Recession makes it easier to catch scammers

/ Source: Business Week

Bernard L. Madoff may have pulled off the biggest Ponzi scheme in history. But his is far from being the one and only. Since the start of 2009, the Securities & Exchange Commission has filed 34 cases alleging investor scams, up from the pace just a year earlier.

The latest: A July 8 complaint against Sky Capital that alleges the New York broker-dealer and a predecessor firm were merely boiler rooms that bilked investors out of more than $140 million over the past decade. Founder and Chief Executive Ross Mandell, 52, and five middle-aged associates, who were led into court in handcuffs, could face 20 years in prison if convicted of fraud charges.

Why the rise in arrests and criminal charges? The downturn in the economy is outing more con artists, attorneys say. Like Madoff's record-setting $65 billion, decades-long scam, many frauds rely on money from new investors to pay returns promised to older investors and to support the perpetrators' typically lavish lifestyles. When financial markets collapsed last year, new investors vanished while older investors began to demand withdrawals. Suddenly funds that had seemed solid turned out to be empty shells.

Had the economy remained stable, attorneys argue, many of these long-running schemes would have gone on undetected. "I don't think there's a rise in these fraud schemes and Ponzi schemes; they've been around forever," says Bradley D. Simon, a white-collar criminal defense attorney of New York-based firm Simon & Partners. "The downturn in the economy is exposing some of these operations. Had it not been for [the downturn], I think Madoff would be perpetuating his."

The North American Securities Administrators Assn. estimates that securities fraud costs investors about $40 billion a year.

Beyond headline-grabbing scams like Madoff's and an $8 billion scheme alleged to have been orchestrated by Texas billionaire R. Allen Stanford, smaller cases are emerging weekly, on average.

These are cases like Tom Petters of Minnesota, who allegedly tricked investors into pouring at least $1 billion into a phony wholesale consumer-goods scam from 1995 to 2008. Petters is awaiting trial. Paul Greenwood and Stephen Walsh face civil and criminal charges for allegedly using money that investors turned over to New York-based WG Trading Investors as their own "personal piggy bank," according to SEC documents. The duo is estimated to have taken $554 million since 1996.

Investors may be getting smarter. Many of the new cases stem from tips from investors who began to wonder how they were getting such strong returns in a dismal economy. "The one good thing about the Madoff investigation was that because of its size it put all investors on notice," says Robert J. Ridge, a defense attorney and Pittsburgh-based partner with law firm Thorp Reed & Armstrong. "Those investors who were on notice started to ask harder questions."

Could the upsurge in white-collar prosecution reflect the election of President Barack Obama and a more activist government? Ridge, for one, doesn't think so. "I don't get the sense that this is because regulators decided they were going to ride around on white horses and find Ponzi schemes," he says.

But some attorneys and investigators worry that Madoff's long sentence—the 71-year-old was ordered on June 29 to serve 150 years in prison—won't deter future scams and that the harsh economic climate will be a breeding ground for new con men who will target investors desperate to eke out a profit anywhere they can. "There always have been and always will be bad guys out there chasing the money," says Peter Turecek, a senior managing director at risk consultancy Kroll. "These scam artists have too much bravado to think that they'll ever get caught."