Securities Law Blog

Fear and greed appear to be driving an increase in investment and financial scams, experts say, and they predict the problems will get worse as the economy idles. The warning comes amid multiple high-profile prosecutions of accused Ponzi scheme architects who face charges of running pyramid scams by taking money from new investors to pay off older ones. The schemes ultimately collapse, experts said, because more and more people are needed to funnel new money into the pyramid. But they all work in pretty much the same way: by playing to the fear and greed of investors looking for a financial edge. "You don't even have to throw out a big return any more - 10 or 15 percent will do it," said Fred Joseph, Colorado's securities commissioner. "There's a lot of angst out there. It's fear and greed." Joseph said that as the economy has soured, investors have turned to increasingly risky schemes to earn money, a sort of "double-or-nothing" venture. He said some investors get so ensnared in the schemes that they refuse to help with criminal investigations, believing that things will all work out. "I refer to it as the tooth fairy syndrome," Joseph said. "People just want to believe." Compounding the problem, many initial investors in pyramid schemes actually see large returns, which prompts them to persuade friends and family to join. "Ponzi schemes always pay out at first. But eventually, the check is no longer in the mail," Joseph said. "You'll see people tell their family members and friends, and when the thing goes bad, it really strains the relationships. All of a sudden, Thanksgiving dinner isn't any fun.” Jean Woodford, the first assistant attorney general in Colorado prosecuting a man indicted in a Ponzi scheme said many investors feel responsible. She said she recently prosecuted an evangelical minister in Colorado Springs who was skimming off money from a hedge fund he set up with parishioners' money. Woodford confirmed there's been an increase in white-collar securities crimes in Colorado, a spike for which she said she had no real explanation. "A lot of times the cases, the people who invest the money have a certain level of trust in the person," Woodford said. "I've seen too many nice, intelligent people get ripped off because they were too trusting." Woodford and Joseph both said investors ought to be asking lots of questions and should feel free to check with local law enforcement or lending regulators on the background of the people offering deals. Many of the investors who say they were scammed in a Ponzi scheme said they felt that they would get better returns because they were alternative investments. Joseph cautioned that too many people get taken in because they are trying to secure some sort of special advantage. The reality, each said, is that it's very hard to find anything like that that's both legal and real. "The bottom, bottom line is that if it sounds too good to be true, it probably is," Joseph said.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.