How to run a Ponzi Scheme for 4 years and scam $75 million?
For almost four years, Steven E. Thorne and Derrick N. McKinney and others ran a prime bank ponzi scheme, in which the salesmen were recruited by multi-level marketing techniques, according to the indictment against them, filed in the U.S. District Court in Northern Ohio, December, 2005.
On July 20, 2006, the US District Attorney for Northern Ohio announced that "that the Honorable John R. Adams, United States District Judge, in Akron, Ohio, sentenced Derrick N. McKinney to 36 months incarceration, supervised release of 3 years, and ordered restitution of approximately $1 million to victims of the securities fraud scheme, $107,636 to a mortgage company in connection with the mail fraud charge, and $444,437 to the Internal Revenue Service for tax violations.
McKinney had entered guilty pleas to one count of conspiracy, and three counts of securities fraud in connection with his involvement in a securities fraud scheme with co-defendant Steven Thorn, and others. McKinney also entered guilty pleas to an information charging him with one count of mail fraud for defrauding a mortgage company, and one count of income tax evasion in failing to disclose over $1 million in taxable income, resulting in tax due and owing of over $440,000."
What can we learn about due diligence for these types of business opportunities, by reviewing the indictment?
Technorati Tags: mail fraud, securities fraud, fraud scheme, fraud charge, northern ohio, ponzi scheme, akron ohio, internal revenue service, multi level marketing, prime bank
How did this scheme work? According to the press release, "the indictment charged that Thorn, McKinney and others conspired to promote and sell fraudulent investment "trading programs" (also known as high-yield investment fraud, or prime bank fraud). The indictment charged that from in or about December 1997 through in or about April 2001, Thorn, through McKinney and others, raised approximately $75 million from hundreds of investors residing throughout the United States and a number of foreign countries through investment offerings. The indictment charges that Thorn and McKinney represented to potential investors that their money would be pooled with money from other investors to reach required minimum capital levels and then used to invest in, or finance the trading of, various investments or securities, including so-called medium-term notes, debt instruments issued by banks, and treasury securities. Thorn and McKinney represented to investors that they were investing their funds in different European "trading programs." According to the indictment, the defendants told investors that there was little or no risk in the investment, and, in fact, led investors to believe that there was no risk because the money would remain in the bank and/or an instrument would not be purchased unless a contract to sell the instrument had already been executed. The defendants promised monthly rates of return ranging from 3 percent to 100 percent." (my emphasis)
There are several sophisticated compliance techniques working here, and I want to focus on the use of scarcity. The representation that by pooling assets, you will be able access trading normally reserved for others is hard to resist, especially for individuals who believe that there may be a cabal of financiers "running the world". The representation works because it relies upon several unstated premises, which are all false but widely subscribed to nevertheless.
a) the rich have secrets which explains their wealth, as opposed to their talents.
b) if something is in scarce supply, it is valuable, as opposed to just being scarce because nobody wants it.
c) regulations are always designed to prevent the little guy from getting ahead, as opposed to being the result of the cumulative wisdom of the regulatory authority.
Technorati Tags: mail fraud, securities fraud, fraud scheme, fraud charge, northern ohio, ponzi scheme, akron ohio, internal revenue service, multi level marketing, prime bank
