Investors Bilked Out of More Than $750 Million : Thousands Reportedly Hit by Ponzi Schemes

They might start out as legitimate business schemes and lapse into fraud when things don’t go as planned.

Often, though, the originator knows going in that he or she and just a handful of first investors are the only ones who will make the big bucks promised.

There may yet be hope for all those disappointed people who had hoped to make a million dollars raising earthworms, or, for those too sophisticated for such sales pitches, there’s always room to play around with mass-market tax shelters, or high-tech stocks or even designer jeans, but new evidence points to another conclusion.

The nation’s state securities administrators say they have found a pattern of 30 major known or suspected Ponzi schemes in which tens of thousands of Americans were bilked out of more than $750 million over the past three years.

‘Ponzi Schemes’

The North American Securities Administrators Assn. and the Council of Better Business Bureaus said the schemes, based in 14 states, appear to have defrauded investors in all 50 states.

A Ponzi scheme, named for its developer, Carlo Ponzi, a con artist of the 1920s, can take as many different forms as the mind of a swindler can create.

The common denominator is that the first few people who take the bait indeed do prosper--at the expense of later investors, who end up losing all or most of their money to the promoter.

Earthworm farming has become old hat by now, but state regulators say larvae farming schemes could be the coming thing among quick-buck artists, who always seem able to find a certain number of gullible investors eager to grow one easy-care creature or another.

Nonetheless, it’s the more high-sounding schemes involving what the association calls a “bewildering array of new, poorly understood investment vehicles which have emerged in wake of the deregulation of the financial marketplace” that has them most worried.

Check for Registration

The association said a two-month survey uncovered examples of Ponzi schemes masquerading as high-tech stock investments, mass-market tax shelters, deferred delivery contracts in commodities, currency futures, oil and gas funds, leverage contracts in precious metals, mutual funds, mortgage brokering, business opportunities, options and money-market accounts.

What are some tip-offs that what is billed as a wonderful opportunity is in reality a scam? One waving red flag would be if the person or outfit offering the deal is not registered with the state securities office in which it is offered.

The officials said lack of registration in itself does not mean it is a fraudulent scheme, but such an omission is a clear signal for the individual investor to make a thorough check before parting with his or her money.

But perhaps the surest gauge is what Ohio Securities Commissioner Roger Marting called the time-tested slogan that hangs on his office wall: “If it seems too good to be true, it probably isn’t.”

State securities officials know there’s at least one other scheme aborning for everyone they shut down--they just can’t spot them in advance.

“We will hear about them when the checks start to bounce,” said Susan Rittenhouse, Maryland’s securities commissioner. “People are afraid to ask (in advance of investing) because they don’t want to be told it’s too good to be true.”

What, then, is the rationale for spending more money to protect the relative handful of unsophisticated--or greedy--people who get caught in fraudulent investment scams?

“This hurts more than the individual investor,” said Colorado Commissioner Royce Griffin. “There’s a social cost. It’s a drain on the economy as a whole. This money doesn’t go back into circulation to build a plant and create jobs. It goes into some swindler’s offshore bank account in the Caribbean.”