#1

Ponzi Schemes
http://topics.nytimes.com/top/reference/timestopics/subjects/f/frauds_and_swindling/ponzi_sche
mes/index.html?inline=nyt-classifier
Ponzi Schemes were named after Charles Ponzi because of the noted scheme he pulled off in the
1920s. Ponzi schemes are a type of pyramid scheme that works solely by using new investors’
money to pay the returns of earlier ones instead of paying by real profit. It usually works by
promising high returns in short periods with low risks. However, as time goes by, the pyramid
gets so big it is impossible for the promoter to pay off previous payments, and eventually the
pyramid will collapse. To be able to pull off a huge Ponzi scheme requires a well connection
through people or any social network because it usually requires total control over the funds and
discloses nothing about the actual plans, thus requiring total trust. Nevertheless, some Ponzi
schemes didn’t even start out as schemes at all, for example Charles Ponzi’s plan for
international postal arbitrage. Although he did have a great plan, he couldn’t make the logistics
work, so he may have thought of this ploy as a temporary stopgap until he could come up with
another great plan to pay the investors back, but he eventually fell deeper and deeper and ended
up as a scheme.

’92 Ponzi Case Missed Signals About Madoff

http://www.nytimes.com/2009/01/17/business/17ponzi.html
January 17, 2009
Around 1992, federal investigators had a chance to expose the actions of Bernard Madoff and
Frank Avellino (an accountant who had been funneling investors to Mr. Madoff since the 1960s.)
The S.E.C. had received marketing materials that showed Avelloni & Bienes (accounting firm
formed by Frank Avellino and Michael Bienes) were promising investors a 15 percent annual
return, they believed they have stumbled upon a Ponzi scheme and therefore went to
investigation. Yet when the commission found that the money existed and would be returned to
investors, they were satisfied and concluded that there was nothing indicating fraud. In fact there
were many questionable points about the case, like: How could a firm that oversaw $440 million
keep no records, or why would Mr. Avellino and his partner guarantee returns on money they did
not have control on? In spite of the whole case revealing numerous dubious points, the S.E.C.
failed to dig further and discover what there were up to. At the end, the S.E.C. only sued the
accountants but not Mr. Madoff, claiming he didn’t know they were raising money illegally.

For Victims of Schemes, the I.R.S. Can Be Flexible

http://www.nytimes.com/2009/01/07/business/07tax.html
January 7, 2009
There now may be some ways for victims of the Madoff scheme to seek redress from the federal
government. In total, it may cost federal, state and local government a total of $20 billion. The
first way is to file an amended tax return that can go back three years from the date they
discovered the fraud. Then claim a theft-loss reduction equal to the lost principle on their current
federal returns. These deductions can be carried back three years or forward 20 years. Another
way is to claim a theft-loss deduction that is equal to the original investment plus any phantom
interest or income obtained over the years. However you cannot include any taxes paid on
fictitious income as part of loss, and deductions are reduced by 10 percent of adjusted gross
income plus a $100 deductible. The third way is called claim of right rule, it goes for investors
that who claim theft-loss deductions but cannot use it because of insufficient ordinary income to
offset the deductions. They generally can claim a refund on the taxes paid on the phantom
income without interest.

#2
What Happened, How It Happened, What Might be Done
Investing with Bernie Madoff
http://www.counterpunch.org/velvel01192009.html
January 19, 2009
As I actually thought that Madoff’s returns were quite high compared to the market, it was rather
low in contrast to the returns of mutual funds during the 1990s where earnings could go from 25
to 40 percent or above, making Madoff’s funds seemingly a conservative type of investment. By
the mean time, because those gains were ordinary income or short term capital gains rather than
long term capital gains, they were taxed at the rate of ordinary income instead of the far lower
rate for long term capital gains. In other words, people who were investing with Madoff were not
only getting a lower rate of return but also paying more for taxes. It also was pointed out that
since 1992, the SEC had investigated Madoff eight times and never warned the public or found
anything suspicious of him, despite the fact that there were many red flags such as not being able
to find his trading records, information by Harry Markopolos that showed questionable points, an
article on a hedge fund industry publication called MAR/Hedge (RIP) written by Michael Ocrant
that also blew a whistle or the tiny accounting firm that audited them. All of those incidents have
to have implied something, however they still missed all of it and blew it off.

Madoff Exposure Spreads to Labor Union Pension Funds

http://unionreview.com/madoff-exposure-spreads-labor-union-pension-funds
January 8, 2009
This fraud has not only devastated individual, but also many foundations, non-profit organization
and now to labor union pension funds as well. Due to the Madoff scheme, many foundations and
charities are forced to shut down, now union pension funds are found to be affected as well. As
some were caused because of consolidation, many others were because of the investment in
capital management’s, which they in turn invested with Madoff. Union pension funds now face
an issue of “clawbacks”, because such money was derived from a fraud not a legitimate
investment, the receipt of such money is labeled as “fraudulent conveyance”. Under such
circumstances, the trustee can force recipients to return the cash, and since union pension funds
receive regular payments during retirement, they are at particular risk from clawbacks. After this
break out, many pension funds are likely to adopt a strict diversification regulation in order to
lower the risk toward a single investment firm to 10 percent.

Why Wasn’t Madoff’s Alleged $50B Ponzi Scheme Discovered Earlier?

http://abajournal.com/news/why_wasnt_madoffs_alleged_50b_ponzi_scheme_discovered_e
arlier_/
December 16, 2008
How could such an enormous fraud act be left out by the S.E.C. or any accounting firm? It’s
quite obvious that it is out of the hands for a small accounting firm like Friehling & Horowitz to
be able to handle a company that handles such a large amount as Madoff’s Investment Securities.
Furthermore, many big firms such as KPMG and PWC that audited the investment managers
who directed money to Madoff’s firm had no question about it, too.
However, still some people detected some things and took action. When the investment adviser
of Aksia hedge fund found out a three-person accounting firm was auditing the Madoff’s firm,
they warned clients to stay. Also, Frank Casey, vice president of marketing for Rampart
Investment Management in Boston, after having a visit with Madoff, was quite disappointed with
his investment system and wrote a report which further prompted a colleague to take a closer
look, and made a complain to the S.E.C. The S.E.C., though having many chances to investigate
his brokerage, still failed to detect anything at all.

#3
L&G execs arrested over investor fraud
http://search.japantimes.co.jp/cgi-bin/nn20090206a1.html
February 6, 2009
The chairmen of L&G K.K., with 22 other executives were arrested under suspicion of
defrauding investors. Chairman Kazutsugi Nami established L&G in 1987, initially selling health
and bedding products. He started to raise funds from the outside during 2001, and promised a 36
percent annual dividend on every 100 million invested. He also brought in the firm’s own
“enten” quasi currency. Claiming that it could be used through nationwide stores, and in that
case attracted more funds from the elder and housewife’s. Later on Jan 2007, L&G stopped
paying cash dividends and starting paying entens instead. On October, police arrested him under
suspicion of violating the Law Concerning the Regulation of Receiving of Capital Subscription.
A month later the company claim in bankruptcy. According to investigation, Kazutsugi Nami
was already aware of the company’s financial problem at 2000. He collected a total of 126
billion from 37000 clients from 2000 to 2007.

Financial Adviser Indicted in Fraud Case

http://www.nytimes.com/2005/06/10/business/10vilar.html
http://www.nytimes.com/2008/09/30/arts/music/30vilar.html?fta=y
June 10,2005
Alberto Vilar, once a high-flying investor when riding through the market boom was arrested on
charges of defrauding clients of his firm, Amerindo Investment Advisors. During the mid-1990s
Mr. Vilar funds soared in value and profits rolled through his investment firm. However, the
market plunged in 2000, his funds declined markedly and he lost millions of dollars. He then
turned to fraud in order to pay expenses and satisfy customers who were demanding their money
back. In 2002 he induced a client to invest $5 million in an Amerindo fund that was backed by
the government for a small businesses investment, where he promised a quarterly return of
$250,000. However, he never had approval for the fund and instead steered the money elsewhere
for personal and business expenses and settlements with other clients. He even diverted $250,000
to his personal account by using some Scotch tape and scissors. Another scheme also involved
instruments he offered to clients called “Guaranteed Fixed Rate Deposit Accounts.” Investors’
money in those accounts were said to be put in short-term debt instruments with little or no risk,
high rates of return and liquidity. Nevertheless, the money was put into risky technology stocks
that ultimately lost most of their value.
Former National Century Financial Enterprises CEO Convicted of Conspiracy, Fraud and
Money Laundering
http://www.fayettefrontpage.com/public_safety-08/8-8-08_ptc-securities-fraud.htm
http://www.backgroundnow.com/blog/background-check/lance-k-poulsen-national-century-
financial-enterprises-fraud-cost-investors-2-billion/
November 3, 2008
Lance K. Poulsen, founder and CEO of National Century Financial Enterprises Inc. was
convicted of conspiracy, fraud and money laundering. National Century specialized in buying
receivables from healthcare providers, using money they obtained from sales of asset-backed
notes to institutional investors such as insurance companies and pension funds. The company
was involved in misusing investor’s money and making unsecure loans to healthcare providers.
In order to cover up, Mr. Poulsen and several executives lied to investors and rating agencies
about their company’s financial health and how investors’ money was used. They moved money
back and forth between programs and created investor reports containing fabricated data in order
to make it appear that NCFE was in compliance with its own governing documents when
actually their business model presented to the public was drastically different from what they
were doing. At the mean time, Mr. Poulsen and others made millions of dollars in unsecured
loans to companies they owned. Their actions were designed to hide a financial house of cards
from investors, eventually costing investors $2 billion

#4

If this happened in the 1920’s I would have thought it quite reasonable, times were bad, not
much had the idea of investment and there weren’t that much fraud at that time. So when one
person jumped out claiming he could double people’s money in a short period of time, it was
quite easy for people to line up and entrust their money with him. Though I was still surprised
these kinds of things could still happen nowadays. It’s really hard to believe that Madoff abused
others trust to do such an awful thing and think he could get away with it, especially while
people really looked up to him and relied on him because of his fame, standing and knowledge in
investment. Not only individuals, but also big firms were being deceived because of tied
endowments in Madoff’s funds. I expected big firms or investment managers to handle
investments more prudently instead of just flatly investing in such an insecure fund. Yet, while
some managers knew something was wrong, they choose to keep on investing with him because
of the great returns and not report to the S.E.C.

In the meanwhile, knowing there were actually many signs showing a matter of issues over
Madoff’s investment that can be dated way back to 1992 but were neglected by the S.E.C. is
quite shocking. Also the fact that S.E.C. didn’t do any follow up afterwards with all those
widespread excitements over the scandal is really hard to understand. I don’t understand how the
S.E.C. could overlook so much information and not see it through those years. The most obvious
would be having a small accounting firm, that hasn’t been through a peer review since 1993, sign
their audit reports. Meanwhile, though it claims to have been telling the AICPA for 15 years it
doesn’t conduct audit’s, it has in fact signed a statement of financial conditions for Madoff
Securities on Oct. 2006.
This scheme has harmed many investors and has definitely knocked down investor’s faith. Many
have thrown in their life time savings (although you have to say they do have to take some
responsibility on this), others were affected by their pension funds, and others were indirectly
affected because of the many foundations and organizations that were closed by this incident. It
is definite that almost everyone in this society is directly or indirectly affected by this scheme. I
think the government should quickly come up with a way to compensate the victims. Maybe
forcing those who got returns give the returns back or allow some tax deduction and refund.
Though this could be quite difficult since the scheme has continued for decades and much
information may have been lost, I still hope people can retain an unselfish attitude, stand up
together and help others get through this crisis.

Still, I can understand how the words of others can affect one so much, especially when they are
from those we trust or one that is highly respected by others. My friend once told me she was
making some investments at her company and her returns, compared to the market, were high
and steady. It immediately caught my interest, and since she was a very good friend I didn’t even
bother to do any research on what she was investing and how it worked. What I want to say is,
sometimes these schemes are based on trust from a close one, it’s possibly you may remiss it and
in turns lose your money. So I guess the only way to protect yourself from being swindled is to
be very careful with every decision you make. Nonetheless I do believe that most of this is
caused by people’s greediness, that we always want more and just can’t have enough of
anything.

However, I believe the government also has a responsibility to protect investors as well. All we
have to do is eliminate the motive of conducting a fraud, that is, let the costs of performing it be
greater than the benefit. We can do so by setting more regulations or carrying out better
executions and so on. I also think that peer reviews between accounting firms should be forced
in all states, since this protects not only the people but also the government. Accounting firms
are a very important part of monitoring these actions. We can achieve more effective monitoring
by combining it with all the regulations control system and hope to minimize the chance of any
fraud at all.

As to the part of ethics, although it seems to be something required in any textbook or course in
business, I don’t think this is a thing that can actually be taught. If they want to fraud, they will.
You can only hope that those who do such a job maintain high standards of ethics, and our
monitoring system is good enough to detect any fraud. For any fraud and scheme, I hope the
government can come up with a way to force those who committed one, pay back what they have
taken away. Not just serve their time but really earn the money and realize the damage they have
caused and how hard people worked to earn that money.