Ponzi Schemes On the Rise?

With the highly-publicized Bernie Madoff Ponzi scheme, which resulted in an ABC mini-series and the HBO original movie, Wizard of Lies, investors might tend to think that Ponzis are a thing of the past.  But Ponzi schemes are alive and well, and may even be on the rise.  According to a New York Times report from last week, the United States Securities and Exchange Commission (SEC) has prosecuted 50 percent more Ponzi cases in the last 10 years since the Madoff scheme was busted, affecting over 4 million investors in 291 Ponzi cases, ultimately costing investors more than $31 billion in losses.

This week, the SEC filed charges against yet another Ponzi fraudster, James T. Booth, who the SEC alleges to have conducted a multi-year scheme, defrauding approximately 40 investors out of up to $10 million.  The SEC complaint alleges that Mr. Booth fabricated elaborate account statements for his clients, many of whom were seniors and unsophisticated investors who utilized Mr. Booth to manage their retirement savings.  Mr. Booth is 74 years old and resides in Norwalk Connecticut, and he is the founder of Booth Financial Associates, a firm originally created by Booth to sell advisory services and insurance products.

Mr. Booth was also a financial advisor registered with the investment advisory and brokerage firm LPL Financial LLC, a firm that is registered with the SEC and the Financial Industry Regulatory Authority (FINRA).  Over time, Mr. Booth would solicit his customers from LPL to wire money away from LPL to invest in opportunities elsewhere, with promises of safer investments or higher returns.

LPL’s business model is notable in the securities industry for its decentralized office structure, with advisors permitted to work from home or smaller branch offices.  But securities laws require the same level of supervision in all offices and in all declared business activities by its advisors.   Regulators require securities firms to employ sophisticated technologies and generate reports to detect suspicious activities or irregular patterns of customer withdrawals. Securities laws also require firms like LPL to conduct regular audits of these offsite offices, which if unmonitored, can allow fraudsters to continue their Ponzi undetected.  In Mr. Booth’s case, his fraud persisted over the course of 20 years, but unraveled shortly after LPL conducted an unannounced onsite visit to Booth Financial, whereby LPL was given access to inspect certain account statements.

Ponzi schemes are often born out of a trust in one’s financial advisor and, typically, all that is needed these days is a supply of paper and a cheap color printer to produce fictitious statements to string investors along, leading them to believe that their savings are in good order and that their returns are strong enough to be dissuaded from ever withdrawing the funds.  One hallmark of Ponzi schemes is that the money invested is often quickly spent by the fraudster to either fund a lavish lifestyle, to pay off debts, or, as in Mr. Booth’s case, what appears to be gambling habit.  When funds are withdrawn, the fraudster must ultimately find new investor money to pay the withdrawing investor, otherwise the Ponzi scheme collapses.  When Ponzi schemes collapse, investors are often dismayed at how impossible it can be to sue the fraudster and collect the lost assets, which have typically already been spent.

There are some instances, however, where the retail investor can recoup losses after the Ponzi has been uncovered, particularly when there is a registered firm involved like LPL, creating the supervisory duties described above.  The experienced team at Malecki Law has attorneys who have successfully recovered over tens of millions of dollars in investment losses for Ponzi victims, including representing over 100 victims of Robert Van Zandt of the Bronx, in connection with accounts held at MetLife Securities, Inc.  Most recently, Malecki Law recovered Ponzi losses for nine investors from upstate New York, who were caught up in a Ponzi scheme perpetrated by Hector May.  Like Booth who was registered with LPL, Mr. May was also registered with a FINRA-member firm, Securities America.   Mr. May pleaded guilty and in July of this year was sentenced to 13 years in a federal prison.

In addition to representing victims of Ponzi schemes, Malecki Law has represented victims of Ponzi-style hedge funds, note schemes, and other financial frauds.  If you have suffered investment losses with your financial advisor, you should contact our attorneys for a free consultation.  Clients of Malecki Law typically choose a contingency fee, meaning you do not pay unless we recover.