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September 17, 2010

Investment Firms & Ponzi Schemes

POLITICS - If you thought someone was running a Ponzi scheme and defrauding investors who would you tell?

And worse, even if you did tell the authorities, how would they prove it? Police aren't exactly able to get a warrant to investigate suspected Ponzi schemers and audit their finances.

If we look at the history of Ponzi schemes, from the original Charles Ponzi to more modern con artists like Bernie Madoff, nobody really learns the truth until the fraud artist runs out of money and declares bankruptcy, often applying for bankruptcy protection.

With respect to investment firms its far too easy for companies to post false claims about their profits in an effort to keep their investors happy. Once that happens and they start issuing false payments to investors that means they are stealing money from other investors to keep individual investors happy and unaware that their investments are in danger.

In the case of Bernie Madoff and other high profile Ponzi schemers these men (its almost always men for someone reason) also like to live life high on the hog... they go to golf clubs, yachting clubs, spend extravagantly and they get so used to this wealthy life style and wooing new investors by appearing to be successful that they have to keep up the facade in the hopes that they can maintain their status.

They could just cut and run, take all the money and disappear overseas but they delude themselves into thinking they can outwit everyone whom they owe money to.

But eventually their bad management and incompetence catches up to them. They start delaying payments to their investors, scrambling to keep their investors happy... if they get desperate they start suing people and looking wistfully at Swiss bank accounts.

The problem however is that there is no tip line for reporting people or companies suspected of running a Ponzi scheme (or a Pyramid scheme, which is a different matter). People can pretty much get away with defrauding investors and continuing doing so until eventually the bank(s) shuts them down.

So there is one possibility there to help solve this problem. Bank regulations and a requirement for banks to report suspicious behaviour to auditors who can investigate the company's transactions.

We already know that deregulation of the banking system can have disastrous results like when the USA and Britain switched to "light touch regulation" and removed a lot of their regulations governing banks. That mistake (deregulation of sub-prime mortgages and securities) was a major factor in the Great Recession.

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