Happily retired, Len and Ruth Mitchell’s world turned upside down a few years ago when they lost more than $100,000 of their life savings to a con artist.
It all started back in 1994, when they invested $30,000 with Guardian Investments, a classic Ponzi scheme in Beaver County, Pa., that was run by their neighbor, accountant Barry Korcan. For the next 11 years, they continued adding to their investment, expecting to bolster their retirement fund. But, then, in 2005, it all fell apart and they had to start over.
“It’s really been a nightmare,” Mrs. Mitchell, 71, said. “To be our age, and have to count every penny, I never thought it would end up this way. I can’t even believe it. He wrecked a lot of lives; a lot of victims are now dead.”
Even after the notorious collapse of Wall Street financier Bernard L. Madoff in 2009, investors are still learning the hard way that if it sounds to good to be true, it probably is, with the Securities and Exchange Commission cracking down on a growing number of Ponzi schemes in the years since Madoff’s financial empire collapsed.
The SEC has taken action against four suspected Ponzi schemes just in the past two weeks, including one that targeted Christians in Puerto Rico and another that targeted ex-players and coaches of the University of Georgia football team. The agency has closed more than 100 cases since 2010.
“As long as we have people who have money, someone’s going to try to steal it from them, either by hook or by crook,” said Lori Schock, director of the Office of Investor Education and Advocacy at the SEC. “Con artists are very persuasive when it comes to convincing people to turn over their money for phantom riches. Their emotions get built up into it, and they stop thinking logically.”
Classic Ponzi schemes take advantage of inexperienced investors, offering sky-high returns and paying off early investors with the proceeds from later contributors. Some of these financial shell games, like Madoff’s, can survive for decades before the inevitable collapse.
But Ponzi schemes reach a “tipping point” and fall apart during bad economies, because new investors don’t have as much money to spend. That may explain why more Ponzi schemes are being discovered, experts say, not necessarily because more are forming, but because more are falling apart.
“One of the worst enemies of a Ponzi scheme is a bad economy,” said Charles Rotblut, vice president of the American Association of Individual Investors. “The conditions right now just make it tougher to operate a Ponzi scheme, because you don’t have as many people willing to take on more risk in hopes of getting a big return.”
In the most recent example, the SEC last week filed charges against Ricardo Bonilla Rojas for operating a $7 million Ponzi scheme through his company, Shadai Yire, which targeted as many as 200 evangelical Christians and factory workers in Puerto Rico, Florida, New York and North Carolina from August 2005 to February 2009.
Mr. Rojas, who said he would spend the money in commodities but never did, promised investors up to 50 percent returns that were “100% guaranteed.” He kept $700,000 for himself.
Shadai Yire was one of the many Ponzi schemes that targets religious groups, which seem to be particularly vulnerable to such fraud because they are naturally trusting people.
“When you’re dealing with people of faith, that’s just it, they’re people of faith,” the SEC’s Ms. Schock said. “They believe in the person, and they don’t think they would lead them astray, unfortunately, until they do.”
This April, the SEC also filed charges against at least two other Ponzi schemes accused of targeting members of the Persian-Jewish community and socially conscious investors in church organizations.
In one of the most notable cases of religious Ponzi fraud, the Office of Financial and Insurance Regulation in 2010 accused Michael Winans Jr. of using his position as a member of the prominent Winans family, a gospel music group from Detroit, to scam churchgoers out of as much as $11 million. “It’s really devastating,” Ms. Schock said. “They’ve lost their money, but in some cases, they also lose their faith in humanity.”
To make matters worse, investors rarely receive all of their money back. The Mitchells only got about $10,000 back. Hundreds of lawsuits have been filed trying to recover a fraction of the money stolen by Madoff, now serving a 150-year prison term.
“Unfortunately, if there’s money to be returned, it’s generally not dollar-for-dollar, so it may end up being pennies on the dollar, or sometimes there’s no money left at all,” Ms. Schock said.
Ponzi schemes typically prove confusing to understand, because the organizers present secretive and complex strategies. These scams are not registered with the SEC, and they offer high returns with supposedly little or no risk. They also show consistent results, a red flag for markets such as the stock market where wide swings are the rule. Investors might notice difficulty receiving payments and issues with paperwork.
“The biggest defense against a con artist is to ask a lot of questions, because they don’t want questions to be asked,” Mr. Rotblut said. “They don’t want to be challenged.”