* FINRA probing steady crop of new Ponzi schemes
* Swindlers tout high-yield notes, investments
* Schemes also tap social media to lure investors
NEW YORK, Aug 2 (Reuters) - A year after Bernard Madoff went to prison for masterminding the biggest-ever Ponzi scheme, lawyers and regulators say a growing number of these scams are preying on investors and their hunger for high yields.
Razor-thin interest rates are squeezing the flow of income to Americans putting savings into CDs, money-market accounts and bonds. Swindlers have responded with schemes that lure victims, often retirees and the elderly, with promises of high rates for seemingly safe vehicles.
“There’s been a dramatic increase in Ponzi schemes,” said David Meyer of Columbus, Ohio, law firm David P. Meyer & Associates, who represents investors in claims against brokers. “The increase is a factor of the bad economy.”
Such scams, that use money from new victims to pay earlier rounds of investors, have been around for centuries, including the namesake one, perpetrated by Charles Ponzi, that collapsed in 1920.
The recent financial crisis helped end Madoff’s decades-long phony investment business responsible for an estimated $18 billion in losses for thousands of victims.
But the combination of paltry rates and turbulent stock markets has helped create an audience more receptive to real estate investment trusts (REITs), promissory notes and other seemingly safe vehicles offering rich yields.
The Financial Industry Regulatory Authority, which regulates U.S. broker-dealers, says it has been catching more Ponzi schemes in the past year or so.
“We’re seeing a steady number of cases coming in. We have number of these cases under investigation,” said James Shorris, who became FINRA’s acting enforcement officer earlier this year. “As we’ve gone into an economic decline, it has helped bring more of these schemes to light.”
Ponzi schemes are also using the global reach of social media networks like Twitter and Facebook to lure investors and manufacture buzz about the plans.
Compared with schemes that relied on face-face meetings, mail or phone calls, Internet-based scams can quickly and efficiently reach millions of potential victims.
“Social media networks provide a veneer of legitimacy scammers can use to infiltrate and then mislead others,” Shorris said.
Last month FINRA issued an investor alert warning about “high-yield investment programs,” typically unregistered investments touted by unlicensed people and promising daily returns of 20 percent, even 100 percent and more.
Many operate as Ponzi schemes, FINRA said, using payments from new recruits to pay “interest payments” to earlier rounds of investors and referral fees for helping attract members.
The Genius Fund had promised 36 to 40 percent daily interest rates, illegally selling securities through its web site. Investors lost some $400 million before British Columbia regulators banned it permanently in April.
A month later, federal prosecutors in Illinois charged a Philippines resident with fraud stemming from his “Pathway to Prosperity” scheme, where 40,000 investors on six continents lost $70 million. The Pathway site offered plans lasting a week to two months, with returns ranging as high 720 percent.
“There’s a definite increase in Ponzi scheme problems,” said lawyer Scott Shewan of Clovis, California-based Pape & Shewan LLP and the current president of the Public Investors Arbitration Bar Association (PIABA).
Many schemes involve Regulation D transactions, private placements intended to be sold to wealthy and “sophisticated” investors. As a result they are only lightly regulated.
In March Provident Asset Management was expelled by FINRA for marketing a series of 23 fraudulent private placements by affiliate Provident Royalties. The firm took in $480 million from some 7,000 investors through more than 50 brokerages between September 2006 and January 2009.
Provident Royalties promised investors up to 18 percent annual returns from oil and gas interests, but a portion of new funds were used to pay earlier Provident investors.
Last August, FINRA barred two brokers for running separate multimillion Ponzi schemes.
Oren Sullivan, a NYLife Securities broker in South Carolina, was banned for taking $3.7 million in a decades-long scheme from 30 victims. Sullivan told victims they were investing in promissory notes paying 6 to 12 percent rates.
Regulators also barred William Spencer of Franklin, Tennessee, for taking $2 million from elderly members of his church and customers of Wiley Brothers-Aintree Capital.
Some schemes involve REITs not listed on public exchanges.
Last August, FINRA permanently barred Kenneth George Neely of St. Louis, a former AXA Advisors and Stifel Nicolaus broker. Neely created a phony “St. Louis Investment Club” that then would put money into a fictitious REIT promising high yields.
Neely bilked some $600,000 from friends, family and fellow church members for his own use, including his son’s wedding.
“We’re seeing more investors offered high yielding products,” said lawyer Steve Caruso of Maddox, Hargett & Caruso, and a past president of PIABA. “Any time you have a product that is illiquid or where investors can’t monitor the price, those are investments can lead to significant abuses.” (Reporting by Joseph A. Giannone; Editing by Tim Dobbyn)
Our Standards: The Thomson Reuters Trust Principles.