Wextrust Capital LLC Ponzi
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"The United States Securities and Exchange Commission today filed charges against Wextrust Capital, LLC (Wextrust), its principals, and four affiliated Wextrust entities, alleging that defendants conducted a massive Ponzi-type scheme from 2005 or earlier that raised approximately $255 million from approximately 1,200 investors.
The targets of the fraudulent offerings are primarily members of the Orthodox Jewish community."
I recently listened to Charlie Munger, giving the DuBridge lecture at Caltech.
He made a useful point, among many. He said that when we see something very odd, in his example, moonie brainwashing, then we should look for a confluence of social influences all pointing in the same direction. Munger believes that these social influences come from distinct academic fields - which is why academics often fail to explain the problem correctly.
In a typical Ponzi scheme, we need to have several factors working together.
1. "It is our turn now", there has to be some group cohesion first for the social proof to work. In this case, apparently the frauds were among a close knit group of Jews.
2. Regret, or missing the boat while it sails away with all your friends - temporarily rich. We don't know how this worked, but I suggest that with all the funds created, 60 in total, the con criminals were trying use regret. "Well, you missed the great returns on that fund, but we have another one."
3. There has to be some mechanism which serves to by-pass the usual controls in raising money. In Kirk Wright's case, and others, the mechanism was faking the spreadsheet reports showing great gains. In this case, I would speculate that since the community were Jews who dealt in the diamond trade, where millions can be exchanged on a shake of a hand, the requirements for documents might have been lessened.
4. You have to have salesmen that you can essentially bribe. (This was another good point of Munger's: if the price of an item goes up, and it sells more, then it is likely the price of the good, if not a luxury good, has been increased to pay bribes, rebates, or kickbacks to the the salesmen.) Usually, it is a sales staff which has to be compensated. But, according to the complaints, the defendants found a novel way around this:
"The Defendants have also resorted to "over-raising" funds in a number of offerings in order to use excess proceeds to meet deficits in other entities.
Wextrust Securities' records show that the actual amount raised in at least twenty-one offerings exceeds the amount that the Defendants represented they would raise in the various private placement memoranda by a total of more than $20 million."
5. The con criminal must have a way out - even if the way out appears absurd. The con criminal knows from the very beginning that they have to cool out the mark, or face jail. In this case, the emails suggest that "the individual defendants have staked their ability to extricate themselves from these frauds on the success of their diamond mining investments in Africa."
6. You also need to prevent a large number of people from redeeming their investments when due because your project is insolvent from the beginning. I don't see in the complaint any explanation of how this worked - but it has to be there.
7. Finally, you need to have corrupted some gatekeepers. In Ponzi's case, he allowed some bank officials and policemen to invest in his scheme with "borrowed" money. Neat. In this case, it appears the con criminals were corrupting one of the other partners by threatening to blow up the fund, which would deprive the partner of the ability to make payroll.
