2009: The Year of the Ponzi
It wasn't just Madoff -- a tough economy toppled many pyramid schemes in 2009.
Jan. 1, 2010 — -- It was right at the end of 2008 that Bernard Madoff admitted to his sons that his multibillion investment business was "one big lie." As his scam unraveled in the courts and in the media throughout 2009, we learned that his $65 billion Ponzi scheme was the biggest in history, and he ended the year serving 150 years in federal prison.
But Madoff wasn't 2009's only Ponzi villain. Why did so many bogus investment schemes blow up last year?
It's the weak economy, said Scott Friestad of the Securities and Exchange Commission. Friestad, an associate director at the SEC's division of enforcement, said that Ponzi schemes depend on positive cash flows, but tough times make it hard to for the scammers to keep up.
"Eventually, it becomes a house of cards that collapses," said Friestad.
Friestad said he is optimistic about what the New Year might bring.
"We've had Ponzi schemes around for as long as we've been an agency," said Friestad, "but we're hoping that the past year has been an aberration."
A 2009 Ponzi Rogues' Gallery
Sir Allen Stanford
Size of Alleged Scheme: $8 Billion
Status: In Prison Awaiting a 2011 Trial
The Sir in financier Allen Stanford's name was conferred by the Caribbean nation of Antigua, and the Texan turned tanned offshore billionaire embraced the role of colonial gentleman with relish, even funding a cricket team. But Stanford became just plain Allen again, and a federal prisoner, after he was arrested in June on charges of orchestrating an $8 billion pyramid scheme. The Antiguan government has revoked his title.
Authorities say Stanford and his alleged co-conspirators engaged in a scheme to defraud investors who purchased approximately $7 billion of CDs from the Stanford International Bank, an off-shore entity based in Antigua. Stanford and his co-defendants are accused of misusing and misappropriating most of their investment assets. Stanford told ABC News he "would die and go to hell if it's a Ponzi scheme."
The indictment alleges that Stanford and his associates falsely claimed that the bank's assets had grown from $1.2 billion in 2001 to $8.5 billion by December 2008. The bank also allegedly made thousands of dollars in bribes to the former head of Antigua's Financial Services Authority to ensure the bank was not audited.
Stanford was charged with fraud, conspiracy and obstruction in a 21 count indictment. If convicted, he faces a maximum sentence of 250 years in a federal prison. The financier surrendered to the FBI in Virginia and has pleaded not guilty to the charges. He is being held in Texas and will not face trial until at least early 2011.
Tom Petters
Size of Scheme: $3.65 Billion
Status: In Prison Awaiting Sentencing
On December 2, a federal jury in Minneapolis convicted Tom Petters, 53, of carrying out a $3.65 billion Ponzi scheme. After a month-long trial, he was found guilty of ten counts of wire fraud, three counts of mail fraud, one count of conspiracy to commit mail and wire fraud, one count of conspiracy to commit money laundering, and five counts of money laundering.
As CEO and chairman of Petters Group Worldwide, LLC, he acquired other businesses to divert attention from the fraud, prosecutors said. He used false bank statements about the sale of nonexistent merchandise to obtain huge loans. The acquisitions included Polaroid Corp. and Sun Country Airlines. Petters had about 2,400 people working at his companies, but after the scam was exposed, nearly all of them lost their jobs.
Prosecutors say Petters defrauded investors to finance his "extravagant lifestyle" that included luxury homes in an upscale suburb of Minneapolis and gambling. The Associated Press reported he spent $10 million at one casino. He was also a major contributor to several charities.
Petters is currently awaiting sentencing and could get life in prison.
Scott Rothstein
Size of Alleged Scheme: $1.2 Billion
Status: In Prison Awaiting Trial
In South Florida, federal authorities are say they're working the biggest fraud case in local history. Fort Lauderdale attorney Scott Rothstein once graced the society pages of local newspapers and gave big to Florida politicians, but in December he was arrested on federal fraud charges and accused of running a $1.2 billion Ponzi scheme.
Prosecutors say Rothstein swindled his own friends and clients, running the scam out of his 70-lawyer, Fort Lauderdale law firm, where he was CEO. The 47-year-old allegedly forged federal court documents, including judges' signatures, to make his investors believe the settlements they were buying into were legitimate. When the alleged fraud was exposed, Rothstein briefly fled to Morocco, but returned to Florida on a chartered jet.
Rothstein faces five counts of racketeering and fraud related to his alleged scheme. Rothstein has pleaded "not guilty" to all charges. If convicted he could be sentenced to up to 100 years in prison.
Bernard Madoff
Size of scheme: $65 Billion
Status: Sentenced to 150 Years in Federal Prison
For sheer size, Madoff's Ponzi scheme may remain without peer for some time. A former chairman of NASDAQ, the investment advisor catered to high net-worth clients who expected -- and received – double-digit returns, up market or down. But Madoff may not have made any actual investments for 20 years. When his fraud was uncovered, he admitted to starting his scheme in the early 1990s, but investigators think it may have started earlier.
Madoff's thousands of victims include major worldwide banks, asset managers, private investors, pension funds and non-profits. Some had trusted him with billions. One list of his victims ran 162 pages. His scheme hit Jewish charities particularly hard. The scheme funded a lavish lifestyle that included multiple residences and yachts; his estate is now being auctioned off by the U.S. Marshals Service to recoup the losses of his investors.
Click here to go behind the scenes of Brian Ross' investigation into Bernie and Ruth Madoff.
Madoff pleaded guilty in March to eleven federal charges, including securities fraud, wire fraud, mail fraud, money laundering, perjury, theft from an employee benefit plan, and making false statements to the SEC. In June, the 71-year-old Madoff was sentenced to the maximum, 150 years , and is now housed in a federal prison in Butner, N.C. There is no parole in the federal prison system.
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