Common wisdom says that victims of Ponzi schemes will never see their investment monies again. In most cases, that is likely true. But not always, and victims should be aware that sometimes they may have viable remedies to recover some or all of their losses.
The problem is enormous. Ever since the $50 billion Ponzi scheme masterminded by Bernard Madoff exploded two years ago, securities regulators have become more vigilant in pursuing these illegal investment scams. All of a sudden, we seem to be inundated with the disclosure of new Ponzi schemes nearly every week. According to a recent analysis conducted by the Associated Press, 150 Ponzi schemes collapsed in 2009, nearly four times the number that fell apart the year before, resulting in losses to victims of more than $16.5 billion. The Securities and Exchange Commission ("SEC") issues 82 percent more restraining orders against Ponzi schemes and similar securities fraud cases in 2009 as compared to 2008, and the FBI has opened more securities fraud investigations than ever before. Once the final statistics for 2010 are available, there is no reason to believe they will show any improvement.
Any victim of securities fraud faces potentially devastating losses. For investors who lose money due to the misconduct at brokerage firms, the opportunity to recover their losses through arbitration exists. Because most Ponzi schemes are run by fraudsters unaffiliated with brokerage firms, the collapse of these schemes often leaves victims with no recourse.
Recovery of losses, however, is not always out of the question. In 2010, the investment fraud lawyers at Block & Landsman were hired by a couple who were victimized by a woman who is now imprisoned in a federal penitentiary for operating a massive Ponzi scheme. The fraudster represented to our clients that her firm was selling interests in a bond yielding 8% interest and that they could pull their money out any time they wanted. The investors believed these promises and wire transferred their investment to a bank where the schemer said the money needed to be deposited. As soon as the transfer was complete, however, the fraudster withdrew the funds and used them for personal expenses. Although the investors soon discovered the fraud, their money was already gone, and they felt all was lost.
Fortunately for our clients, they may find relief. The bank they transferred their money to has an affiliated brokerage firm. The woman now in prison used to be registered as a broker with that brokerage firm, until she lost her securities broker license for stealing money from a customer's account. Despite this background, the affiliated bank allowed her to open numerous accounts on behalf of others in her capacity as a financial adviser, ignoring the many red flags that she was continuing her criminal enterprise.
