Identifying a Ponzi Scheme: The Red Flags to Watch For

The Structure of a Ponzi Scheme

Ponzi schemes come in many forms, but usually contain the same type of structure.

• First, the promoter sets up a business that appears to be generating huge returns in a short period of time.
• Second, the promoter generally pays back his early investors with large returns, on a timely basis, thereby generating an investing frenzy.
• Third, the Ponzi scheme principal lives a lavish lifestyle, thus reinforcing his investors’ belief that the business is very successful and profitable.
• Fourth, many Ponzi scheme principals employ investors as promoters or general partners of limited partnerships to raise money, and pay those promoters a significant commission for every investor they bring to the business.
• Fifth, the Ponzi business has little or no legitimate business, and eventually, the Ponzi principal and his promoters are unable to bring in enough new investors to generate the ever increasing revenues necessary to pay earlier investors, thus causing the Ponzi scheme to implode.

The Businesses that Ponzi Schemes Utilize

The types of business that Ponzi schemes utilize are as varied as the imagination. They sometimes take the form of a successful commodities trading company,₁ a “wizkid” stocktrader₂, or a Christian church-based gold trading investment meant to “double the blessings” of investors..₃

Sometimes the scheme involves a business that loaned money to others collateralized by auto loans,₄ or the food brokerage business₅. Others often involve raising “working capital” for established companies.₆

Still others focus on the power of the internet, claiming that huge returns can be made by generating advertising revenue.₇

Still others involve corrupt music or concert agents with connections to famous entertainers such as the Backstreet Boys,‘Nsync, and even the Rolling Stones.₈

However, many of the Ponzi schemes use common techniques, such as:

• Promissory notes;
• high fixed rates of return greater than an average stock market return;
• unregistered offerings;
• lack of audited financial statements, and;
• sales made outside of the traditional channels of brokerage firms, financial planners or insurance companies.

Also, because of the internet, victims are often given the appearance of a valid investment account, via access to an online account statement on a website, using an account name and password. This way, the investors are comforted by viewing their investment balance and profits online, thus reinforcing the false belief that their money is safe and profitable.₉

Lastly, Ponzi schemes often target victims in churches, temples or generally through a common affinity (hence the name “affinity fraud.”).₁₀

1. See Litigation Release No. 19117 / March 3, 2005, Securities and Exchange Commission v. K.L. Group, LLC, et al.,Case No. 05-80186-CIV-RYSKAMP (S.D.Fla., filed March 2, 2005).
2. Reed Slatkin was touted as a uncanny investor, who told investors he had wisely invested in business ventures (for the most part allegedly in publically traded securities), defrauding hundreds of investors of hundreds of millions of dollars., and was famous for donating huge amounts of money to the Scientology Church, thereby attracting Hollywood celebrities who followed scientology. In re: Reed Slatkin, Case No. ND 01-11549-RR (Bktcy.N.D.CA 2001).
3. See Greater Ministries International (GMI), www.sptimes.com/News/031301/ TampaBay/Jury_convicts_five_in.shtml. Their flagship program, the “Double Your Money Gift Exchange,” promised to double contributions thanks to GMI’s (nonexistent) investments in precious metals. GMI marketed the program to ultraconservative political and religious groups as well as to other communities outside the mainstream, especially the Amish and Mennonite sects. The program, stated Gerald Payne, was based on Luke 6:38:”Give, and it shall be given unto you.” Claiming to accept money only from active Christians, Payne said that God had modernized the multiplication of the loaves and fishes and asked him to share the secret.
4. See Securities and Exchange Commission v. Charles Richard Homa et. al. Case No. 99-cv-06895. (NDIL 1999); SEC Litigation Release No. 17726 / September 16, 2002
5. See SEC vs. Premium Sales Corporation (“Premium Sales”), Litigation release No. 13668 dated June 9, 1993.
6. SEC v. J.T. Wallenbrock, 313 F.3d 532 (9th Cir.2002).
7. See Litigation Release No. 19579 / February 27, 2006, SEC v. Charis Johnson,
   Lifeclicks LLC and 12dailypro, Civil Action No. CV 06-01018 NM (PLAx) (C.D. Cal.) The SEC alleged that Johnson raised more than $50 million from more than 300,000 investors by convincing visitors to the Web site that they could earn a 44 percent return on their investments in 12 days by looking at Internet advertisements. The scheme, which the SEC calls concert agents with connections to famous entertainers such as the Backstreet Boys, ‘Nsync, and even the Rolling Stones.12
8. Ponzi schemes by music and concert agents include Louis J. Perlman (Backstreet Boys, ‘Nsync’s former manager, note 12, infra) and Jack Utsick (concert promoter for artists such as the Rolling Stones and Nora Jones).
9. See Harris vs. Heierle, 07-22279-civ-Moreno (S.D.Fla. 2008).
10. From 1993 until 1997 a church named Greater Ministries International in Tampa, Florida, headed by Gerald Payne bilked over 18,000 people out of 500 million dollars. Payne and other church elders promised the church members double their money back, citing Biblical scripture. However, nearly all the money was lost and hidden away. Church leaders received prison sentences ranging from 13 to 27 years.