Ten Years After Madoff, Updated Ponzi Database Shows Schemes Are Thriving

December 2018 marked the ten-year anniversary of the collapse of Bernard Madoff's massive Ponzi scheme, a cataclysmic event that catapulted the term "Ponzi scheme" into the everyday lexicon and was the likely impetus for the Associated Press's decision to crown 2009 as “The Year of the Ponzi Scheme.  While the sheer economic destruction of that scheme and $17 billion in losses will likely (and hopefully) never be equaled, many may not realize that Madoff's scheme was literally one of hundreds of Ponzi schemes to collapse in the recent ten-year period that Ponzitracker has termed the "Madoff Era."  Indeed, an extensive and exclusive recent analysis by Ponzitracker shows that over 800 Ponzi schemes were discovered from 2008-2018 that collectively caused nearly $60 billion in losses.  Believed to be the first database compiling Ponzi scheme discoveries and sentences during the "Madoff Era," the analysis provides jaw-dropping context to the continuing destruction caused by these financial schemes.  

“Only When The Tide Goes Out Do You Discover Who’s Been Swimming Naked”

Ponzi schemes can generally be thought of as a lagging economic indicator – the hallmark outsized and consistent gains promised by the fraudsters at least appear more realistic and possible amidst a booming economy, and investors are generally content to watch their accounts steadily climb in the midst of continuing market gains.  As long as these times continue and new investor funds continue rolling in, the scheme stays afloat and is able to meet its obligations to existing investors.  Indeed, from October 2002 to October 2007, the S&P 500 Index gained over 100% – nearly 2% per month.  It is not surprising, then, that very few Ponzi schemes were uncovered during that period.  Many did not realize that they were unwitting participants in what would soon be a staggering loss of wealth.

In 2008, the metaphorical tide began to go out as stock markets plummeted amidst unprecedented market turmoil.  The S&P 500 suffered its largest annual decline that year (-38.49%) since 1937.  Jittery investors began safeguarding their capital, including turning to their “safe” investments that had been touted as impervious to risk and historically delivered consistent returns in any market.  The continuity of new investor funds is the lifeblood of a Ponzi scheme, and schemes began to collapse in droves as both new investor funds dried up and redemption requests soared.  Three of the largest Ponzi schemes in U.S. history (Madoff, Stanford, and Petters) collapsed in the span of ten months and alone involved approximately $25 billion in investor losses.  Those schemes were among more than 150 schemes that were uncovered in 2008 and 2009 - including nearly 120 in 2009 alone.

"Are we at high tide?"

Since the S&P 500 bottomed out in March 2009, it has since posted an increase of nearly 270% by the end of 2018 in one of the longest bull markets in history.  As the bull market picked up steam after the “Great Recession,” the number of schemes uncovered in the immediate aftermath appears to support the hypothesis that Ponzi schemes can be thought of as a lagging economic indicator.  Below is a chart of discovered Ponzi schemes from 2008 - 2018 (generally featuring losses of roughly $1 million or more):

• 2008: 40

• 2009: 118

• 2010: 80

• 2011: 99

• 2012: 103

• 2013: 65

• 2014: 66

• 2015: 73

• 2016: 65

• 2017: 60

• 2018: 42

In total, approximately 811 Ponzi schemes were uncovered from 2008 to 2018.  The actual number is likely higher; Ponzitracker's analysis was generally limited to Ponzi schemes that raised approximately $1 million or more from investors.  Those 811 schemes involved over $58 billion of investor funds, with an average scheme size of $71.8 million and a median size of $8 million.   To put that number in comparison, the $58 billion involved in those Ponzi schemes is just shy of Costa Rica's 2018 gross domestic product.  These figures only account for Ponzi schemes in the United States - a country with one of the most aggressive and proactive regulatory frameworks - and thus the worldwide total is unfortunately most likely a multiple of this number. 

The data shows that Ponzi scheme discoveries peaked from 2009 to 2012 with at least 90 schemes discovered each year during that period.  Several factors can be attributed to this increase.  First, Madoff and other large schemes had a violent ripple effect across the financial industry as jittery investors caused a wave of redemption requests.  These redemption requests quickly overwhelmed Ponzi schemes that had been on the brink of collapse given tumultuous market conditions and the lack of new investors.  Second, regulators began taking a much more aggressive approach to rooting out fraud amidst claims that they had not acted quick enough to detect Madoff and other schemes.  These increased enforcement efforts were successful at rooting out roughly 400 Ponzi schemes from 2009 - 2012 alone. 

After 103 Ponzi schemes were discovered in 2012, the next five years saw a potential post-Recession “new normal” with the number of schemes uncovered each year holding in a range from 60-73.  After 60 schemes were uncovered in 2017, that number dropped by 30% to just 42 in 2018 - the lowest number of discoveries since at least 2008.  The theories for this decrease are both encouraging and ominous.  For example, the decrease could be due to increased regulatory efforts that have corrected previous inefficiencies and succeeded in identifying the schemes before they were able to proliferate.  The Securities and Exchange Commission disclosed in its most recent Regulatory Priorities that it was continuing to focus on increasing its examinations of registered investment advisors and that it now covered 17% of investment advisors - an increase from a 10% coverage rate earlier this decade.  Another positive potential reason could be that efforts to educate investors about spotting fraud are paying dividends.  The rationale could also be ominous if the previous bull market from 2002-2007 is any indicator of what to expect when the current market runs into headwinds; the number of schemes uncovered in 2008 nearly doubled in 2009 in the wake of economic turmoil and it was not for ten years until the number of annual discoveries returned back to 2008 numbers. 

What do we know about our accused Ponzi schemers?  For starters, nearly nine of ten are men.  From 2008 to 2018, men never accounted for less than 84% of all Ponzi schemes and collectively comprised 89% of individuals charged with running Ponzi schemes.  The percentage of women accused in Ponzi schemes hovered at a high of around 15% in 2014 and 2015 but has since decreased to less than 7% in 2018. Each of the 50 states is represented in Ponzitracker’s database, but the majority of schemes were concentrated in a handful of states with large populations (including retirees).  California topped the list, with nearly 20% of the nearly-1,000 individuals accused of masterminding or assisting in Ponzi schemes from 2008-2018 hailing from the state.  Florida, New York, Texas, and Illinois rounded out the top 5, with nearly 60% of all individuals in the database hailing from those five states. In a surprising statistic, Utah had the sixth-highest number of Ponzi schemers despite ranking 31st in population.  The disparate rate of Ponzi schemes in Utah is likely attributable at least in part to the state’s large Mormon population which has been a hotbed for affinity fraud.  Eight states also had collective investor losses of at least $1 billion during the pertinent period.  

One trend has remained constant over the years: Ponzi schemers are often (and some would say rightly) harshly punished by the legal system for their misgivings.  The prospect of a harsh sentence is likely more certain in federal court proceedings where prosecutors have an arsenal of criminal fraud statutes at their disposal that carry lengthy potential sentences.  For example, most Ponzi schemers typically face charges of mail fraud, wire fraud, and/or securities fraud which each carry a maximum twenty-year prison term.  That, coupled with federal sentencing guidelines that heavily emphasize the amount of economic losses, generally makes a federal courtroom an unfriendly place for a Ponzi schemer awaiting his/her fate.

From 2008-2018, Ponzitracker’s database shows that at least 715 individuals were sentenced for their roles in a Ponzi scheme. This equated to nearly 8,000 years of collective prison sentences with an average sentence of 130 months and a median sentence of 97 months.  While the 150-year and 110-year sentences handed down to Madoff and Stanford are not surprising given the billions in losses, some outliers have resulted in lengthy sentences for schemers with considerably smaller losses.  For example, Florida resident James Jackson Jr. saw a judge hand down a 90-year sentence for a scheme with approximately $2 million in losses.  Juan Miguel Lopez, of Texas, received a 79-year sentence for a $4.9 million scheme.  While the rationale for those sentences is uncertain, one certainty is that the disparities are not likely to evoke sympathy from the aggrieved victims. 

 The Full Database is below:

Disclaimer - This database was compiled using publicly available news sources.  As a general rule, the database includes schemes of $1 million or more.  The names and sentences displayed are based off news reports, and are not independently verified.  Please contact Ponzitracker here with any clarifications or comments.

California Fugitive Faces Criminal Charges For Alleged $300 Million Ponzi Scheme Targeting Veteran Pensions

A California man has been indicted on federal fraud charges for running what authorities allege was a massive Ponzi scheme that purportedly obtained pensioners’ future cash flows by paying up-front premiums and then selling those structured cash flows to potential investors. The U.S. Attorney’s Office for the District of South Carolina announced that Scott Kohn and his company Future Income Payments, LLC (“FIP”) had been indicted on charges of mail fraud conspiracy and wire fraud conspiracy. The charges come as multiple states have already filed lawsuits or instituted cease-and-desist proceedings against FIP, which apparently collapsed after stopping payments to investors in April 2018. If convicted of the charges, Kohn could face up to twenty years in federal prison. However, Kohn must first be found - he is a fugitive and rumored to be in the Philippines.

Kohn is convicted felon who pleaded guilty in 2006 to felony charges of trafficking in counterfeit goods and later served a 15-month term in federal prison. Following his release, Kohn formed Pensions, Annuities, and Settlements (“PAS”) in 2011 which would later be known as FIP. Through various marketing tactics, FIP and Kohn solicited pensioners by offering the ability to receive a lump sum, buyout, or advance through the sale of a portion of their future pension payments. FIP and Kohn attempted to classify the process as a “Purchase and Sale Agreement” even though the transaction was simply the loan of money to the pensioner in exchange for an agreement to pay future sums based on that principal amount. For example, the following “Recitals” from one Virginia man’s “Purchase and Sale Agreement” made multiple references to a “seller,” “purchased asset,” and “purchase price”:

Unbeknownst to many of the pensioners was that the “Purchase and Sale Agreement” also obligated them to pay a significant amount of future pension payments to FIP that often equated to an annual interest rate exceeding 100% over a five-year term. These payments obligations sometimes continued even after death, forcing some pensioners to secure life insurance policies that could cover those obligations if necessary. According to the Consumer Finance Protection Bureau, which sued FIP and Kohn in September 2018, “many military veterans, retirees, and their spouses have contracted with FIP..” Federal law prohibited the assignment of military pension payments.

FIP and Kohn then offered the income streams from those pensioners to third-party investors in the form of 60-month or 120-month cash flow payments providing annual payments from 6% to 12%. FIP used a network of various financial professionals to pitch the “pension loan” program to potential investors through promises of a consistent and predictable income stream that could be purchased using retirement funds as well as assurances that FIP had established short and long-term reserve accounts to mitigate default risks. Those financial professionals were often incentivized through an up-front commission after an investor’s purchase.

According to federal authorities, FIP “diverted new investor funds flowing into the business to fund payments to earlier investors” in a textbook example of a Ponzi scheme. FIP ceased doing business in April 2018 while owing investors approximately $300 million.

Kohn is rumored to be in the Philippines given his apparent familiarity with the country through the use of a Philippines-based corporation used in the scheme.

A copy of the Indictment is below:

Maine Woman Receives 80-Year Sentence For $4.7 Million Ponzi Scheme

In what is likely the stiffest sentence for a female Ponzi schemer, a Maine woman was sentenced to serve eighty years in prison for her role in a $4.7 million Ponzi scheme.  Karen Bowie, 61, received the sentence after being convicted at a week-long trial in Austin, Texas of property theft.  While Bowie was not charged with masterminding the scheme, authorities accused her of playing a focal role in promoting the scheme, in which she received over $2 million that was diverted from investors.  While Bowie would be eligible for parole due to her conviction on state crimes, the sentence will likely be a life sentence.

Bowie was part of Titan Wealth Management, LLC ("Titan"), which was in the business of recommending European mid-term notes ("MTN's") to clients.  Potential investors were told that the notes were low risk and offered outstanding short-term returns ranging from 10% to 50%.  Additionally, Titan's owner, Thomas Lester Irby, told investors that Titan would receive no fees or compensation from selling the notes, and in the event of emergency, Irby could easily liquidate a $10 million MTN that he personally owned.  Irby and Titan would eventually raise over $3 million from more than 30 investors.

However, investor funds were not pooled to purchase MTN's or even any interest in MTN's.  Instead, millions of dollars in investor funds were used to pay putative MTN 'profits', as well as diverted for Irby's personal benefit.  Bowie, who did not deal directly with investors but instead directed Irby to make false representations, also received nearly $2 million without providing any apparent consideration.  Irby was sentenced in 2010 to 24 years in prison after being charged with money laundering.

Bowie's 80-year sentence should serve as a stark reminder of the perils of proceeding to trial rather than accepting a guilty plea. The severity of Bowie's sentence is not only grossly disproportional to the relatively meager amount of funds involved, but is also easily one of the highest handed down to a Ponzi schemer - man or woman. (While women have been convicted of operating Ponzi schemes, they are handily outnumbered by men.)  Indeed, the 30-year sentence handed down to a Florida woman for orchestrating a $100 million Ponzi scheme pales in comparison to Bowie's sentence.  Other examples of women being sentenced for Ponzi schemes are here, here, here, here, and here.