Below I’ve examined 10 of the most infamous examples of ponzi schemes from recent U.S. history.
1. Louis J. Perlman
Lou Perlman, the manager of such singing sensations as the “Backstreet Boys.” and ‘NSync, conducted a $500 million dollar Ponzi scheme. In 2006, it was discovered that Pearlman was the head of one of the largest and longest running Ponzi schemes in American history, leaving almost half a billion dollars in debts. Perlman headed up Transcontinental Airlines Travel Services Inc. and Transcontinental Airlines Inc., and the Transcontinental Savings Program (collectively referred to as “Transcontinental”), which existed only on paper.
For over 20 years, Perlman raised money from investors in Transcontinental, using falsified FDIC, AIG and Lloyd’s of London documents to gain investors’ confidence in his business. Perlman created the “Employee Investment Savings Account” (E.I.S.A.) program and he used fake financial statements created by a fictitious accounting firm “Cohen and Siegel” to secure bank loans. E.I.S.A. investors were falsely led to believe their investment “deposits” were safe, secure and residing in U.S. financial institutions, where FDIC and other insurance guaranteed the investment.
The existence of FDIC, Lloyd’s of London or AIG insurance, however, was simply a fabrication that went hand in hand with the false representations that all E.I.S.A. funds were maintained in U.S. institutions such as Citibank, where above market interest rates were provided to purportedly cash laden companies such as Trans Continental Airlines, Inc.1
One of the key findings by state regulators was that the bank records indicated the investors’ deposits of approximately $118 million were utilized to pay earlier investors both dividends and cash withdrawals, as is the case in Ponzi schemes, to pay commissions of approximately $7 million to sales agents who marketed the program, and to funnel approximately $50 million to the Pearlman and his companies.2
On May 21, 2008, Pearlman was sentenced to 25 years in federal prison, after pleading guilty to charges of conspiracy, money laundering, and making false statements during a bankruptcy proceeding. Perlman was given the chance to cut his prison time, by an offer from the judge to reduce his sentence by one month for every million dollars he helps the bankruptcy trustee recover.3
2. SEC v. J.T. Wallenbrock
Wallenbrock promised investors a 20 percent return in ninety days, by using their money to provide working capital to Malaysian latex glove manufacturers, raiding $250 million dollars in the process. Ordinarily, Wallenbrock claimed, these manufacturers had to wait eighty to ninety days after shipment to collect payments from buyers.
Wallenbrock would purchase these manufacturers’ accounts receivables at a significant discount, providing the glove manufacturers with immediate access to working capital. Wallenbrock investors, in turn, would enjoy a 20 percent return when Wallenbrock collected the receivables from glove purchasers in due time.
In reality, the officers of Wallenbrock took the investors’ money and used some of it to pay off earlier investors, some to pay for personal expenses, and some to invest in risky start-up companies.4 This type of “accounts receivable factoring” Ponzi scheme is one of the more common types of Ponzi schemes. While Wallenbrock was a “latex glove” account receivable scheme, still others involved the brokerage of food (See Premium Sales, below), or the factoring of receivables for contractors, manufacturers, and wholesalers.5
3. Worldwide Entertainment
Jack Utsick, of Worldwide Entertainment, was considered the third largest independent concert promoter in the world, according to Billboard Magazine.6 What was unknown to his investors was that he was running a massive Ponzi scheme. The SEC alleged in its 2006 complaint that from at least 1998 through late 2005, Utsick and his partners Donna and Robert Yeager sold unregistered securities in the form of loan agreements or units in special purpose limited liability companies (“LLCs”) to raise funds for a variety of entertainment ventures
produced and/or promoted by Jack Utsick including Rolling Stone concerts and even a Paris Hilton movie, National Lampoon’s Pledge This!.
Utsick, the Yeagers, and others told investors that their investments would earn annual returns ranging from 15% to 25% and, in some cases, an additional 3% of the profits generated by Jack Utsick and his companies. The investments in the LLCs or loan agreements were usually for a term of one year, and many investors rolled over their principal and purported “profits” from project to project. Over the years, defendants raised funds for dozens of projects, including theatrical productions and concerts for well-known artists and groups such as Shania Twain, Elton John, Santana, The Pretenders and Aerosmith.7
Utsick paid over $7 million in undisclosed commissions to the Yeagers and others. Utsick also used investor funds inconsistently with the purposes promised to investors. Utsick opened an options trading account at Gunn Allen Securities through which he traded (and lost) nearly $17 million, and he used investor funds to, among other things, pay principal and interest to earlier investors, pay sales commissions, purchase two multimillion condominiums in Miami Beach, Florida, and to fund his lavish lifestyle.
The Worldwide Entertainment case is notable for the fact that it actually had some legitimate, albeit losing, business operations. Some concert venues were profitable, while many others were not. Some investments like Paris Hilton’s National Lampoon Pledge This! movie were a flop, while other investments such as concert venue leases were profitable and continue to make money.
Still other investments included oil and gas lease partnerships, modeling agencies, and even restaurants. Some of the investments had to be abandoned by the Court-appointed Receiver, Michael Goldberg, and others are still being managed for the benefit of investors to this day.8
4. Mutual Benefit Life
Between 1994 and 2004, Mutual Benefit Life (MBC) operated as a viatical and life settlement provider, raising money from 29,000 investors to purchase viatical and life settlement contracts.9 A viatical or life settlement contract involves the sale of a life insurance policy by a terminally ill person or senior citizen (known within the industry as a “viator”) at a price discounted from the face value of the policy. Investors pay the premiums, and receive the face value of the life insurance policy when the insured, or viator, dies.
In turn, the viator receives a portion of the proceeds of his life insurance policy as a lump sum. MBC allocated investor funds to approximately 9,000 life insurance policies with an aggregate anticipated death benefit of approximately $1.451 billion.10 MBC promised investors guaranteed, fixed rates of return ranging from 12% to 72%, depending upon the term of investment chosen by the investor. The life expectancy of the viator as determined by MBC, in turn, determines the total rate of return.
For example, MBC promised investors who selected a policy insuring an individual with a one-year life expectancy a 12% return on the investment, investors who selected a policy insuring an individual with a two-year life expectancy a 28% return, and investors who selected a policy insuring an individual with a three-year life expectancy a 42% return.11
MBC sold its investments to 29,000 investors primarily through a national network of independent sales agents, consisting mainly of insurance agents, brokers and financial advisors.12 The Company also solicits investors directly through its Internet website. MBC, primarily at the direction of Leslie Steinger, oversaw the activities of its sales agents through a staff of in-house sales directors. MBC trained its outside sales force during multi-day training sessions called “MBC University.”
Steiner participated in these training sessions held at MBC’s Fort Lauderdale headquarters, and other sessions held throughout the world. Steiner instructed future sales agents about the viatical industry in general, the humanitarian aspects of viatical settlements, MBC’s philanthropic efforts, and MBC’s excellent track record in the viatical settlement industry.
During these sessions, Steiner did not disclose to future sales agents any information about his brothers’ disciplinary history, criminal conviction, or the cease-and-desist orders issued against MBC by state regulators.13
For their role in marketing the offering, MBC’s sales agents were paid a commission, generally from 6% to 12%, based on the total investment.14 MBC also offered its agents incentives for reaching sales goals, such as all-expense paid vacations. During their oral sales solicitations, MBC’s sales agents assured investors that the investment opportunity was “guaranteed.”15 Agents also regularly downplayed the fact that the viator might live beyond his life expectancy.
Life expectancy figures determined, among other things, the rates of return to investors and the amount of funds to be escrowed for payment of future premiums. Approximately 90% of MBC’s policies were well beyond their life expectancy estimates and, in a Ponzi-like fashion, new investor funds set aside to pay premiums on specific policies were being used to pay premiums of policies assigned to earlier investors.
Ultimately, the Eleventh Circuit Court of Appeals upheld the trial court’s finding that the viatical investments were “securities” and thus sold as unregistered securities to unsuspecting investors.16
5. In re World Vision Entertainment, Inc.
This Ponzi was known as the Nine-Month Promissory Note Sales Program. Jamie Piromalli formed World Vision Entertainment, Inc., as a Florida corporation in 1994, to promote itself as an entertainment investment company. In 1996, World Vision started selling nine-month promissory notes with annualized interest rates varying between 10.9 and 11.9 percent.
Investors could collect their interest monthly or at the end of the nine-month term in a lump sum together with their principal investment. Although the notes were unsecured, investors received a certificate of insurance promising full repayment if World Vision defaulted. At the expiration of each nine-month term, World Vision encouraged investors to reinvest their principal for additional nine-month terms.
Between June 1996 and September 1999, World Vision sold ninemonth notes totaling approximately $62 million in 33 states to approximately 1,200 investors. The investors typically were elderly people living on a fixed income. They lacked financial sophistication and often invested their retirement savings into the note program relying on the advice of their broker.17
6. E-M Management
Edward Paul May was an investment advisor and the managing or controlling member of some 266 corporations. Allegedly, the corporations were not legitimate businesses, but rather were used to facilitate a fraudulent Ponzi scheme. Allegedly, over a period of several years, May solicited and received funds from many parties for purported investments totaling between $200 and $300 million. Contrary to representations made by May, funds received from investors were placed into high risk, rather than low risk, investments.
In many cases, funds may not have been invested at all, but rather were used to pay false dividends to earlier investors, or diverted for the personal use of May. May is purportedly under investigation by the Securities and Exchange Commission, the Federal Bureau of Investigation, and possibly other federal or state authorities.18
Frank Bluestein, a former registered representative with Gunn Allen, allegedly sold investments involving E-M Management, and as a result, Gunn Allen is presently the subject of many arbitration claims by investors for “selling away”.
7. SEC vs. Premium Sales
The SEC’s complaint alleged that Premium Sales fraudulently raised over $500,000,000 through a grocery diverting scheme and defrauded investors with promises of up to 60% annualized returns on their investments. The SEC’s complaint against Morris and Scott Thenen alleged that they played a major role in the operation of Premium Sales, a Ponzi scheme that operated from North Miami Beach, Florida. Premium Sales, Morris and Scott Thenen told investors they were in the business of grocery “diverting”.
Grocery diverters take advantage of differences in prices for wholesale grocery products among different regions of the country. In a form of arbitrage, diverters purchase lower-priced groceries in one region and resell them for a small profit in another region where prices are higher. Unfortunately for investors of Premium Sales, most of the diverting transactions made by Premium Sales were fictitious.19
This author’s former law firm represented the unsecured creditor’s committee in the Premium Sales bankruptcy case, during which the committee helped uncover the fact that the bank for Premium Sales had aided and abetted the fraud, and uncovered ill-gotten gains of promoters who received “commissions” for bringing investors to the company.
8. Caritas (“Charity” in Latin)
Caritas was a $450 million dollar Ponzi scheme in Romania which was active between April 1992 and August 1994. It attracted millions of investors from all over Romania who invested more than a trillion lei (between one and five billion USD) before it finally went bankrupt in 1994.
Caritas was a self-described “mutual-aid game” (hence the name “Caritas”, meaning charity in Latin) which had the purpose to help the impoverished Romanians during the transition to capitalism and promised eight times the money invested in six months.
An eightfold return appears ridiculously high in hindsight, but not in 1993, given that Romania was suffering from heavy inflation (over 300% yearly), and Romania’s citizens were not used to modern financial instruments, so almost none of the investors suspected a scam during the early stages of the scheme.
Caritas was aided by its connections in the nationalist Party of Romanian National Unity (PUNR) and the mayor of Cluj-Napoca, Gheorghe Funar, who welcomed this scheme and even helped it build a credibility by renting space right in the town hall, appearing in public and on television defending Caritas from criticism.
The mayor also gave space in the local newspaper to publish a list of the ‘winners’ who would have to go and claim their money eightfold, a list which at times was as long as 44 pages.
9. Reed Slatkin
Reed Slatkin was a former Scientologist minister and a cofounder of Earthlink, the internet service provider. Slatkin was touted as a wunderkid of stock and business investing. It was verified that he had made $100 million in profit on the internet company Earthlink alone. He and his family lived in a large estate in Santa Barbara and employed an estate manager to tend to the property. They took vacations to Europe and Hawaii, belonged to an elite country club, and their social circle included some of Santa Barbara’s wealthiest and most influential people.
During the 1990’s, Slatkin was investing in a wide array of real estate developments throughout the United States, film and production companies, investment partnerships, and securities in a variety of companies. Most of Slatkin’s investments later proved to be financial disasters.20 In reality, Slatkin’s financial castle was a house of cards. Slatkin began to be exposed in 1999. The total amount invested with Slatkin during a 15-year period was $593 million, of which he disbursed $534 million to investors and the remaining claims, representing actual cash invested but not returned, was approximately $255 million.
His true success, it was later revealed, was limited to his investment in Earthlink. Most of Slatkin’s investments went sour, but as far his investors were concerned, Slatkin’s was a hugely talented investor, because he sent all of his investors false financial statements showing huge profits, and was able to pay off earlier investors very large returns.21
According to Slatkin’s bankuptcy trustee, “Slatkin may have been viewed by many as a financial “whiz kid” generating stupendous returns for those investors fortunate enough to entrust their money to him. This reputation seems to have been primarily based on three factors:
(1) substantial returns (albeit completely fabricated) as reported on the investor monthly statements provided by Slatkin;
(2) the investors’ ability, at least until the latter stages, to withdraw money without difficulty from their accounts;
(3) Slatkin’s appearance of expertise based on his opportune Earthlink investment.”
With the notable exception of his Earthlink investment, for the most part Slatkin’s investments were losers. A review of 37 investments revealed that Slatkin lost $47 million of the $68 million he invested in stocks.22 Slatkin’s investors included many Scientologists, including Foxnews reporter and Scientologist Greta Van Susteren23 and her husband John P. Coale.
They invested $2.1 million and received $2.7 million in payments according to a report by the court-appointed trustee When being told that even innocent parties (i.e. participants who didn’t know it was a Ponzi scheme) are required to return the extra money, Van Susteren’s husband, John Coale said: “I’ll fight this thing for 100 years” because “Most of that money went to the IRS.”24 That fight is already over. Van Susteren settled the case by agreeing to pay back $705,000.25 Slatkin later claimed he was “brainwashed” by the Church of Scientology, to whom he had donated between $25 and $50 million dollars.26
10. Foundation For New Era Philanthropy
John Bennett scammed hundreds of respected institutions and individuals through a “matching gifts program” that made Bennett’s name famous within charity circles. Bennett’s “New Era Philanthropy” program provided for a group of anonymous and extremely wealthy donors to match funds raised by non-profit institutions and philanthropists.27 After being invited to participate in the program, non-profit institutions would raise funds and deposit them with New Era. Similarly, philanthropists would deposit funds earmarked for designated charities.
One major requirement was that New Era hold the funds for six months. During this time, New Era would deposit the funds in a “quasi-escrow” account with Prudential Insurance, where they were to be invested in T-bills. This holding period was designed to give New Era time to collect enough interest to cover administrative expenses and find a matching donor. The anonymous donors would contribute funds to New Era, doubling the original amounts raised by the institutions and donated by the philanthropists. After six months, the deposited funds, plus the matched funds, would be transferred to the appropriate non-profit organization.
Different donors were told different things; over time the waiting period grew from six to nine to ten months. The number of anonymous donors, anonymous benefactors, and anonymous philanthropists also varied, though Bennett eventually settled on claiming to have nine of them.
John M. Templeton, Jr., son of John Templeton, Sr., the famous investor and philanthropist, was a friend of Bennett and people believed that he was one of the anonymous. In addition, Prudential Securities was a prominent part of the setup (and became the subject of a $90 million lawsuit accusing them of complicity)28. In 1994, Bennett expanded the program to allow “donations” by nonprofit organizations.
Like many modern Ponzi schemes, Bennett’s was an ‘affinity’ scheme, in which he defrauded people of common interest: in this case, local non-profit organizations and Christian charities. Using the swelling funds from these churches, Bennett expanded further, establishing offices in Radnor, Pennsylvania. He had glossy brochures and a staff to process all the money coming in.
Bennett increased his sales force by encouraging organizations to take a “finder’s fee” from any money they raised. In other words, if a representative could convince donors to give $10,000,000, the agent could keep $1,000,000 for himself, give the remaining $9,000,000 to New Era and get back $18,000,000 for the non-profit in six months.
By and large his donors did not ask many questions. When they wanted proof that the money they donated was not being stolen, he provided evidence that the Foundation owned government bonds. However, he was showing the same bonds to everybody, and they had been pledged as collateral on loans. Bennett told prospects that his anonymous donors met several times a year, in person or by phone. Former U.S. Treasury Secretary William Simon, who ironically lost a lot of money to the scam, asked to be admitted to the donor panel.
Bennett never responded to the request and Simon gave him money anyway. With the cash flowing though his hands, Bennett made all sorts of private investments. He bought a share of a travel agency and ran all of New Era’s travel business through it. He also purchased a publishing house and other businesses.
On May 15 1995, a skeptical article about the Foundation appeared on the front page of the Wall Street Journal. The same day, the Foundation capitulated in the face of a lawsuit demanding repayment of a $44,000,000 loan and filed for chapter 11 bankruptcy protection. In filing, the foundation stated that its assets were worth $80 million with liabilities of $551 million.
A close examination of the documents filed in the subsequent lawsuits reveals that more than $354 million passed through New Era’s hands and that Bennett took $8 million of that for himself.
Airlines, et.al Case No.: 48-2006-CA-011136-O (Orange Cty, Fl. Cir.Ct. 2006);
06-20975 (S.D. Fla.)
Indiana , Pennsylvania and Vermont, have issued cease-and-desist orders against MBC and its
principals for securities fraud and registration violations . In addition, the state of Kansas issued
a cease-and-desist order against the sales agents who sold the investment opportunity in that
state. See Complaint, Scheck Investments LP vs. MBC et al. Case no. 04-21160 (S.D. FL 2004).
the show Burden of Proof until December 2001, when the show was cancelled.
September 27, 1996)