Google does a good job of filtering spam comments out of Blogger, but I still have to delete several per day. Some of these spam commenters are clever and include key words from the post they are commenting on. However, a recent spammer’s pathetic effort just made me laugh: “Fast Return Investment-9000% after 24 hours.” With all the warnings we see about being wary of offers that are too good to be true, I’d hope that nobody would get caught by something this ridiculous. But let’s daydream a little. What if we could roll over an investment to make a 9000% return compounded each day. Starting with one dollar, let’s see how our wealth would grow: After 7 days : The dollar would grow to over $50 trillion! We’d be able to pay off the U.S. national debt with plenty left to spare. After 15 days : Our wealth would be roughly equal to a block of gold the mass of the Earth. After 41 days : We’d have about a dollar for every electron in the known universe. I pity any person who...

It pays to be wary of investment scams. The well-done 3-minute video below hits the high points for how to protect yourself. It was created by the (deep breath) U.S. Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.

Earl Jones pleaded guilty to defrauding 158 clients in a $50 million Ponzi scheme, and he has been sentenced to 11 years in prison. However, because his crime is non-violent, he could get out of prison after serving as little as one-sixth of his sentence, or 22 months. It has to be galling for Jones’ victims to see him convicted and sentenced to nearly the maximum possible sentence, and yet he could be out in a couple of years. This shows that there never was any hope of a satisfying outcome for the victims, at least as far as punishing Jones goes. The only (legal) satisfying outcome for the victims is the return of their money. However, selling off Jones’ possessions will only recover a small fraction of the money people thought they had invested.  (As reader Gene pointed out, here is an explanation of why there is no money left even though investors thought they had a lot of money invested .) The latest hope for the victims is to find some deep pockets to blame. The dee...

Two Alberta men, Milowe Allen Brost and Gary Allen Sorenson, have been charged by the RCMP with allegedly running a Ponzi scheme that attracted more than $100 million from investors. The scheme’s marketing was based on gold mining and investors were promised a high rate of return along with tax advantages. RCMP were investigating the scheme for more than three years before charges were laid. This will be maddening for those who lost money over the last three years. To lose money in a scheme already believed to be a fraud by authorities has to be infuriating. This type of story is all too familiar lately. Shocked investors will be hoping that the money will be found, but if it really is a Ponzi scheme, it is very likely that almost all of the money is long gone. To investors in Ponzi schemes, it feels like the money disappears suddenly. In reality years of account statements were fantasies because the money was stolen over time. Some media reports feed into this feeling tha...

It’s understandable that victims of Ponzi scheme operators like Bernard Madoff and Earl Jones focus mostly on trying to get their money back and on seeing criminals punished. Not being a victim myself (so far) allows me enough detachment to question the mindset of the guilty. Do these people enter into their occupations planning to defraud investors or do they get tempted to dip into the money or to overstate the returns they generate? Once there is a gap between actual amount invested and the amount investors are told they have, it wouldn’t take too long for this gap to grow out of control. The part that is most baffling to me is why more Ponzi scheme operators don’t try to run off to some other country and hide. As the end is drawing near and the amount of money still in their control dwindles, it becomes obvious that they will eventually be found out. Perhaps the onset of the recession sped up the demise of the Ponzi schemes enough that their operators hadn’t finalized plans to ...

A common misconception about Ponzi schemes is that the criminal running the scheme runs off with all the money owed to investors. In reality, by the time the Ponzi scheme collapses, there is no money. Imagine the following simplified Ponzi scheme. Bob, the friendly financial guy, gets people to invest $500,000 (inflation adjusted) with him each year. Bob reports a return of 5% above inflation every year to his investors after his fees, and the investors withdraw 10% of their money every year. However, in reality, the financial statements Bob sends out are lies because he is only making a return of 3% above inflation, and he has been taking $100,000 of investor money each year to spend on himself. This means that the amount of money invested is actually less than the total Bob reports to his investors. Unfortunately for Bob, investors withdraw 10% of the larger fictitious amount each year. The following chart shows how the claimed assets and real assets grow over the years. From th...

Yet another suspected Ponzi scheme has surfaced in Montreal. Financial advisor Earl Jones has disappeared owing investors an estimated $50 million to $100 million. If this turns out to be a Ponzi scheme, then this money doesn’t actually exist because old investors get paid out of new investors’ capital. Typically, Ponzi schemes are detected when the economy goes bad and many people need to draw on their savings. The demand for cash overwhelms the ability of the criminal running the Ponzi scheme to find new investors to supply the needed cash. As more of these schemes are uncovered, the call for regulation gets louder. In some cases, opportunist organizations simply call for self-serving changes to laws. But, what rules would actually detect Ponzi schemes in their early stages? The key difference between legitimate financial firms and Ponzi schemes is that the legitimate firms actually control assets that match the total amount on statements sent out to investors. In Ponzi schemes...

Bernard Madoff was sentenced yesterday to 150 years in prison for investment fraud. At this point, the only people charged with a crime are Madoff and an outside accountant. Before his arrest, Madoff’s firm’s accounts showed $65 billion in assets, but only $1.2 billion have been recovered so far to return to investors. It is difficult to get a sense of scale of this fraud. One way to think of it is that the staggering 150-year sentence amounts to less than a day in prison for every million dollars missing in investors’ accounts. It seems inconceivable that only two people could have perpetrated this fraud. If prosecutors are unable to convict any other guilty parties, they would have to consider their efforts to be a failure.

Conrad Black has won a U.S. Supreme Court review of his fraud conviction for taking money from hapless investors. He has been serving his sentence for a little over a year now and hopes to be released by the Supreme Court. Black has nothing to lose and much to gain from this appeal. Black and others were convicted of giving themselves illegal bonuses of $6.1 million. This money is just a small slice of the total amount in question during the investigation into Black’s actions. The cost of employing lawyers to continue his defense up to the Supreme Court is not a concern. In poker parlance, Black is on a free roll. At worst if he loses the appeal his situation remains the same and he is forced to serve the remaining 5 years of his sentence. At best he will be released soon. It would be much more entertaining if there was some downside risk attached to this appeal. In most cases, I see appeals to higher courts as an effective means of keeping lower courts in line. But this ...

I offer this morning’s small April Fools’ joke with apologies to Signetics who ran an ad in 1972 for write-only memory . Sadly for the victims of Bernard Madoff’s huge Ponzi scheme , the concept of a Deposit-Only Bank Account (DOBA) is all too real. It doesn’t much matter how good the investment returns are if you can’t ever withdraw your money.

Bernard Madoff’s lawyers are arguing that a Manhattan apartment and $62 million are unrelated to the fraud investigation because they are in his wife’s name. Nothing ventured, nothing gained I suppose, but this one doesn’t pass the sniff test. It’s hard to wrap my mind around the extent of the crime here. Madoff is accused of a $50 billion fraud. That would be like committing a $1 million fraud once a day for over 130 years! The idea that he could come out of this with anything more than some worn personal items in a suitcase sickens me. It will be interesting to see whether the legal system is able to give Madoff any kind of meaningful punishment. One thing that seems certain is that the process will take a long time.

According to CNN, a Ponzi scheme run by Andres Pimstein fell apart recently in Miami, Florida . A Ponzi scheme is a fraudulent investing scheme where investors are paid returns out of other investors’ principal instead of being paid from the returns of a legitimate business. Ponzi schemes fall apart when there aren’t enough new investors to pay the existing investors. The fraud grows exponentially until the pool of suckers runs out. What I find interesting about this story is the way that people are tricked into these schemes. Potential investors are offered guaranteed big returns in a short time. If this were a legitimate business, why wouldn’t the pitch man just borrow some money from a bank and keep the huge profits himself? The usual explanation for why people get caught in these frauds is that greed overcomes reason. I think that is just a partial explanation. My guess is that the people, like Pimstein, who run Ponzi schemes are charismatic. Potential investors probably lik...

Researchers at the University of Cambridge have found simple ways to compromise bank card readers. The next time you’re at a store punching your PIN into a debit card reader, if there is a paperclip or needle sticking out the back of the reader, you should be suspicious. The researchers Drimer, Murdoch, and Anderson have documented their findings in this technical report . They chose two different models of card reader and bought two each of them online for a total of $80 for the four readers. They then took one of each type apart to see how it worked and were then able to compromise the other readers simply. The card readers they examined were actually a type that is intended to work with higher security bank cards called smart cards. Instead of just a magnetic stripe, these cards contain a microchip that gives higher security. These cards are being deployed throughout Europe and are currently being tested in Canada. The researchers were able to probe the inside of the reader to get P...