International Due Diligence – Investigative Due Diligence – Hedge Fund Due Diligence

2011 Ponzi Schemes By the Numbers

The Ponzi scheme epidemic has continued to proliferate in 2011 nearly 2 ½ years since the largest Ponzi scheme in history came to the forefront when Bernard Madoff was arrested in December 2008.

Over the first half of 2011, Diligentia Group has identified over 51 Ponzi schemes* with alleged damages of $837 million which have been foiled by regulators, prosecutors and law enforcement officials.

By The Numbers

  • On average, charges have been filed against eight individuals (or groups of individuals) per month averaging $139 million per month.
  • Ponzi schemes that operated out of California ($227 million), Missouri ($60 million), New York ($95.7 million), Florida ($59.5 million) and Texas ($55.6 million) have accounted for the most significant amount of the damages.
  • Texas (4), Illinois (4), California (6), Florida (7) and New York (7) are leading the way thus far in terms of geographic dominance of these Ponzi Schemes. These states alone accounted for more than half of all of the Ponzi schemes so far in 2011.
  • The top three Ponzi schemes that became unraveled in terms of alleged monetary losses include Timothy Durham ($200 million), Douglas F. Vaughan ($76 million)  and Francisco Illarramendi ($53 million).
  • Reported losses sustained as a result of Ponzi schemes so far in 2011 ($836 million) is greater than the gross domestic product (GDP) of the island of Grenada and greater than  Groupon’s scheduled $750 million IPO (although Groupon incurred net losses of $389.6 million in 2010…go figure).

Common Themes

  • At least four of those charged this year have a history of fraud including Dorothy Delay-Wilson who was previously convicted of fraud, James Risher who previously pled guilty to multiple counts of “theft by taking” and Paul Cirigliano who was previously charged with larceny.
  • Many of the perpetrators offered “safe” and significant returns on their investments including Frederick H.K. Baker and Mark W. Akin who reportedly advised investors that they would make a return of 8 to 12 percent per month and Ira J. Pressman who promised investors “no risk returns of up to 100 percent annually.”
  • A number of Ponzi scheme operators showcased an extravagant lifestyle which included waterfront homes, lavish personal vehicles and yachts including Miko Dion Wady who purchased 30 vehicles, including a Lamborghini, a Ferrari and a Bentley and a $175,000 luxury 41 foot boat and Timothy Durham who had a 45-car garage (no…that is not a typo).
  • Looking back now, several perpetrators waved certain “red flags” that could have been easily identified through the use of proper due diligence screening including Kurt Barton who reportedly lied about his education background or Martin Sigillito who was not as financially successful as he touted when he was filing personal bankruptcy.

Final Thought


Bernie Madoff may have put the term “Ponzi scheme” back on the map, but the execution of this crime has always been constant. Investing in a Ponzi scheme is almost completely avoidable if investors take the time to do their homework.  Truth be told, as the old saying goes, if it sounds to good to be true, it likely isn’t. 

*Our research was conducted through open sources and should not be solely relied upon as complete and/or accurate information. We welcome readers to share with us any additional Ponzi related charges from 2011 which should be included in the list.

An important question remains on how stop a Ponzi Scheme from beginning?  More regulation and oversight by the government?  Investor awareness? What do you think?

Additional resources on steps to avoid a Ponzi scheme:

 

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Family Office Due Diligence Background Checks

A due diligence background check on potential investments can help your family office preserve wealth and protect assets for generations to come.

Frauds, Ponzi Schemes and Financial Fraudsters

The news is filled with stories of some of the most sophisticated investors in the world being duped by investment frauds, Ponzi schemes and financial fraudsters.

While institutional investors have been splashed across the news for their lack of due diligence and background checks, in truth, it is the smaller family offices and wealthy individual investors who have been most affected. For institutional investors, losses can be more easily absorbed, but any losses sustained by a family office from an investment fraud can affect generations of family wealth.

A recent poll by Rothstein Kass Family Office Group found that 85% of single-family office operations are currently invested in hedge funds.

The fact of the matter is that fraudsters prey on wealthy individuals, family offices, endowments and even nonprofit organizations because they know that they do not have the same due diligence resources as institutional investors and are less likely to perform a due diligence investigation. As financial frauds have become prominent, so too have the services of professional investigative firms to uncover potential issues and minimize investment risk.

What your family office could have avoided with a due diligence background check:

  • Sam Israel (Bayou Fund) – In 2005, Sam Israel was charged with losing more than $400 million from investors in the Bayou Fund and was sentenced to 25 years in prison in 2008. A due diligence background check on Israel and the Bayou Fund would have identified multiple red flags, including embellished employment credentials, an accounting firm that had ties to Bayou’s own chief financial officer, and DUI and criminal possession of a controlled substance charges against Israel.
  • Samuel “Mouli” Cohen – In August 2010, federal prosecutors in California unsealed a criminal indictment accusing local businessman Samuel “Mouli” Cohen of defrauding more than 55 investors, including actor Danny Glover, out of more than $30 million. An investigation into Mouli Cohen would have identified previous failed business ventures, prior allegations of fraud and nearly $500,000 in back taxes owed to the government.
  • Danny Pang (PEM Group) – In 2009, Danny Pang, the principal of a $4 billion international investment firm, was accused of defrauding investors of hundreds of millions of dollars. A background check would have revealed that Pang was misrepresenting his education credentials, his property was in foreclosure five years prior to charges being brought against him, and multiple civil lawsuits including harassment charges were filed against him.

Final Thought

Don’t become another statistic. Due diligence background checks can help you minimize your risks, protect your assets, make more informed decisions about your investments and protect assets for generations to come.

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Report on Ponzi Schemes; What you Need to Know!

Christopher Marquet (former Kroll staffer and co-founder of Citigate) of Marquet International has released a report on Ponzi schemes which provides some great statistics and analysis of Ponzi Schemes and their traits.  The report analyzed 329 distinct Ponzi schemes in the United States which have come to light since 2002.

You can read the entire report here, but here are some of the highlights:

Of the 329 distinct Ponzi identified for this report, more than 12 percent of the schemes were carried out by perpetrators who have a prior history of fraud.

Lesson:  As we have previously outlined on this site, one of the fundamental lessons of avoiding a fraudulent investment scheme is to conduct thorough criminal checks on the individual with whom you are investing.

The average Ponzi scheme spanned more than 5 years, with 11 of the 329 schemes lasting more than 20 years.

Lesson: Logic tells us that businesses who have been around for several years must have a successful track record, but this logic may be totally inaccurate.

The average annual rate of return was 282 percent and many perpetrators claimed “guaranteed” or “risk free” returns.

Lesson:  Consider that the average annual rate of return for the Ponzi schemes was 282 percent, while one of the most successful hedge funds in the world, SAC Capital Advisors, boasted annualized returns of 27 percent from 1996 through 2009. If it’s too good to be true, it probably is.

Perpetrators of Ponzi schemes perpetuated an “overly opulent” and sometimes extravagant lifestyle which included waterfront homes, luxury cars, yachts and large philanthropic contributions.

Lesson:  A major warning flag for investors is a “showcase” of wealth.  Investment fraudsters driven by greed and power, often camouflage the legitimacy of their investments by purchasing luxury homes, automobiles, yachts and one-of-a-kind items.

90 Percent of Ponzi schemes are perpetrated by men.

Lesson:  As we all know, men are from Mars, women are from Venus.

Additional resources on steps to avoid a Ponzi scheme:

 

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Lessons from Barry Minkow – A Tiger Doesn’t Change its Stripes

Barry Minkow, a “reformed” fraudster, was charged yesterday for his role in disseminating false information about Lennar Corp. in 2009. According to the criminal complaint, Minkow published false and misleading information about Lennar Corp., calling the company a Ponzi scheme, while profiting from Lennar’s falling stock with options contracts. 

More than 20 years ago, in 1988, Minkow pled guilty to running a Ponzi Scheme in connection with his carpet-cleaning business ZZZZ Best.

After being released from prison in 1995, Minkow reinvented himself by becoming a pastor and founding the Fraud Discovery Institute, which is a non-profit entity which fought to uncover financial fraud. Minkow has been profiled on 60 Minutes and was applauded for his work in a series of articles in the Wall Street Journal in 2008 which uncovered inflated credentials by corporate executives.

Despite all of his self-promoting and “anti-fraud” hype, Minkow is set to face some additional prison time for his second fraud.

Here are a couple of important lessons to learn from Minkow:

A Tiger Doesn’t Change its Stripes

Making a blanket statement about all criminal offenders is a mistake, but it’s certainly a reason to be more cautious in your business dealings.

Beware of Repeat Offenders

Minkow is not the first, and certainly not the last repeat offender.

Another “reformed” fraudster, Barry Wenbe, who was convicted for embezzling on two different occasions, said in an interview with the Association of Certified Fraud Examiners, “If you put me in a position of trust again…chances are I’m going to violate that trust.”

The Association of Certified Fraud Examiners pointed out two other “reformed” fraudsters who also broke that trust by committing multiple frauds: Kenneth Kemp and Steve Comisair.

If you do any sort of “background check” make sure you check criminal record history

Minkow was open about his criminal history, but that doesn’t mean everyone else will be and it certainly doesn’t mean you should take what people say at face value.

You can go the do-it-yourself route and do a fake background check, but people can and will do anything to escape from their criminal past…something that “Googling” will not find.

What do you think?  Would you do business with a “reformed” fraudster?  Let us know in the comments.

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The Ponzi Scheme is Not Dead…Yet


View 2011 Ponzi Schemes in a larger map

In December 2008, Bernie Madoff put the term “Ponzi scheme” back on the map. 2009 was declared the “Year of the Ponzi” by the Associated Press, during which time over 150 Ponzi schemes totaling over $16.5 billion were unraveled (excluding Madoff’s $65 billion scheme, which came undone in December 2008).

While 2011 has not unraveled anything close in terms of monetary damages to Madoff, Allen Stanford ($8 billion), Tom Petters ($3.65 billion) or Scott Rothstein ($1.2 billion), the Ponzi scheme has not disappeared.

2011 Ponzi Schemes

Based on our research, through the end of February 2011, charges have been brought against 18 Ponzi schemes with alleged damages of more than $370 million (see map above).

While this figure may represent less than one percent of Bernie’s epic scheme, the execution of the fraudulent operations remain the same.

The victims have varied between members of the Church of Jesus Christ of Latter-day Saints who were swindled when Kurt Branham Barton’s $41 million Ponzi scheme unraveled in February 2011, to 2,600 Amish people who were taken by one of their own, when Monroe Beachy (the “Amish Madoff”) was arrested for running a $33 million Ponzi scheme earlier this month.

Avoiding the next Ponzi scheme

Regardless of its leader or execution of the operation, a common element behind all of these schemes (besides loss of money and faith), is that investing in a Ponzi scheme is almost completely avoidable if investors take the time to do their initial homework before jumping in the pool.

By way of example, at least four of the swindlers indicted this year have prior criminal records including fraud and larceny.

In addition to uncovering previous criminal acts, an experienced investigator may also uncover additional facts such as previous allegations of fraud, misrepresentations, regulatory actions, financial troubles or other issues that could have steered you away.

Truth be told, identifying a potential ponzi schemer is not too difficult.  As the saying goes and goes and goes… “if something looks too good to be true, it probably is.”

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Utilizing a Private Investigator for your Investigative Due Diligence

“Due Diligence” is a phrase that varies in meaning between different business organizations and industries, but from a private investigator’s perspective, investigative due diligence most commonly refers to the assessment of the background and reputation of a potential business partner(s) or key player(s) in a venture before parties enter into a substantial financial relationship.

Investigative due diligence can also encompass the assessment  of company-wide issues including quality of assets, liability issues (such as lawsuits) or regulatory or environmental issues, but for the purposes of this post, we are only discussing the reputation of a potential business partner(s) or key player(s).

Minimizing Your Risk

When your business or reputation is on the line, investigative due diligence can help you minimize the risk of potentially bad investments, costly mistakes or angry investors. If you are not conducting a comprehensive background check and instead are relying on inexperienced fly-by-night  companies that provide unorganized “data dumps” of information from random database records, you are asking for trouble. Thorough analysis of data identified by a trained professional private investigator can assist you in understanding what is out there and help you make informed decisions instead of disastrous ones.

What key issues can be uncovered on potential business partner(s) or key player(s)?

  • Business Interests – Corporate executives engaging in self-dealing, hidden business interests or historical affiliations that have been the subject of controversy, bankruptcy or sanctions
  • Personal History – Multiple divorce filings with allegations of personal misconduct
  • Professional History – Falsified education credentials or misrepresentations of previous work history
  • Regulatory Issues – Undisclosed regulatory complaints or disciplinary actions taken by state or federal regulatory agency
  • Criminal/Civil Cases – Multiple convictions for driving under the influence of alcohol, allegations of soliciting a prostitute or litigious past
  • Financial Status – Hundreds of thousands of dollars in federal tax liens, credit issues to grievances filed with U.S. Tax Court
  • Assets – Multiple houses and boats which could show someone living beyond their means

Final Thought

Investigative due diligence can help you identify self-dealing, hidden interests, personal issues or past red flags on potential business partner(s) or key player(s), that can help you minimize the risk of potentially bad investments.

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How a Google Search Might Cost JP Morgan $6.4 Billion

The “Well-Known Cloud” over JP Morgan’s Head

If living in hindsight was a reality,  there are many of us who would have taken a different path at times during the road of life.  As reported in today’s New York Times, JP Morgan Chase executives reportedly “expressed serious doubts about the legitimacy of Bernie Madoff’s investment business more than 18 months before his Ponzi scheme collapsed, but continued to do business with him.” Unfortunately now for JP Morgan, the path they chose (which encompassed a “Google search with no follow-up”) may cost them $6.4 billion in civil claims.

According to several internal bank documents unsealed yesterday in connection with the Madoff Trustee liquidation proceeding, several high-ranking JP Morgan risk management executives shared communications in 2007 about Madoff’s “Oz-like signals” which were “too difficult to ignore.”

As described in the court filings:

For whatever its worth, I am sitting at lunch with [JPMC Employee 1] who just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a [P]onzi scheme-he said if we google the guy we can see the articles for ourselves-Pls do that and let us know what you find.”

[JPMC Employee 2] warned, “you will recall that Refco was also regulated by the same crowd [SEC, NYSE, NASD] and there was noise about them for years before it was discovered to be rotten to the core. Hopefully this is not the case here but given [JPMC Employee 1’s] view, I think we owe it to ourselves to investigate further.”

Nevertheless, Equity Exotics seemed eager to receive approval, and the further research on Madoff was limited to a Google search with no follow-up. REDACTED [JPMC Employee 8] asked one of her colleagues to “please have one of the juniors look into this rumor about Madoff that [JPMC Employee 2] refers to below.”

The analyst forwarded an article about a proposed change in SEC regulations that would eliminate a loophole in the regulations governing broker-dealers. He speculated the loophole allowed broker-dealers to run “a ‘[P]onzi’ scheme of sorts.” Even though the article made no mention of Ponzi schemes and provided no suggestion as to why Madoff in particular would have had a “well-known cloud” over his head, upon information and belief, no further investigation was conducted—even after [JPMC Employee 2] cautioned, “Mr. Madoff will not allow us to conduct any due diligence on him directly and we are forced to rely on the diligence of third parties. . .

Now getting back to the earlier point of living in hindsight; we are confident that many individual investors and business executives were unfortunately blinded by Madoff’s “well-known cloud” and possibly even ignorant to the subtle red-flags he may have waived.  However, when one of the largest financial institutions in the world considers proper due diligence as “googling the guy” or last “having one of the juniors look into this rumor about Madoff”…something is seriously wrong with the avenue JP Morgan chose to vet Mr. Madoff, possibly even now negligent.

What do you think about JP Morgan’s “due diligence”?  Let us know in the comments.

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Due Diligence Background Investigation for Private Equity Firms

One of the most overlooked areas in a private equity transaction is a due diligence background investigation on the key players or principals part of the transaction.  The purpose of the due diligence background investigation is to evaluate the integrity of individuals – both personally and professionally – that you are going to be doing business with. Understanding the personal and professional history of those key players can be the difference between a successful transaction and a complete failure.

People are Assets

In some cases, the key assets that are being acquired as part of an acquisition are hard assets such as a product, factory, patent  or even an idea.  But in other cases, the most important assets are the people that are going to be on board, especially in service related businesses.  If the transaction involves the acquisition of key principals that are going to be the foundation to the future success of the company, among the key issues that need to be answered as part of the due diligence investigation process is the background and reputations of the parties whom you will be doing business with.

Key issues that could be uncovered:

  • Business Interests – Corporate executives engaging in self-dealing or previous business interests that have been the subject of controversy, bankruptcy or sanctions
  • Personal History – Multiple divorce filings with allegations of personal misconduct
  • Professional History – Falsified education credentials or misrepresentations of previous work history
  • Regulatory Issues – Undisclosed regulatory complaints or disciplinary actions taken by state or federal regulatory agency
  • Criminal/Civil Cases – Multiple convictions for driving under the influence of alcohol, allegations of soliciting a prostitute or litigious past
  • Financial Status – Hundreds of thousands of dollars in federal tax liens, credit issues to grievances filed with U.S. Tax Court
  • Assets – Multiple houses and boats which could show someone living beyond their means

In Depth: Anatomy of a Comprehensive Background Investigations [Infographic]

Who should a private equity firm conduct a due diligence background investigation on?

To best answer this question, some of the key questions that you need to ask yourself is: how much capital is at risk, how much reliance is being placed on the key principals of this transaction and the nature of the business (a paper mill and an oil exploration business have two totally different risk profiles). Ultimately, it’s a choice that the private equity firm must make, but at the very least, a due diligence background investigation should be conducted on the key principals as part of the transaction, specifically those individuals whom you have identified during the transaction as keys to the future success to the company.

Final Thought

Having the wrong management in charge can be the  difference between an immediately successful acquisition or a complete failure. The goal of the due diligence background investigation is to identify relevant issues in management’s background and track record to make a well informed business decision that could impact your investment decision.

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