As economy worsens, Ponzi operators see their empires crumble

MIAMI - It was a rough year for Ponzi schemes. In 2009, the recession unraveled nearly four times as many of the investment scams as fell apart in 2008, with "Ponzi" becoming a buzzword again, thanks to the collapse of Bernie Madoff's $50 billion plot.

Tens of thousands of investors, some of them losing their life's savings, watched more than $16.5 billion disappear like smoke in 2009, according to an Associated Press analysis of scams in all 50 states.

While the dollar figure was lower than in 2008, that's only because Madoff -- who pleaded guilty this year and is serving a 150-year prison sentence -- was arrested in December 2008 and didn't count toward this year's total.

In all, more than 150 Ponzi schemes collapsed in 2009, compared with about 40 in 2008, according to the AP's examination of criminal cases at all U.S. attorneys' offices and the FBI, as well as criminal and civil actions taken by state prosecutors and regulators at the federal and state levels.

The 2009 scams ranged in size from a few hundred thousand dollars to the $7 billion bogus international banking empire authorities say now-jailed financier Allen Stanford orchestrated, as well as the $1.2 billion scheme they say was operated by disbarred Florida lawyer Scott Rothstein. Both have pleaded not guilty.

While enforcement efforts have ramped up -- in large part because of the discovery of Madoff's fraud, estimated at $21 billion to $50 billion -- the main reason so many Ponzi schemes have come to light is clear.

"The financial meltdown has resulted in the exposure of numerous fraudulent schemes that otherwise might have gone undetected for a longer period of time," said Lanny Breuer, assistant attorney general for the U.S. Department of Justice's criminal division.

A Ponzi scheme depends on a constant infusion of new investors to pay older ones and furnish the cash for the scammers' lavish lifestyles. This year, when the pool of people willing to become new investors shrank and existing investors clamored to withdraw money, scams collapsed across the country.

"Some portion of the investors in the Ponzi scheme always get the short end of the stick and do not get paid," said Elizabeth Nowicki, a former Securities and Exchange Commission (SEC) attorney who teaches law at Boston University.

Even those who say they did their homework ended up losing everything.

A retired Air Force sergeant, Tom Annis searched the Internet for red flags such as complaints or lawsuits involving Minneapolis-based radio host Patrick Kiley after hearing about his investment on a weekly Christian show called "Follow the Money."

Finding none, the 63-year-old from Jacksonville, Fla., invested his $270,000 nest egg -- money that has since evaporated after federal regulators shut down what they've called an elaborate, $190 million Ponzi scheme.

"I tried to do my level of due diligence," Annis said. "How could I be duped like this after years of investing?"

Ponzi himself was an Italian immigrant who concocted a scheme in 1919 involving bogus investments in postal currency. He cheated thousands of people out of $10 million, eventually going to jail for wire fraud before being deported in 1934.

Ninety years later, federal statistics paint the picture of a Ponzi nation:

• The FBI opened more than 2,100 securities fraud investigations in 2009, up from 1,750 in 2008.

• The SEC this year issued 82 percent more restraining orders against Ponzi schemes and other securities fraud cases than in 2008, and it opened about 6 percent more investigations.

• The Commodity Futures Trading Commission filed 31 civil actions in Ponzi cases this year, more than twice the 2008 count.