Novel Ponzi scheme

After American businessman Bernard Madoff was sentenced in 2009 to 150 years’ imprisonment for masterminding the world’s largest financial fraud (roughly worth $65 billion), the business community thought it has seen the last of mega-scams.

Considering the publicity that accompanied his arrest, confession and conviction, people were expected to be less gullible or more cautious in investing in schemes that promised fantastic returns with the least efforts.

Call it ignorance or plain greed, but the lessons from Madoff’s caper appear to have been lost on some investors who were taken for a ride by American lawyer Scott Rothstein, managing partner of a 70-person law office in Florida, to the tune of $1.2 billion.

Sometime in 2005, Rothstein started borrowing money from friends and clients—which he described as “time bridge loans”—to support the law office’s financial deficiencies.

As the pool of willing creditors started to dry, he conceived of the idea of selling supposedly confidential settlement agreements entered into by his law office with various parties litigants.

These agreements were promoted as sensitive compromise settlements of embarrassing sexual harassment or whistle-blower cases that the parties, especially the defendants, wanted to keep hush hush.

Fake documents

The settlements were sold at a discount upon the promise that the investments, together with their interest, would be repaid over a certain period of time.

Following the Ponzi scheme (where part of the deposits of new investors were paid to earlier investors), Rothstein prepared fictitious bank statements, opinion of counsel, assignments of agreements and personal guarantees to lure gullible investors, including some of his clients, to the scam.

So brazen was Rothstein that, in one instance, in order to prevent a client from demanding the immediate return of his money, he drew up a counterfeit court order signed by a federal judge directing the client from desisting from such action!

If some investors asked too many questions about the status of the funds subject of the settlement agreements they’ve bought, he quietly paid them (and their lawyers) off.

Although the scam operated directly from the law office, not all of its lawyers were involved in the transactions. Only a handful of lawyers participated in it and shared its multimillion-dollar proceeds.

To his credit (tongue in cheek), he turned down the investments offered by unknowing associates who heard from the office grapevine about the profitability of the transactions.

Contributions

In a bid to cover his tracks, Rothstein used some of the proceeds from his scam to acquire several companies engaged in profitable business activities.

During his deposition, he stated that, through these companies, he hoped to generate sufficient legitimate profits to pay the returns he had promised the investors of his settlement agreements.

In true karmic fashion, however, these businesses did not turn in the expected profits or had to be sold later to stem further losses. So he found himself in deeper financial trouble.

Like Madoff, Rothstein used the proceeds from his scam to maintain a high profile in Florida’s social and political circles.

He contributed heavily to the campaigns of Democratic and Republican candidates for high government positions. Hospitals and charitable organizations became recipients of his generosity.

Unaware of the source of his largesse, Florida’s crème dela crème was mesmerized by his luxurious and flamboyant lifestyle, until (as in all Ponzi scams) the flow of new investments was not enough to sustain the returns promised to earlier investors.

When things unraveled in 2009 and the authorities started to investigate his activities, Rothstein fled to Morocco shortly after transferring $16 million to an offshore bank account.

Conviction

Three months later, he returned to the United States to face the music. He confessed to his sins and was sentenced late last year to 50 years’ imprisonment for financial fraud.

His conviction was described as “a humbling reminder of what can happen when greed and ambition run amok.”

According to reports, of the $1.2 billion that Rothstein is believed to have illegally amassed, the authorities have so far seized his assets, i.e., cars, waterfront homes, an 87-foot yacht, 304 pieces of jewelry, bank accounts, shares of stocks, including 20,920,701 American Express reward points, worth about $100 million only, or just a small fraction of his loot.

Rothstein’s partners in the law office and in crime are not off the hook despite his admission of guilt. They are facing serious civil and criminal charges, on top of disbarment. Their erstwhile white shoe law office has, in the meantime, been shuttered.

So after Madoff’s debt and equity instruments and Rothstein’s settlement agreements, what other financial scams are waiting in the shadows to catch unwitting victims?

Lately, there have been reports of “portfolio traders,” or foreigners who fly in from Hong Kong, Singapore and other financial centers offering securities or financial instruments that supposedly represent participation in gold bars, precious stones, foreign currency and oil reserves.

The underlying products will supposedly be sold, either in their entirety or partially, depending on the prevailing market price, with the proceeds to be shared proportionately among the owners of the securities or instruments.

The sales pitch is similar to that of Rothstein’s: the returns on investments will be incrementally remitted to the investors until they reach their pre-agreed value.

Forewarned is to be forearmed. But the sad truth is, a sucker is born every minute.

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