ShareThisPonzi schemes come in all shapes and sizes, and they seem to keep coming and coming.
Although the Securities and Exchange Commission failed to detect Bernard Madoff's alleged $50 billion scheme until his sons turned him in, last week it filed charges against two smaller alleged Ponzi operators: Joseph S. Forte, 53, of Broomall, Pa., who allegedly raised more than $50 million from investors over more than a decade; and Richard Piccoli, 82, of Williamsville, N.Y., who allegedly raised $4.1 million the past two years.
Also last week, federal agents arrested James Trabulse at San Francisco International Airport on his way back from France on one count of mail fraud.
In 2007, the SEC charged the Daly City, Calif. man with defrauding more than 100 investors, many in the Bay Area, out of $5 million in a scheme that had some Ponzi characteristics. Trabulse settled the SEC charges but now faces a criminal charge in U.S. District Court in San Francisco. He is under house arrest pending the posting of a $1 million secured bond.
No two Ponzi schemes are alike, which makes them hard to spot, except in retrospect. One thing they have in common: returns that seem too good to be true. The profits don't have to be spectacularly large; they could be eerily consistent or above the returns on similar investments.
Madoff's fictitious stock and options investments allegedly paid 10 to 12 percent a year, which sounds reasonable except they came every year, in good markets and bad. Piccoli allegedly promised investors a guaranteed annual return of 7.1 percent at a time when guaranteed investments were yielding substantially less.
In a classic Ponzi scheme, the perpetrator promises to invest client money but instead uses it for something else, usually himself. He creates fictitious profits and when investors ask for their earnings or principal, he pays them with other investors' money. Ponzi schemes can keep going until someone smells a rat or there's not enough money left to pay investors and the scheme collapses.
The scheme was named after Charles Ponzi, an Italian immigrant who was arrested in 1920 for conning New England residents out of millions of dollars.
The SEC doesn't keep track of Ponzi schemes because there's no strict definition. In a quasi-Ponzi scheme, the operator might actually invest some of the money, use some for himself and use some to pay other investors.
Fickes, of the SEC, says investors could notice inconsistencies in their statements. "The math is wrong. The ending balance one month is not the same as the beginning balance the next month," he says. Also, some investments were listed simply as "stocks" or "foreign exchange" instead of specific securities.
Fickes says another red flag in Ponzi schemes "is when there is one person doing everything," or if he says his investing formula "is top secret. I can't let anyone look."
Fickes adds that it's hard to spot Ponzis because there are few similarities, other than too-good returns.
Some Ponzi scheme operators, such as Madoff, are registered with the SEC, although that's no guarantee they will get caught. Many are not registered.
Fickes says investors should "look for independent verification of the claims an adviser is making. Are the financials audited" by a reputable firm?
Many Ponzi scheme operators target religious or other affinity groups. Many Jewish investors and charities invested with Madoff; Piccoli allegedly targeted Catholics.
In general, it's reassuring if investors receive a statement in their names from a third-party brokerage firm. But Fickes says that in his Los Angeles case, clients received statements from a major brokerage firm, but the perpetrator gained access to their accounts by securing their personal identification and posing as them.
Who was Ponzi?
The Ponzi scheme is named after Charles Ponzi, an Italian immigrant who duped thousands of New Englanders in a postage-stamp scam in the 1920s.
According to the Securities and Exchange Commission, Ponzi told investors he could exploit differences between U.S. and foreign currencies used to buy and sell international mail coupons. He promised a 40 percent return in 90 days at a time when bank accounts were paying 5 percent. "Although a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons," the SEC says on its Web site.
Losses in the Ponzi case have been estimated between $3 million and $7 million. Adjusted for inflation, $7 million would be about $75 million today. By comparison, investors in Bernard Madoff's fund thought they had more than $50 billion, including profits. To date, auditors have located less than $1 billion in assets.
E-mail Kathleen Pender at kpender(at)sfchronicle.com.
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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