Recession forces unraveling Ponzi schemes into the open

In Texas, a financial promoter who raised nearly $11 million from investors by claiming weekly foreign currency trading returns as high as 8.1% allegedly spent some of the money on his son's auto-racing career.

In Hawaii, a financier who took in $4.4 million from investment seminars at community centers for the deaf is accused of spending more than $1.4 million of the money on a new home and other personal expenses.

And in Colorado, an investment manager who raised up to $20 million by promising investors annual stock-trading returns as high as 20% allegedly diverted money to buy Rembrandt masterpieces and other art.

Since the Dec. 11 arrest of Bernard Madoff, federal authorities have filed enforcement actions and lawsuits for dozens of alleged financial scams similar to the massive Ponzi scheme masterminded by the disgraced New York financier.

So many alleged scams have collapsed amid the worst national recession in generations and heightened investor wariness prompted by the Madoff case that Bart Chilton, a commissioner of the Commodity Futures Trading Commission, last month dubbed the phenomenon "rampant Ponzimonium."

"We're definitely finding a lot more of these cases," says Stephen Obie, acting director of the agency's enforcement division. Halfway into the 2009 federal fiscal year, the CFTC has filed civil actions in 22 alleged Ponzi schemes, nine more than in all of 2007-08.

Similarly, the Securities and Exchange Commission has filed more than two dozen emergency enforcement actions to halt alleged scams like Madoff's just since Jan. 1, says Robert Khuzami, the agency's enforcement director.

That tally includes a civil complaint that accused Texas financier R. Allen Stanford of running a Ponzi scheme in which he and a partner allegedly misappropriated billions of dollars in investors' funds. Federal prosecutors are also pursuing a criminal investigation of Stanford, a Forbes 400 list member who earlier this month told ABC-TV in an interview that he expects to be indicted soon.

Federal officials say the recent surge of cases shows little sign of slowing. This week alone, federal or state securities and commodities regulators filed new actions against alleged Ponzi schemes in California, Hawaii and Montana.

"A significant market collapse tends to unravel Ponzi schemes as investors turn cautious or demand a return of their investment," says Khuzami. "Recent market ills will hopefully result in fewer new schemes taking root."

Nonetheless, suspected scams have found a home in cyberspace, where they're luring Americans struggling to make ends meet, the Council of Better Business Bureaus warned last week.

Scams on the Internet

According to TubeMogul, an online video analytics firm, YouTube features nearly 23,000 "cash gifting" videos in which new participants' contributions are funneled to earlier ones in a 21st century online incarnation of an age-old pyramid scam.

"Bernie Madoff isn't the only guy with a Ponzi scheme. Money-making opportunities promising big returns for little work are all over the Internet and are extremely enticing," warns Steve Cox, a Better Business Bureaus spokesman.

There's no comprehensive financial data on Ponzi schemes. But Tamar Frankel, a Boston University law professor who has testified before Congress on financial frauds, said worldwide losses in litigated court cases reached an annual high of more than $9.6 billion in 2002.

What's triggered the spate of alleged scams?

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