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"Think about it, why would a legitimate operation (have to or want to) pay returns that far exceed the range of those paid by other investment funds and programs?"
MIAMI, March 2, 2009 -- Bernard Madoff whistle-blower Harry Markopolos said it took him "five minutes" of looking at records to suspect that former NASDAQ chairman was perpetrating a fraud and another four hours to mathematically prove it.
Apart from himself, many of Wall Street's biggest financial institutions also knew that Madoff was a phony long before his group collapsed under the weight of its illegal activities, rather than due to any regulatory action, Markopolos told US television show '60 Minutes' in an interview that was broadcast on Sunday.
It is also starting to come out now that the Madoff-like Ponzi scheme committed by offshore banker Allen Stanford had been widely known in the financial and intelligence communities for more than a decade before it was recently shut down.
So what were the warning-signs in Madoff's and Stanford's scams that some people picked up on but tens of thousands of others didn't?
Ironically, the very thing that attracts many victims to Ponzi schemes – consistently-high returns – is one of the clearest indications of wrongdoing, said Martin Kenney, an attorney based in the British Virgin Islands who specializes in recovering the proceeds of crime for victims.
"The first indication that an investment scheme is fraudulent is when the returns paid to investors are unrealistically high compared to the prevailing market norm," Kenney told OffshoreAlert. "Think about it, why would a legitimate operation (have to or want to) pay returns that far exceed the range of those paid by other investment funds and programs?"
Echoing what Markopolos told '60 Minutes' about Madoff hardly ever having a down month, even when the markets went down, Kenney added: "A second red flag is unfurled when a company claims that its historical earnings record has always trended upwards."
As Madoff's victims are now finding out, the 'historical earnings' claimed by Madoff and Stanford were an illusion created by sociopaths with the help of promoters, managers, and auditors, who were either incompetent or dishonest.
"Some investment programs start out as legitimate undertakings, but their managers turn to the old Ponzi model when they start to go belly-up due to a failed business plan, while others are designed as a Ponzi scheme from the get-go," said Kenney. "Either way, once a business is run as a Ponzi scheme, virtually all of its revenues are considered the spoils of fraud.
"A Ponzi scheme is always promoted as a 'going concern' when in reality it's a fantasy plan. It has little or no underlying, sustainable economic activity because it lacks the indispensable element of substance.
"Essentially, a Ponzi scheme is based on a dream, not on a business."
The lack of substance behind the scams perpetrated by Madoff and Stanford is now becoming clear. A preliminary conclusion of Irving Picard, the Trustee-in-Bankruptcy of Bernard L. Madoff Investment Securities, LLC, was that Madoff had neither bought, nor sold, any securities for his investors for at least the past 13 years, while it has emerged that Allen Stanford appears to have borrowed $1.6 billion of clients' funds without telling them to support his lavish lifestyle.
Once investment frauds collapse, the level of despair and depression suffered by many victims is as great as their financial loss, as they struggle to cope with the emotional devastation that comes with having your life-savings wiped out by placing their trust in the wrong people.
So is there any reasonable prospect of victims receiving any of their money back? While victims of most scams receive little or nothing back, Kenney said that all is not necessarily lost.
Any individual or business who received funds from a Ponzi scheme during the course of its life-time is a potential target of litigation in the hunt for recovery, said Kenney.
"To deconstruct the accounting records of a Ponzi operation, the investigator needs to remain mindful that all of the revenue from a Ponzi scheme should be considered the proceeds of fraud, since all are based on material misrepresentations and the gross misapplication of investor capital," he commented.
Kenney (pictured left), one of the world's best-known asset recovery attorneys, will chair a special 90-minute session entitled 'Ponzi Schemes: How to Detect Them & Steps To Take if You Are a Victim' that has been added to the agenda of the 7th Annual OffshoreAlert Financial Due Diligence Conference, which will take place in Miami Beach on April 26-28, 2009.
This session is split into two 45-minute segments. In the first segment you will learn how to identify red flags that are indicative of Ponzi schemes and other fraudulent investment activity. In the second segment, you will learn what steps you should take to protect your interests and attempt to recover your assets after such schemes have failed.
Other speakers for this session include:
- Mitchell E. Herr, whose law firm, Holland + Knight, has formed a team to represent holders of Certificate of Deposits sold by Allen Stanford's group;
- Accountants Marcus Wide, who has liquidated dozens of fraudulently-operated offshore banks and investment schemes, and Maria Yip, who specializes in forensic accountancy; and
- Attorneys Ed Davis and Chris Redmond, whose collective experience includes chasing criminal proceeds across the globe, including the Bahamas, Cayman Islands, Nevis, Liechtenstein, Isle of Man, the Channel Islands, Switzerland, United Kingdom, Norway, France, Italy, the Netherlands, Netherland Antilles, Japan and Latin America.
Attend this and 26 other unique sessions presented by industry experts from the world's top organizations at the 7th Annual OffshoreAlert Financial Due Diligence Conference, where new practitioners and experienced professionals will find opportunities to enhance their knowledge, expand capabilities and learn new skills.
