Ponzi schemes flourish with vulnerable victims, underfunded watchdogs

McClatchy Newspapers (MCT) - Sam Antar is a fast-talking former accountant who wears snazzy suits and eye-catching silk ties.

With a twisted, toothy sort of grin, he especially likes to greet a room full of perfect strangers with: "Hi, I'm Sam Antar, and I'm a crook."

Antar wants you to understand how Ponzi operators and fraudsters steal money by taking advantage of "nice people" for years, only to be arrested after their schemes collapse and lives are wrecked.

"Criminals like me consider your humanity a weakness to be exploited in the execution of our crimes," Antar told participants at a recent conference at the John Jay College of Criminal Justice. "We can steal more money with a smile than we can steal with a gun."

His unvarnished message is an unnerving but timely one: it seems a new Ponzi scheme is unraveling every day, a Bernie Madoff lurking at every turn.

Securities and Exchange Commission enforcement director Robert Khuzami said the SEC has halted more than 75 Ponzi-related schemes since 2007.

Police, lawyers and academic experts say Ponzi schemes flourish undetected for years for several reasons: securities regulators and law enforcement agencies are underfunded, auditors are undertrained, while victims are vulnerable to get-rich-quick pitches.

Susan Will, an assistant sociology professor at the John Jay College, says Ponzi schemers successfully exploit growing divisions between lower- and higher-income segments of American society.

"The gap between those who have and those who don't has widened," Will said. "People look to their role models _ the wealthy _ and see speculative real estate and other investments.

"That sets the stage for Ponzi scheme operators to come in and say, 'I can teach you the way, a way to get off your stagnating wages,'" Will added.

"It doesn't work. Nobody is immune from these scandals and Ponzis, because we put our trust in so many checks and balances," she said.

Investors mistakenly trust regulators, she added, presuming that if an investment or firm is a fraud, it would be detected quickly and shut down.

But William Black, a University of Missouri law and economics professor, suggested there's so much accounting fraud going on these days, the authorities can't keep up.

Nationwide mortgage fraud _ about 80 percent of it "induced" by corrupt lenders, Black said _ went unaddressed only partly because the FBI shifted 500 agents to its counterterrorism squads from its fraud squads after the 2001 terrorist attacks.

Lenders and borrowers were complicit in mortgage fraud in many instances, he said, so it's no surprise that investment bankers who were repackaging and marketing the loans as securities referred only 34 cases to the FBI from 2003 to 2007.

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The FBI also isn't proactive enough, added Black.

"The FBI cannot infiltrate al-Qaida, but they could have penetrated WaMu," he said, referring to lender Washington Mutual, which failed in 2008 after massive mortgage fraud and thousands of its customers sank into foreclosure.

Patrick Carroll, a supervisory special agent who oversees the securities and commodities fraud squad in the FBI's New York office, denied that the agency's focus on counterterrorism has allowed Ponzi schemers and mortgage frauds to thrive unchecked since 2001.

Carroll said Ponzis have always existed and "will continue to be there."

Stock market and economic downturns expose many Ponzis, Carroll added, because anxious investors often try to cash out their money, triggering a liquidity crisis for the criminal that ends when investors learn their money is gone.

The FBI has run proactive, undercover operations into major securities and commodities frauds, Carroll said, adding that the agency has "responded effectively and efficiently."

Black disagrees. "They have just been completely overrun," he said.

(The FBI recently said it will hire 850 special agents and 2,100 professional staff members by fall, one of the largest hiring blitzes in its 100-year history.)

Walter Ricciardi, who became a partner at a New York law firm in 2008 after a stint as a deputy director of the Securities & Exchange Commission's enforcement arm and head of its Boston office, said the SEC and FBI both lacked resources. Many fraud investigations were shelved or never launched, he said.

Ricciardi described an earnest, dedicated SEC staff that was technologically backward.

SEC staff obsessed with amassing statistics in smaller, easier cases instead of developing bigger, more complex fraud cases, he said. It was about "the stat," he said.

Though the SEC lacked resources to investigate fraud, Ricciardi said he was warned never to admit that publicly.

"I was told if we said we had insufficient resources, that would not be good. Congress would be upset. 'Do the best you can with what you have,' I was told," Ricciardi said.

SEC spokesman John Heine offered no comment. In one recent week, the SEC shut down three Ponzi schemes. In Dallas, $50 million to $75 million was allegedly looted from Chinese Americans. In Long Island, an investment adviser allegedly skimmed $55 million from friends. And in Denver, 38 investors who trusted a fund manager with $17 million to $20 million were allegedly sent fabricated account statements showing fabulous returns, while the manager used their cash to buy classic cars, an Idaho cabin and a Rembrandt painting.

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Solomon Wisenberg, an ex-federal prosecutor who works as a defense attorney in Washington, D.C., said fraud enforcers also suffer from "regulatory myopia."

For example, the SEC ignored complaints about Madoff's fraud for years. Investors and former employees of Texas fund manager R. Allen Stanford accused him of running "a Ponzi scheme" in 2005 and 2006 court cases. The SEC finally accused Stanford of an $8 billion fraud in 2009.

Wisenberg said federal and state officials don't spot obvious fraud red flags during routine financial examinations.

"Examiners are not trained to think, 'Something's going on and I think criminal investigators need to be brought in here,'" Wisenberg said.

Antar agreed. Too few auditors can spot fraud, he said, and those with training don't get enough of it. "You won't beat criminals until you start teaching people how to catch them," he said.

Elaine Carey, a Los Angeles-based vice-president who oversees fraud investigations at Control Risks, a private firm, said the typical Ponzi schemer or fraud architect is a guy very much like Sam Antar.

For 18 years, Antar was chief financial officer of Crazy Eddie Inc., a family-run electronics retailer. He and other family members skimmed off millions of dollars from the company and its shareholders, even after it went public.

Antar pleaded guilty to securities fraud in the 1990s and avoided jail by testifying against his family and helping victims in a later civil lawsuit.

Carey said typical fraud perpetrators are male (though women are increasingly involved, she said), between 30 and 50 years old and hold senior management jobs. Most frauds or Ponzi schemes go on for 18 months before they're spotted, and some much longer, Carey said.

The motive often involves hidden affairs, gambling and drugs, just plain greed, or all of the above, she said.

Antar, who now educates the public about white-collar crime, said criminals are oblivious to the pain and suffering they cause.

"During my 18 years as a crook, we never had one conversation about morality," Antar said. "We simply didn't care. We did it for fun; we did it for profit."

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