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The New York Times recently published an article on how to avoid a Ponzi scheme which provided some valuable pointers to avoid these investment frauds. But what the article failed to mention, and probably the easiest thing you can do to avoid a Ponzi scheme, is to make sure you are not investing with a convicted criminal. It sounds almost too preposterous to be true, but there have been a surprising number of Ponzi schemes over the last several years that were run by people who had already served jail time for other frauds.

Nearly $1 billion in Ponzi Schemes run by convicted criminals

Based on some limited research of our own (see below) we identified nine Ponzi schemes totaling nearly $1 billion run by convicted criminals over the last few years (which is probably only the tip of the iceberg). Could these have been avoided if investors had hired a professional private investigator to conduct a due diligence investigation? Not completely, but it’s reasonable to think that investors would have certainly given it a second thought if they knew they were about to give their life savings to a convicted fraudster.

So while the New York Times article provides some valuable tips such as verifying the pedigree of the fund manager, checking third party administrators and checking with securities regulators, the most obvious thing you may want to do is a criminal records check. Even the SEC’s Ten Questions To Ask About Any Investment Opportunity does not mention anything about criminal records.

Accessing criminal records

Access to state and federal criminal records varies, but, for example, a New York Criminal record search can be conducted through the New York State Office of Court Administration. The key is to identify where and when a person lived so the relevant criminal searches can be conducted in the relevant jurisdictions. Your best bet is to hire a professional investigator who can guide you through the process.

Examples of Ponzi schemes run by convicted fraudsters:

  • In October 2010, Frederick Darren Berg was charged with defrauding investors out of more than $100 million. In 1987, Berg had pled guilty in a check-kiting scheme and had reportedly embezzled more than $20,000 as a 20 year old in college.
  • In June 2009 David Hernandez was charged with bilking more than 100 investors in 12 states out of $11 million. Hernandez had previously served 34 months for an investment fraud scheme in 1998.
  • In January 2009, Nicholas Cosmo was charged with operating a $370 million Ponzi scheme.  Cosmo previously served 21 months in federal prison in 1997 for misusing client funds and was forced to pay $177,000 in restitution and undergo “extensive gambling therapy.”
  • In December 2009, Philip Lochmiller was charged with running a $31 million Ponzi scheme.  Lochmiller failed to disclose to investors that he had previously served three years in prison in 1985 for securities fraud.
  • In December 2010, the self-proclaimed Three Hebrew Boys, Tony Pough, Joseph Brunson and Timothy McQueen, were sentenced to 25+ years in prison for running an $82 million Ponzi scheme.  Pough was previously convicted of a financial crime.
  • In November 2010, Robert Stinson Jr., who claimed to operate several real estate hedge funds, was charged with overseeing a $17 million Ponzi scheme.  According to the indictment against Stinson, he had previously been convicted of fraud and twice filed for bankrupcty.
  • In October 2010 the US Commodity Futures Trading Commission charged Keven Harris, Keelan Harris, Karen Starr and Patrick Cole of operating a multi-million dollar foreign currency Ponzi Scheme.  The complaint charged that they concealed from customers that Kevin Keelan, Kevin Harris and Karen Starr had been previously been convicted of multiple offenses including fraud.
  • In May 2009, James S. Koenig was arrested and accused of orchestrating a $200 million Ponzi scheme that defrauded thousands of investors.  Koenig reportedly failed to disclose to investors that he was previously convicted of mail fraud.
  • In March 2010, Michael Greenberg was charged with running a $53 million Ponzi scheme.  Greenberg had previously served almost four years in federal prison for running a Ponzi scheme and fraudulently obtaining investments and loans.

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  1. […]  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 […]

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