Twenty-six alleged investment frauds, exposing to loss approximately $60 billion since the Madoff scandal erupted in mid-December 2008.1 The Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) are the two federal agencies bringing forth lawsuits on behalf of the investor community. The charges coming from these agencies against the alleged perpetrators include claims they were operating Ponzi schemes and misappropriating investor funds. The Ponzi scheme continues to work on the "rob-Peter-to-pay-Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.2
The perfect catalyst for collapsing a Ponzi scheme is a downturn in the economy. Investors seek massive redemptions of their investments, and Ponzi scheme operators are unable to convert investments into cash. Ponzi operators can’t pay redemptions, because at an earlier point in time, they siphoned money meant for investing away from the investment pool leaving holes that could only be filled by new investors. Misappropriation boils down to a theft, the dishonest use of an investor’s money for personal use.
Investigating Ponzi schemes and misappropriations is a meticulous task requiring significant time and resources. Investigative measures can include documenting an understanding of the perpetrator’s operations, detailed data analysis, email and other communication discovery, and tracing volumes of cash and investment transactions. In addition, analytical assessments on investment returns and investment strategy are often needed. This analysis is sometimes relevant for the defense side of the matter as well. For example, if you’re an investor that got out earlier than others, then you are at risk for a “clawback” of your redemptions.3 A thorough analysis of the transactions and chain-of-events may avoid your redemptions from being recovered by the trustee or receiver.
The forensic accounting professionals of Parente Randolph have extensive experience in dealing with complex investigations such as Ponzi’s/investment fraud. For more information on how we can assist you, please don’t hesitate to contact one of our forensic accountants – Robert Gray, James O’Brien and David Duffus.
1) The count and dollar volume at the time this brief was finalized for release.
2) http://www.sec.gov/answers/Ponzi.htm
3) A “clawback” is an attempt by the Receiver or Trustee to recover early investor withdrawals for a future equitable distribution to all unpaid investors in the investment fund because of special circumstances – in this case a massively orchestrated fraud.
