Situation

In a textbook example of a Ponzi scheme, a New York man was claiming to sell debenture notes (a debt instrument used to borrow money at a fixed or floating interest rate), promising secure investment opportunities and high returns of up to 12% for investors. While he did make some legitimate investments in small companies, the majority of the money was never invested and was instead used to buy lavish gifts for himself, along with airplanes, cars and homes.

Credentialing himself as an experienced financial advisor, he defrauded nearly 400 different investors over the course of a few years.

It wasn’t long, however, before the SEC began investigating these “investments” and soon summoned the man to a meeting in New York to answer for his solicitation of investor funds without the proper filings. Yet, on the evening before the meeting with the SEC, he killed himself.

Just before, however, he had signed over millions in life insurance to friends and family members (including three different girlfriends), leaving behind a financial mess and hundreds of angry investors who had just learned they’d been conned.

Solution

The SEC appointed a receiver to review the case, and that attorney immediately hired Springline Advisory to serve as the forensic accountant and start investigating.

“He called us on a Friday afternoon, and by Monday morning, we were digging through the offices, trying to figure out what all’s going down,” said Jim Marasco, managing partner. “There were millions of dollars out there, and nobody knew what was going on.”

To pursue those who had been unjustly enriched from the life insurance, the team needed to uncover who might have profited and how it might get that money back, all while ensuring a fair and equitable distribution. Working side by side with the receiver for nearly a year to analyze the accounting, the team was eventually able to trace the money and prove that the premiums on the life insurance policies were primarily paid with investor funds.

“We tried to figure out just how much money he took in, from whom, how much he had paid out, what he had spent his money on, and what assets we could recover,” Marasco said. “But in the end, we put Humpty Dumpty back together.”

The investigation even uncovered various other illegal and unscrupulous activities, including the man taking cash advances on his elderly parents’ credit cards, as well as some connections with the New York mafia.

“They were inside trading on small penny stocks, and he’d used some of the money to back them — and they were coming after him,” Marasco said. “It was a crazy six months to a year, and every day something new popped out.”

Results

Typically, Marasco said, these types of cases make it hard to recover any money at all.

“People usually take it on the chin,” he said.

But in this case, the team was fairly successful in recovering a lot of assets by going after the people to whom the fraudster tried to leave the insurance money. The investigation led to lawsuits to sue the recipients for unjust enrichment in an attempt to recoup some of the money.

The case was scheduled for federal court, but on the eve of the trial, the attorneys representing the beneficiaries settled. So, after a tedious two-year investigation and litigation process, the team was able to reclaim nearly 30 cents on the dollar and distribute that money back to the investors.

Unlike some more high-profile Ponzi schemes that involve banks and other institutions with deep pockets, Marasco said these types of cases usually only recover around 10 cents on the dollar — if anything at all.

“In these smaller ones, the money’s usually gone,” he said. “After all, if I buy six cars tomorrow, what do you think they’ll be worth in three years? So, we had a very favorable settlement.”