Recession forces unraveling Ponzi schemes into the open

Colorado investment manager Shawn Merriman was charged last week with running a $20 million Ponzi scheme that victimized dozens of investors in at least three states. Defense attorney Patrick Ridley said Merriman contacted federal prosecutors and admitted what he had done.

Merriman, a former Mormon church congregation leader, allegedly used some of the money to buy expensive collectible cars, priceless Rembrandt etchings and other art by Peter Paul Rubens, Albrecht Durer and other masters.

"He used to take super, big-deal hunting safaris in Africa and bring back the animals he shot. He had a whole roomful of them that ended up in a museum," says Davis McCann, an investor angry at Merriman for allegedly defrauding him and others who considered him a personal friend.

Alleged affinity frauds

Several of the cases involve so-called affinity frauds, alleged scams in which the operators belong to the same community, church or social niche as the investors.

Marvin Ray Cooper allegedly pitched an investment scheme that purportedly offered monthly investment returns as high as 25% during financial presentations at deaf community centers in Hawaii.

Cooper, accused of using some of his investors' money to buy a new home, take flying lessons, buy computer and electronic equipment and pay travel expenses, is deaf, according to a CFTC civil complaint.

Similarly, Weizhen Tang, the self-proclaimed "Chinese Warren Buffett," is accused of defrauding Chinese community investors in the U.S. and Canada through an alleged scam that took in as much as $75 million.

In late February, the Toronto-based hedge fund operator told clients he'd used money entrusted with him by some investors to pay others, according to a court declaration by SEC attorney B. David Fraser.

In a public letter to investors last month, Tang insisted he did not steal the money and asked for another chance to recover the losses. "I know that only with everyone's supervision and assistance, I can repay everyone in around a year. This will be the most sincere form of apology," he wrote.

Even as they file enforcement actions and ask judges to freeze suspected scammers' financial assets, securities and commodities regulators are moving to find and stop as yet unreported frauds and head off future scams.

SEC Chairman Mary Schapiro last month announced plans to improve the agency's handling of whistle-blower tips about suspected financial scams. The move followed widespread criticism of the SEC's failure to act on Boston whistle-blower Harry Markopolos' repeated warnings about Madoff.

"Often, it's only when the customers complain that we're given good information that somebody has illegally operated as a money manager," says Obie, the CFTC enforcement chief.

Congress recently gave the CFTC increased authorization to pursue foreign currency fraud. The agency this year also won a $35 million increase in its $111 million 2007-08 budget, helping fund an 11% increase in its enforcement staff.

Additionally, both agencies are working with federal prosecutors who have pursued parallel criminal cases against financial frauds. Prosecutors have filed criminal actions in eight of the 20 Ponzi scheme cases brought by the CFTC this year the agency said. Criminal investigations, including some that have produced charges, have been opened in 17 of the SEC's two dozen enforcement actions.

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