation discrepancies, unregulated offshore entities, phantom profits, insider trading, and businesses bled dry to enrich a few individuals at the expense of employees, investors, bankers, and bondholders. Other revelations will reinforce the idea that companies, governments, and individuals are in far worse shape than people had assumed only a few years earlier. Much like the child watching the royal parade in Hans Christian Anderson’s tale, “The Emperor’s New Clothes,” they will be bewildered by the starkness of businesses lacking any real substance.

Yet despite all the chicanery that has been exposed so far, it looks like there is plenty more to go if the following Financial Times report, “Watchdog Fears Market ‘Ponzimonium,’” is anything to go by.

US federal regulators have warned of a “rampant Ponzimonium” as they disclosed they are investigating “hundreds” of possible scams in the aftermath of the $50bn fraud allegedly perpetrated by Bernard Madoff.

Bart Chilton, a commissioner at the Commodities Futures Trading Commission, the US regulator, said the watchdog was “seeing more of these scams than ever before” in commodities and other futures markets.

Mr Chilton said the CFTC, which patrol commodities and financial futures markets such as derivatives on stocks and foreign exchange, was investigating “hundreds of individuals and entities, many of which were related to Ponzi scams”.

The CFTC has filed charges against 15 alleged Ponzi schemes so far this year, compared with 13 during the whole of 2008. If the rate were sustained, the regulator could end the year filling more than 60 cases, officials said.

US regulators have said they are detecting more scams than before as the publicity surrounding Mr Madoff‘s case prompts some investors to question the credibility of returns.

But this is the first time a senior regulator has publicly put the number of investigation in the “hundreds”.

“The floundering economy has unearthed many of these house-of-card scams,” said Mr Chilton. “In the last month alone we’ve gone after crooks in Pennsylvania, New York, North Carolina, Iowa, Idaho, Texas and Hawaii.”

Mr Chilton did not provide details of the investigations but it is likely the majority of the cases relate to small investments, in the range of a few million dollars to $50m (€37m, £35m). In the latest case, the CFTC this week charged a North Carolina investment company over an alleged $40m Ponzi scheme in foreign exchange trading.

“These frauds combined harmed tens of thousands of hard-working Americans, many of whom thought they were investing properly to save for retirement or even their first home,” said Mr Chilton.

“It is a good thing that folks are double-checking to ensure they aren’t being ripped off by fraudsters,” he said, referring to the increasing number of investors who are tipping off US federal regulators after they have become suspicious.

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