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Ponzi schemes and the pandemic . . . a perfect storm?

If 2020 wasn’t bad enough, some experts believe the COVID-19 pandemic is creating the perfect conditions for an increase in Ponzi schemes. Here’s some advice on how best to deal with this type of fraud and why these schemes persist.

Ponzi scheme: An investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves. With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse. (See Ponzi Schemes, U.S. Securities and Exchange Commission, Investor.gov.)

While the headline-grabbing Ponzi schemes uncovered during the Great Recession of 2007-2009 no longer dominate news cycles, this type of fraudulent activity remains alive and well. And it’s only been growing in recent years with big and small scams continuing to victimize investors. A booming stock market, the uncertainty over the pandemic and its economic consequences, plus an abundance of government stimulus money, create an ideal climate for Ponzi schemes to flourish — and explode, say some experts.

Just earlier this year, the Securities and Exchange Commission (SEC) charged three individuals connected to New York-based GPB Capital with running a $1.7 billion Ponzi scheme. The SEC’s account of the fraud showed it to be a classic Ponzi.

David Gentile, the owner of the private equity firm, allegedly used investor money to make a portion of the 8% annualized distribution payments that he said were being generated through the firm’s portfolios. Gentile, with the help of Jeffrey Lash, a former managing partner at GPB Capital, manipulated the financial statements to hide the poor performance of the firm’s funds. The SEC also alleged that the asset manager had violated whistleblower laws in termination agreements that impeded investors from approaching regulators about this matter. (See SEC Charges Investment Adviser and Others With Defrauding Over 17,000 Retail Investors, Feb. 4, U.S. Securities and Exchange Commission.)

The company has replaced Gentile as CEO and vowed to mount a strong defense against what it described as “unfounded allegations.” (See the GPB Capital letter to its community, Feb. 8.) The SEC requested an independent outside monitor to try to protect the 17,000 retail investors who’d participated in the firm’s funds. (See GPB Capital Agrees to SEC Monitor Sought to Protect Investors, by Ted Bunker, The Wall Street Journal, Feb. 11.)

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