Carolina Ponzi Schemes

Unfortunately, victims of Ponzi schemes often find themselves filing for bankruptcy protection. While New York-based Bernard Madoff took the lion’s share of Ponzi scheme news coverage in the last year, North and South Carolina unfortunately saw their share of homegrown financial crime too.

Tens of millions of defrauded dollars

The Commodities Futures Trading Commission became aware of one scheme in  February, when Bruce Kramer, who resided in Midland, North Carolina, committed suicide. Mr. Kramer and his company Barki, LLC of Mint Hill, North Carolina, fraudulently solicited at least $40 million to trade leveraged foreign currency contracts (forex), misappropriating at least $30 million of customer funds to pay purported profits, return principal to customers, and for personal expenses. The defendants concealed their fraud and trading losses through false account statements for over five years.

In September, a Charlotte-based Ponzi scheme was brought to light. According to the Commodities Futures Trading Commission CapitalStreet Financial LLC (CSF) and Sean F. Mescall, both of Charlotte, N.C., with operated a Ponzi scheme involving the fraudulent solicitation of at least $1.3 million from at least 69 customers in connection with foreign currency (forex) trading. Defendants are also charged with misappropriating approximately $875,000 of customer funds.

…since at least September 2006 through the present, defendants fraudulently operated a forex trading scheme, luring customers to trade managed or pooled forex accounts by claiming forex trading success and promising quick and large returns, such as 60 percent to 80 percent annually. Defendants created the false impression that CSF was a well-established forex firm, in operation since 1999 with more than 35 offices in New York and North Carolina. In reality, defendants were not successful forex traders, sustained about $275,000 in trading losses, and opened CSF in or around August 2006 with four offices in the Charlotte area. Defendants provided customers with false monthly statements to conceal trading losses and their misuse of customer funds.

Using religion to perpetuate financial fraud

Rick and I worked with both victims and the bankruptcy trustee on a local case back in 2001 involving a faith-based front for a $39m Ponzi scheme perpetuated by Rahab Trust & Management. The FBI and IRS arrested four local men connected to the swindle. Investors allege that Rahab representatives said  some profits from the deals would fund religious schools.

This brings up a point about the role of religion in perpetuating financial fraud.

This year I attended a seminar based on an article called “Ponzi Schemes: Madoff Case Study” which identified the following four commonalities that make Ponzi schemes work: affinity,  exclusivity,  good, steady returns, and belief in the fraudster.  Religion plays into the affinity and exclusivity factors heavily as we see fraudsters meetig investors at church, synagogue, etc. or somehow uses religion to find investors. This was the case for both Rahab and Madoff.

Here’s an interesting article on the psychology of Ponzi schemes by a Psychology Today blogger.

And if you want a primer on how a Ponzi scheme works, here’s an authoritative explanation by the Associated Press.

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