Are Ponzi Schemes Going Crypto?

In 2016 investors lost over $2 billion in 59 Ponzi schemes. That's just in the U.S. Opportunities to lose a fortune are global.

And now a new world of money-losing opportunities confronts incautious investors online. "Hundreds of technology firms raising money in the fevered market for cryptocurrencies are using deceptive or even fraudulent tactics to lure investors," The Wall Street Journal warns.

For helpful background, see "Cryptocurrencies and Online Marketing: Legitimate Business or Pyramid and Ponzi Schemes?"

As the authors point out, ICOs (Initial Coin Offerings) aren't necessarily frauds. Many are crowdfundings by wannabe entrepreneurs, with investors buying tokens as digital stock certificates. Unregulated penny stocks for the digital age!

Could ICOs become a significant threat to the wealth of HNWIs?

Henrick Stenson: Playing Well is the Best Revenge

Golfer Henrick Stenson won the Tour Championship by three strokes. That achievement also earned him the FedEx Cup points championship. Combined winnings: over $11 million.

Some said Stenson needed the money. Much of his prior winnings had been invested with a former sponsor, Stanford Financial.  (For his massive Ponzi scheme, Sir Allen Stanford is serving a 110-year prison sentence.)

Woody Allen's "Madoff" Movie

Woody Allen's first creative response to Bernie Madoff's massive fraud was a New Yorker humor piece. Two Madoff victims, Woody imagined, are reincarnated as vicious, vengeful lobsters.

Now he's made a movie, Blue Jasmine. Alec Baldwin plays the Madoff-like figure. Cate Blanchett plays his wife. The film depicts her plight after her husband is imprisoned and stripped of his fortune.

“Profitable Sunrise” – Ponzi Globalized

Like to make 2 percent or more  a day –yes, a day – on your money? Welcome to Profitable Sunrise, a  pyramided Ponzi scheme.

Ostensibly based in Manchester, England, Profitable Sunrise may originate in Eastern Europe. Somewhere I read that certain Internet operations were traced to  Virginia.

And where do clueless investors or daring "in-and-outers" wire their money? According to this post, to Baltikums Bank in Nicosia, Cyprus!

It is a small world, after all.

Ledra Street, Nicosia, Cyprus
Photo via Wikimedia Commons

(It's also a world in which everything you read on the Web isn't necessarily so. Baltikums Bank's Cyprus branch appears to be in Limassoi, not Nicosia.)

The Financial Plan That Saved the Real Downton Abbey

Were this season's episodes of Downton Abbey a bit heavy-handed on the subject of wealth management? OK, the Earl of Grantham lost almost everything betting on a Canadian railway. Would he then consider sending more to that chap Ponzi?

Although The Wall Street Journal has tried to draw modern money lessons from the PBS program, we live in another world. Deciding whether to sell grandmother's place in the Berkshires is one thing. Dealing with a vast estate that's been in the family for five or six hundred years is another.

English lords of a century or more ago had to seek different solutions to their money problems. Prime example: the 5th Earl of Carnarvon, whose holdings included Highclere Castle, the inspiration and setting for the TV show.

Highclere in winter

Going for the gold
Three years after inheriting the Earldom in 1890, George "Porchy" Carnarvon found himself heavily in debt. If he hoped to preserve Highclere and his other estates and continue leading his adventurous life, he required an immense financial transfusion. He needed a fortune.

Young American heiresses helped a good number of Engish nobles meet that need. Porchy did even better: Almina, the illegitimate but beloved teenage daughter of Sir Alfred de Rothschild.

Sir Alfred desired the best for his daughter, and he had the wealth to achieve his desires. To seal the deal with the Earl, Rothschild agreed to settle all of  Porchy's debts. In addition, he agreed to provide Almina – and Porchy, if he outlived her – with wealth beyond the dreams of avarice. £12,000 a year! That's equivalent to about $10 million a year today.

Surely Highclere was well-maintained for scores of years to come – with the possible exception of World War I, when Almina converted the castle into a deluxe military hospital.

•

For more about Almina and Highclere, see "Lady Almina and the Real Downton Abbey," written by the current Countess.

In Two Years, $20 Billion in Investment Fraud!

These are tough times for investors in need of income. One result, a surge in investment fraud and Ponzi schemes. Federal attorneys are fighting back with regional "investment fraud summits."

Nationwide, federal prosecutors looking at investment cases from the last two years identified 500 prosecutions that targeted 800 defendants and involved more than $20 billion in fraud, according to Connecticut U.S. Attorney David Fein. For two recent examples from Connecticut, see here and here.

Income investors who avoid Ponzi schemes by putting their money in dividend-paying stocks aren't necessarily safe. As this NY Times article notes, "the Federal Reserve and other central banks have been flooding the planet with money." A lot of that cash presumably has been sloshing into the stock market. How deep will the Dow dip when it sloshes out again?

Conscientious investment advisers can't always make their clients rich, but often they can keep them from becoming poor.

An Amish Bernie Madoff?

Good grief!

Photo via Wikimedia Commons

Madoff Was No Ponzi

From the Scandal! exhibit at the Museum of American Finance comes this international reply coupon.


Back in the day, Europeans writing to addresses in the U.S. could enclose these prepaid-reply-postage coupons. Because of inflation after World War I, the cost of purchasing the coupons in Italy was less than their value in U.S. postage. That arbitrage opportunity caught the eye of Charles Ponzi.

Admittedly, Ponzi's scheme ended badly. But Bernie Madoff's secret method for manufacturing steady, above-average returns from stocks and derivatives lacked even a veneer of plausibility. Do we insult the memory of Ponzi by linking his name to Madoff's?

Bayou (Strike one!) Madoff (Strike Two!)

Before the owners of the NY Mets invested big-time with Bernie Madoff and made handsome fictitious profits, they entrusted millions to, yes, our old friend Sam Israel and his Ponzi scheme.

Why is truth so implausible compared with fiction?

Fred Wilpon and Saul Katz may have to give back their Madoff "profits." Will they also have to fork over additional millions?

Hundreds of Ponzi Perps, Thousands of Victims

Bernie Madoff was exceptional only for the scale and duration of his thievery. See Plenty of Ponzis:

Confessed Ponzi schemer Sean Mueller received a 40-year prison sentence last week.

***

Since Aug. 16, the [U.S. Department of Justice] has rounded up 343 criminal defendants and 189 civil defendants, many accused of running schemes similar to Mr. Mueller's. The department tallied 120,000 victims and $10.3 billion in losses.

It's a jungle out there – which is why many investors need a fiduciary on their side.

Social Networking for Investors

FINRA Warns Investors of Social-Media-Linked Ponzi Schemes. Didn't take long, did it? (We'll ignore the question of how suckers buying into schemes which "purport to offer returns of 20, 30, 100 percent or more per day" can be called investors.)

For real investors, Facebook, Twitter, et al may prove useful. See Investors are Using Social Media to Assess Advisers.

How about this suggestion:

LinkedIn seems to be the most viable target for wealth managers seeking to build their own social networks. Seventy three percent of those who use LinkedIn would consider joining groups to discuss economic and investment topics.

Has anyone had success with this idea?

Scoundrels and Scandals

Bernie Madoff's golf tees, an Enron stock certificate and reminders of earlier financial scandals, dating all the way back to the 18th century, are featured in an exhibition at the Museum of American Finance in New York. Check out the NY Times slide show.

When the Going Gets Tough . . .

. . . the Ponzi schemes get going.

For evidence of the going getting tough, WSJ subscribers can see Adjusted for Inflation, Dow's Gains Are Puny. The DJIA would have to soar another 25% and more to equal its real 1999 level.

We've called attention to the inflation-adjusted DJIA before. This chart shows the severity of the slow-motion crash in the 1970's. Even if we avoid repeating that slide in the 2010's (keep fingers and toes crossed!) investors may continue to find decent returns hard to come by.

The more frustrated investors become, the faster Ponzi-style plundering proliferates. None of the schemes that unravelled in 2009 equaled Madoff's, but there were an awful lot of them.

Moral: Now more than ever, investors need true fiduciaries to help them navigate in shark-infested waters.

How Ponzi’s PR Guy Blew The Whistle

Recommended reading and viewing: The New York Times story and slide show on the original Charles Ponzi, inspired by an unpublished memoir by William McMasters, a Boston press agent whose clients incuded JFK's grandfather, Calvin Coolidge and – briefly – Ponzi.

McMasters wrote in his memoir: “I do not anticipate that another Charles Ponzi will ever appear in the financial world.” Bad guess!

Noble Trust Founder Pleads Guilty

Before it was shut down because of $15 million in hidden investment losses,, New Hampshire's Noble Trust Company promised customers 12% a year. Colin Lindsey, Noble's founder, has pleaded guilty to two counts of mail fraud. He could face up to six years in prison.

In addition to trying to keep Noble afloat by paying old customers with cash from new ones, Lindsey may have diverted premiums from the sale of insurance policies.

Lindsey earlier directed a quasi-trust company known as the Children's Community Foundation, "a collection of so-called charitable remainder trusts" marketed to farmers.

Seems like old home week here on the blog. First Sam Israel's Bayou funds, then Leona Helmsley's will (see two preceding posts) and now Noble Trust.

Three New Investment Frauds

"Another day," writes Liz Moyer in Forbes, "another $660 million bilked from investors."

Wednesday's fraud tally: three alleged schemes, $660 million, four arrests.

Those numbers seem small compared to Bernard Madoff's alleged $50 billion swindle, and even the $8 billion Allen Stanford is accused of running off with, but it's another sign that federal prosecutors have no end of work in sight tracking down fraud schemes.

Creative Destruction?

In The Wall Street Journal. John Steele Gordon recalls an earlier Ponzi scheme that led to financial ruin . . . and to "the finest work of military history of the 19th century."

“A Financial Falcon and Virtuouso Flimflammer”

In Lost and Found New York, James Stevenson sketches Charles Wyman Morse, who started business in shipping and ice and emerged as a prominent figure in various banks and trust companies at the start of the 20th century. Morse triggered, or at least helped trigger, the Panic of 1907. See How J. P. Morgan Tamed the Trust Companies.

In 1908 Charles W. Morse was sent to jail for his escapades, but he didn't stay long. One of his fellow prisoners would raise flimflamming to new heights: Charles Ponzi.

How Can a Trust Company Go Bust?

Judging from the attention our earlier post is drawing, lots of people wonder what happened to Noble Trust Company, an outfit that seems to have specialized in charitable trusts.

Here's the story from the Colorado end, where the "Ponzi scheme" seems to have originated.

Here's the New Hampshire version from Colin Lindsey, Noble Trust's founder.

Examiners Take Over Trust Company

In New Hampshire, banking officials have taken over a non-depository trust company, Noble Trust Company, after "a routine bank examination uncovered evidence of alleged deceipt and false entries in Noble's books."

In court papers, the banking department said Noble Trust concealed from investors and regulators that a $15 million investment in notes issued by Sierra Factoring had become worthless; failed to have an external audit; and failed to disclose lawsuits it filed in Colorado against its former chief financial officer . . . .

Noble Trust, whose web site seems dormant, specialized in handling charitable trusts and endowments.

New Hampshire has performed no similar takeovers for decades, probably not since 1991, when that era's real-estate binge left lending institutions reeling.