Personal Finance: Ponzi schemes thrive on operator's promises

Personal Finance: Ponzi schemes thrive on operator's promises

August 31st, 2011 by By Travis Flenniken in Business Diary

San Francisco 49ers placekicker David Akers testified to a federal jury on Aug. 16 that he was swindled out of $3.7 million from a Ponzi scheme from 2007 through 2009, run by Triton Financial and its owner, Kurt Barton.

Also this month, the college football world was stunned to hear about the allegations of the University of Miami's egregious NCAA violations involving booster Nevin Shapiro, a man who is serving a 20-year sentence for running a $930 million Ponzi scheme.

Ponzi schemes, named after Charles Ponzi, convicted of financial fraud in 1920, have been around for a long time. They vary in size and breadth.

The largest and most recognized Ponzi scheme was the one perpetrated by Bernard Madoff in 2008 that involved more than 8,000 clients and a cost of about $50 billion.

Chattanooga had its own home-grown scam unravel in 2008 when Luis Rivas was convicted and sentenced to more than 24 years in prison for running a $31 million Ponzi scheme.

The Journal of Financial Planning recently published a critical analysis of Ponzi schemes in which the authors, Jory and Perry, identified common characteristics and markers of a Ponzi scheme.

Three critical components of a Ponzi are when the perpetrator:

* Convinces a group of people about an investment idea. Rivas held investment seminars, for instance.

* Promises a high rate of return. Shapiro promised returns up to 26 percent and Revis promised returns of 90 perrcent.

* Builds credibility initially by delivering on their promises.

Challenging economic times tend to blow the cover for Ponzi schemes because they are structured in a way that requires a continual source of new cash. Without new investors, the older ones can't be repaid. Once their social and professional network of investment prospects has been exhausted, Ponzi schemers often employ others with a large network from which to mine new money.

It's not just the average retail investor that gets targeted. Relatively sophisticated outfits have fallen into the Ponzi trap.

Investment management firm Fairfield Greenwich Advisors lost $7.5 billion with Madoff, and Spanish bank, Banco Santander, lost $2.9 billion.

Even locally, a well-respected Knoxville law firm was fleeced for almost $4 million by Luis Rivas.

Triton Financial's Kurt Barton used his friends that were former NFL players, Chris Weinke and Ty Detmer, to bring in funds from professional athletes.

Many Ponzi schemes don't begin as such, but often are created after a legitimate business venture fails.

Shapiro's grocery distribution business was going under, so he began taking loans and investments and cycling them through each investor, while putting much of it in his own pocket. Triton Financial owned a sports promotion business and was the sponsor of a PGA Champions Tour event in 2009, although the company never paid the bill from the tournament director.

Investors in a Ponzi often will receive promissory notes and a guaranteed return on investment. Monthly or quarterly statements, if provided at all, typically are inconsistent and error-prone.

The secret to their phenomenal performance is kept a mystery. Many perpetrators will claim that their proprietary software system is the secret to their high returns.

Most are not registered with the U.S. Securities and Exchange Commission, and will likely claim that registration would prevent them from earning their exorbitant returns.

Ponzi scam artists often are marvelous philanthropists. Shapiro was a big donor to the University of Miami, and Barton, a donor to the University of Texas in addition to a supporter of Texas Gov. Rick Perry.

The Journal of Financial Planning reports that many Ponzi runners use "Bible-speak" to win investor's trust and target faith-based and or culturally based associations.

When NFL football player Aaron Francisco testified against Kurt Barton, he claimed that he trusted Barton with $350,000 -- most of his family's savings -- after Barton told him he was a Mormon.

Markers of a Ponzi scheme are often obvious and easy to identify. Unfortunately, the victims are blinded by the prospect of gaining extraordinary returns.

Many refuse to accept that their money is gone, such as in the Rivas case, when victims asked the bankruptcy trustee to get Rivas out of jail so that he could start trading again and make back their money.

When the returns don't match up with the risks, one should be very cautious and considered the old maxim, "Pigs get fat, hogs get slaughtered." Nothing exemplifies this maxim like the inevitable outcome of a Ponzi scheme.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Travis Flenniken, CFA, is vice president of investments with DeMoss Capital --