Ponzi Scheme

SITUATION

FSS was hired by the bankruptcy trustee to determine if an investment run by a rogue money manager (“the Project”) was a Ponzi scheme and to testify before the bankruptcy court regarding our findings.

New investors were promised unusually high rates of return. The payment of accrued interest to short term investors was paid current and there was a constant influx of new investors.  Funds from the later investors were used to pay interest and redeem earlier investors. When the ability to pay its obligations waned, so too did the influx of new investors and the Project imploded.

STRATEGY

The FSS team traced the sources and uses funds intended for investment.  Based on a relational database created of the notes, bank statements and trading states of the Project, FSS testified in federal bankruptcy court the Project met the elements of a Ponzi scheme.

RESULTS
  • 468 fixed rate promissory notes were issued over a 1.5 year period totaling $27 million.
  • The promissory notes issued varied from 36% to 120% per annum.
  • Gross returns on investments were less than a third of the $11 million accrued interest due to investors.
  • The primary source of cash flow was from new investors.
  • The continuous enrollment of new investors was necessary to keep the Project from collapse.
  • Only a small portion of the principal received from investors was invested at first, then stopped.
  • Investors’ money was used to fund an extravagant lifestyle rather than the stated purpose.
  • Money was recovered for the bankrupt estate, but only a small portion of the investment by the individuals.