Hard times help expose Ponzi schemes

McClatchy Newspapers (MCT) - The lousy economy is crushing Ponzi schemes _ and driving them out into the open.

The $40 million investment scheme uncovered in Folsom, Calif., this week was one of at least 18 alleged Ponzi scams halted by federal officials across the country this year, according to Securities and Exchange Commission records. That doesn't include New York financier Bernard Madoff's $65 billion Ponzi, which came to light in December.

Officials say the Folsom case, involving 150 investors and a firm called Equity Investment Management and Trading Inc., is the second major Ponzi scheme to pop up in the area in recent months.

The first, Loomis Wealth Solutions, a Roseville, Calif., firm that took in $100 million, surfaced last fall and came to a bizarre climax of sorts in February: Found with $70,000 hidden in a shoe, defendant Christopher Warren was arrested crossing into Buffalo, N.Y., from Canada after a nine-day worldwide tour that ranged from Las Vegas to Lebanon. Two other co-defendants were arrested in Barcelona, Spain.

Experts say it's no coincidence that so many cases are being uncovered now. The recession has dried up the flow of fresh dollars needed to keep a Ponzi going _ just as cash-strapped older investors try to pull their money out.

"Sacramento is definitely one of those areas where we're seeing them totally come apart," said FBI Special Agent Kevin Baker, head of the bureau's financial crimes unit in Sacramento, Calif. "The things we're seeing now were in existence, and are just being dismantled."

Baker expects more Ponzis to be uncovered in the coming months as the economy weakens.

A Ponzi or pyramid scheme depends on an uninterrupted flow of new money. Earlier investors, promised steady returns, are paid with dollars poured in by new investors.

"When the economy tanks, people who had been comfortable leaving money in ... suddenly they need to get their money out," said Bill Branscum, a private investigator in Naples, Fla., who's investigated Ponzis. "At the same time, there is a shortage of people willing to put their money in."

The cases uncovered by federal officials since Jan. 1 range from a $500,000 Ponzi in upstate New York to the alleged billion-dollar scheme involving Houston financier Robert Allen Stanford. State officials around the country are pursuing Ponzi schemes, too, including a $52 million Orange County, Calif., case uncovered in January by the attorney general's office.

On Thursday, the day Madoff was sent to jail following his guilty plea, victims of the Folsom case were trying to come to grips with their losses.

"These were people that other people said you could trust," said Kevin Stillian, an investor from Rancho Murieta, Calif., who is in danger of losing $105,000. Stillian, 38, was trying to build up enough money to make a hefty down payment on a house for his young family. The money represented his life's savings.

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"I have a 15-month-old and a 5-year-old," said Stillian, a project manager at a Sacramento kitchen contractor. "They don't understand. I just wanted to buy a house for them."

The SEC on Wednesday sued Folsom's Equity Investment Management and Trading Inc., its president, Anthony Vassallo, and vice president, Kenneth Kenitzer, saying they defrauded 150 investors out of $40 million.

The SEC obtained a court order freezing the firm's operations and directing Vassallo to tell investigators the whereabouts of investors' money. So far the only asset the SEC has found is a $1.2 million Redding, Calif., bank account that had been controlled by Vassallo.

A criminal investigation is also under way. The SEC said Vassallo, 29, has left Folsom for parts unknown, although his lawyer in Florida said Vassallo has cooperated with authorities. Neither Kenitzer, 66, of Pleasanton, Calif., nor his lawyer could be reached for comment.

Like the Madoff affair, in which many of the investors were Jewish, the SEC called the Folsom case an example of "affinity fraud" in which religion is used as part of the bait.

Investors and others familiar with the case say Vassallo and many of the Folsom investors were Mormons. But Lisa West, a spokeswoman in Sacramento for the Church of Jesus Christ of Latter-day Saints, said she had no record of Vassallo belonging to a Mormon church in the area.

The SEC said Vassallo's investors were promised returns of up to 3.5 percent a month. He claimed he had a computer program that could trade stock options with little risk, the SEC said.

It's unknown what exactly caused the alleged scheme to crash. One of its largest investors, Sacramento real estate investor Ethan Conrad, said in court papers that he succeeded in withdrawing $2.1 million last summer, before he realized Equity Investment was a sham.

In November, investors were no longer able to pull money out, said SEC lawyer Jennifer Scafe. After being put off by various excuses, 10 investors confronted Vassallo at his Folsom office around New Year's Eve. He admitted forging documents, the SEC said.

Ironically, Equity Investment's Web sites, through which clients can track their funds, remain operational. Using a desktop computer, Stillian could log into his account Thursday and review the supposed progress in his investments.

The Web site claimed that his account, which had grown at 2 percent a month, was worth $127,805.11.

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© 2009, The Sacramento Bee (Sacramento, Calif.).