CFTC Commissioner Chilton Speaks on Ponzi Schemes: "The Pandemic of Ponzimonium"
Sima Saran Ahuja | Bloomberg Law
In his remarks at New York Law School, Commodities Futures Trading Commission (CFTC) Commissioner Bart Chilton discussed financial scams and compared the recent rise in Ponzi schemes to a “pandemic of Ponzimonium.” Commissioner Chilton suggested, however, that in contrast to health pandemics over which we often have no control, the pandemic of financial scams could be countered with education and due diligence.
Commissioner Chilton noted that while the prevailing view may be to consider health pandemics as “more serious” than Ponzi schemes, the fact remains that domestic and international “financial crimes are ruining peoples’ lives . . . [and] have impacted tens of thousands of people by ripping them off for hundreds of millions of dollars.” Commissioner Chilton also noted that while not “classic” Ponzi schemes, the internet and e-mail have been fertile ground for financial scams to which people routinely fall victim.
Ponzi Schemes―A History
As background, Commissioner Chilton recounted a brief history of Charles Ponzi―the namesake behind Ponzi schemes. Today, Ponzi schemes refer to financial scams that pay early investors from investments made by subsequent investors. According to Commissioner Chilton, that is exactly the kind of scam Ponzi himself engaged in. His scheme was simple. Ponzi promised his clients returns of 50 percent within 45 days or 100 percent within 90 days. He purported to accomplish this by “investing” in postal reply coupons which allowed people in separate countries to send each other mail with the postage being furnished by the coupon.
Ponzi took advantage of this system by buying stamps in the United States and then acquiring more valuable stamps in Italy. When Ponzi received the stamps back in the United States, he would redeem them for cash. Although Ponzi carried out his scam for many years and his victims lost nearly $20 million, his efforts were eventually thwarted. Government authorities claimed that the concept behind Ponzi’s operation was illegal because Ponzi was taking money from new investors to pay old investors. In Commissioner Chilton’s view, Ponzi’s scheme was a “version of foreign currency arbitrage.”
Ponzi Schemes on the Rise
Discussing other examples of Ponzi schemes, Commissioner Chilton warned that the headline-making Ponzi schemes are not the only worrisome ones. In fact, there has been a rise in several smaller scale Ponzi schemes both domestically and internationally. To underscore this point, Commissioner Chilton offered statistics of Ponzi schemes currently being prosecuted by the CFTC, the Securities and Exchange Commission (SEC), and the Federal Bureau of Investigation (FBI).
For example, the CFTC has 32 current cases involving Ponzi schemes, up from seven such cases in 2001. Since 2008, the SEC has doubled the number of Ponzi scheme cases it is handling and now has a dedicated web page about them. The FBI has opened 1,000 new investigations involving Ponzi schemes, up a staggering 150 percent from 2008. Putting these numbers into context, Commissioner Chilton remarked, “We thought all frauds and Ponzi scams were horrific in the wake of the Madoff scandal, but it is even worse now. It is Ponzimonium out there. Individuals need to be more vigilant than ever about their investments.”
Against this statistical backdrop, Commissioner Chilton explained that Ponzi schemes can go on for decades because investors see purported returns and that “scam artists . . . can be very convincing in their ruse.” To illustrate this point, he discussed the Madoff Ponzi scheme in which victims lost an estimated $50 billion over nearly 20 years and called it the “mother of all Ponzi schemes.”
Education and Due Diligence
In Commissioner Chilton’s view, however, these financial scams are eventually uncovered in two ways. The first is by educating consumers about Ponzi schemes and other types of financial scams so they can “spot” signs of fraud. The second is redemptions. For example, the financial crisis of 2008 brought to light many Ponzi schemes because, when the economy began to falter, investors needed their money back.
Commissioner Chilton discussed certain characteristics of recent Ponzi schemes as guidance on how to spot these scams. First, individuals who operate Ponzi schemes are “preying upon people through the use of ‘affinity fraud’ where they use personal contacts to swindle family, friends, coworkers or even fellow church parishioners.” Using examples of recent scams, Commissioner Chilton commented that these “mini-Madoff” schemes have caused people to lose college funds, money for health care expenses and retirement, and in some instances, entire life savings, only to fund the personal lifestyles and expenses of the scam artists.
Citing an excerpt from his book, Ponzimonium―How Scam Artists are Ripping Off America, which recounts 10 Ponzi schemes that took place in 2009, Commissioner Chilton also discussed “Red Flags of Fraud” to help people avoid being victims of financial fraud:
- If it sounds too good to be true, it is;
- The investment promises little or no risk of loss or promises you won’t lose money;
- Profits or rates of return on an investment are guaranteed regardless of the direction of markets;
- The investment is difficult to understand or incomprehensible; and
- Not being able to get written information about a potential investment.
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