Ponzi schemes still at large

Posted by Ben Clark on

What is a Ponzi Scheme?

Many people have heard of the term 'Ponzi Scheme'.  Indeed, the type of scheme, which was concocted by Charles Ponzi in the 1920s, is assumed by many to be an outdated type of fraudulent activity that no longer occurs in today's regulated market, although conversely we are seeing an increase in claims resulting as these schemes continue to come to light.

Ponzi Schemes are essentially simple investment frauds which operate by paying returns to investors from their own money, or from the money of new investors.  Often, there is no investment portfolio and the fraudster will simply manage the fund and siphon off monies for their own benefit.

Ponzi schemes can be extremely elaborate and appear legitimate.  Often people (including experienced investors) can be taken in by charismatic sales techniques and promises of substantial returns on their money.  In fact, the fraudster's fund will be unregulated and typically, the fraudster will suddenly vanish whereby the Ponzi Scheme collapses.

Ponzi Schemes do not make profits per se.  They survive only by obtaining additional investment capital.  When the scheme is uncovered or collapses, investors are unlikely to recover all, or on some cases any, of their investment.

The largest ever Ponzi Scheme was perpetrated by Bernie Madoff in the US.  The fraud was uncovered when it collapsed in 2008.  The fallout from the fraud, which US prosecutors estimated to be $64.8 billion in size, is still being felt today, in cases in many jurisdictions, including the UK, where proceedings originally commenced in the BVI have now reached the Privy Council.  On 31 March 2014, five former employees of Mr Madoff were convicted of conspiracy to defraud clients.

Ponzi Schemes are still very much in existence in the UK.  A recent criminal case before the Crown Court provides a stark example.

Recent sentence for rogue trader highlights the importance of vigilance

On 14 February 2014, Benjamin Wilson, 35, from Poole in Dorset was convicted of creating and managing an elaborate Ponzi Scheme under the name of SureInvestment through which he defrauded his investors (including friends and employees) of some £22 million.  He was sentenced to seven years imprisonment.

Mr Wilson and SureInvestment offered investors an average annual return of 60% on funds invested.  SureInvestment was sold using high quality brochures picturing images of items associated with wealth, including mansions and speedboats.  Funds invested into the scheme by investors went towards paying for SureInvestment's plush offices in Poole, boasting champagne stocked fridges, fine art and a massage room which created the illusion of a thriving business.

In fact, rather than being a trading genius as he portrayed, Mr Wilson used investors' money on sports cars, lavish properties and in Las Vegas casinos.  Out of the £22 million in deposits that Mr Wilson misappropriated from his victims, some £17.5 million is still owed to investors.  The Financial Conduct Authority ("FCA") has since managed to recover some £5.4 million, leaving around £12.2 million in losses.  The FCA anticipates that investors will recover somewhere in the region of 31p in the pound.  This will be of little consolation, given that some investors entrusted their life savings with Mr Wilson and SureInvestment.

This sobering story serves as a reminder that anyone making investments should be vigilant in their enquires into to the legitimacy of investment portfolios, their managers, the client care documentation they are provided with before they make the actual investment, and the route by which any funds are actually placed into any investment.

What to do if you are concerned that you have invested in a Ponzi Scheme

Whilst operating a Ponzi Scheme is a crime, criminal investigations are complex and it can take many years for a criminal prosecution to come to trial, which does not necessarily result in recovery of losses.  It is also possible to bring civil proceedings to recover the monies that you have invested.  As with all frauds, the prospects of recovery are significantly enhanced by speed of action.  If you suspect that you have been the victim of investing money in a Ponzi Scheme, you should take advice as soon as possible from a solicitor as to whether and how you can recover monies invested, and from whom. 

If you are worried about a possible Ponzi Scheme and would like to speak to a member of our team, please contact us:

About the Author

Ben is an Associate in the London Commercial Litigation team.

Ben Clark
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