Troubled Times Bring More Mini-Madoffs to Light

Reply Wed 28 Jan, 2009 10:31 am
January 28, 2009
Troubled Times Bring Mini-Madoffs to Light
New York Times

Their names lack the Dickensian flair of Bernie Madoff, and the money they apparently stole from investors was a small fraction of the $50 billion that Mr. Madoff allegedly lost of his clients’ savings.

But the number of other people who have been caught running Ponzi schemes in recent weeks is adding up quickly, so much so that they have earned themselves a nickname: mini-Madoffs.

Some of these schemes have been operating for years, and others are of more recent vintage. But what is causing them to surface now appears to be a combination of a deteriorating economy and heightened skepticism about outsize returns after the revelations about Mr. Madoff. That can scare off new clients and cause longtime investors to demand their money back, which brings the charade tumbling down.

“There is no way for a Ponzi to survive given the large number of redemptions and a lack of new investors,” said Stephen J. Obie, the head of enforcement at the Commodity Futures Trading Commission. The agency has experienced a doubling of reported leads to possible Ponzi schemes in the last year, and its enforcement caseload has risen this year.

On Monday, at a suburban New York train station, Nicholas Cosmo surrendered to federal authorities in connection with a suspected $380 million Ponzi scheme, in which investors paid a minimum of $20,000 for high-yield “private bridge” loans that he had arranged.

Mr. Cosmo promised returns of 48 percent to 80 percent a year, and none of his investors apparently minded " or knew " that Mr. Cosmo had already been imprisoned for securities fraud. In the end, 1,500 people gave him their money, often through brokers who worked on his behalf.

And in Florida, not far from the Palm Beach clubs where Mr. Madoff wooed some of his investors, George L. Theodule, a Haitian immigrant and professed “man of God,” promised churchgoers in a Haitian-American community that he could double their money within 90 days.

He accepted only cash, and despite the too-good-to-be-true sales pitch, he found plenty of investors willing to turn over tens of thousands of dollars.

“The offices were beautiful, and I was told it was a limited liability corporation,” said Reggie Roseme, a deliveryman in Wellington, Fla., who lost his entire savings of $35,000 and now faces foreclosure on his home.

According to federal regulators who have accused him of operating a Ponzi scheme, Mr. Theodule bilked thousands of investors of modest means, like Mr. Roseme, out of $23 million in all, and put $4 million in his own pocket. This money helped pay for two luxury vehicles for Mr. Theodule, a wedding, a lavish house in Georgia and a recent trip to Zurich that federal authorities are now investigating. The fate of the other $19 million is still unknown.

Investors in Idaho say they lost $100 million in a scheme that promised 25 percent to 40 percent annual returns. In Philadelphia, a failed computer salesman tried his hand at trading nonexistent futures contracts for 80 investors and surrendered to federal authorities this month after losing $50 million.

A Ponzi scheme in Atlanta that promised investor returns of 20 percent every month through something called “30-day currency trading contracts” was shut down this month after losing $25 million. And Tuesday, Arthur Nadel, a prominent money manager in Sarasota, Fla., and philanthropist turned himself in to the authorities. He had disappeared this month, just days before the Securities and Exchange Commission charged him in a $300 million investment fraud that may be a Ponzi scheme.

Investors in many of the schemes were told that their money would go into stocks, foreign currencies and other investments and earn above-average returns " a deception backed up with what appeared to be legitimate monthly statements and fancy offices. Now, Ponzi-related losses are adding up to hundreds of millions of dollars.

The S.E.C. does not keep statistics on Ponzi fraud, but it has brought cases involving losses of over $200 million since the beginning of October last year, including one against the disgraced Democratic donor Norman Hsu. Mr. Hsu was accused of using money from a $60 million Ponzi scheme to make campaign donations to leading candidates, including President Obama and Secretary of State Hillary Clinton. (Mr. Obama and Mrs. Clinton later donated the money to charities.)

Regulators, chastened by failing to uncover the Madoff scandal, are focusing more on such swindles. The Commodity Futures Trading Commission, for instance, has established a new Forex Enforcement Task Force to prosecute Ponzi cases in which investors were told their money was being invested in foreign currencies. In 2008, the agency prosecuted 15 Ponzi schemes and expects that number to increase this year.

Last Thursday, Senators Charles E. Schumer, Democrat of New York, and Richard Shelby, Republican of Alabama, who are both influential members of the Senate Banking Committee, introduced legislation to provide $110 million to hire 500 new F.B.I. agents, 50 new assistant United States attorneys and 100 new S.E.C. enforcement officials to crack down on such crimes.

“Ponzi schemes are against the law,” Mr. Schumer said in an interview. “But we have not had enough law enforcement officials. Madoff should have been stopped. Our proposal would not just provide more resources, but it would work like a posse to go after this fraud.”

Lawsuits brought by bilked investors and federal regulators are piling up in courts.

One case brought by the federal government against a North Carolina company called Biltmore Financial describes an apparent $25 million fraud going back for 17 years that drew in more than 500 investors, many of whom were members of a Lutheran community in that state.

For an investment of as little as $1,000, investors were told they were buying packages of mortgages with 10 to 20 percent annual returns. In reality, the money went to buy an Aston Martin convertible, a $1 million recreational vehicle and vacation and rental properties for the head of the company, J. V. Huffman, who was charged by the S.E.C. last November.

Last week, the S.E.C. charged James G. Ossie of Atlanta with taking $25 million from 120 investors " who had to invest a minimum of $100,000 with him. Mr. Ossie even held periodic conference calls describing his trading strategy, which promised 10 percent monthly returns.

In the South Florida Haitian-American community, Mr. Theodule turned to churches. But his scheme fell apart in November when 40 investors showed up at Mr. Theodule’s office to try to get their money back.

“Theodule had been the king and lived in the community, and then one day he vanished,” said Mr. Roseme, the investor who lost $35,000 in savings.

He described Mr. Theodule as “friendly, someone you could trust, a real positive guy.”

Nerline Horace-Manasse, a 31-year-old Haitian immigrant with six children, saw her life’s savings of $25,000 disappear.

Statements showed her money had grown to $90,000, but when Ms. Manasse asked questions of Mr. Theodule, “he advised he could not tell me where he was putting the money because there were a lot of copycats out there and he’d go out of business.”

Now Ms. Manasse and Mr. Roseme are part of a class-action suit against Mr. Theodule.

Mr. Theodule’s attorney, Matthew N. Thibaut, did not return a call for comment. But in court papers, Mr. Theodule said, “Theodule admits he has told persons that he wants to help build wealth in the Haitian community.”

Lynnley Browning contributed reporting.
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