The Ponzi scheme just won’t go away.
In fact, fraudsters have been particularly adept at updating their schemes with new technology and new pitches to potential victims—a fact that further complicates the ability of legal professionals to investigate and litigate Ponzi-related matters.
For lawyers, staying ahead of this curve requires working with experts who understand the unique and often sophisticated ways fraudsters are morphing their tactics to victimize investors. Establishing a collaborative relationship with a highly qualified team of forensic accountants can help attorneys build significantly stronger cases. In this article, we look at the current state of Ponzi schemes and explore the role a forensic accountant can play in assisting attorneys in financial fraud cases.
A Surge In Schemes
A Ponzi scheme is a fraudulent investment operation where returns are paid to existing investors from the funds contributed by new investors. This illusion of legitimate profits draws in more investors, allowing the fraudster to continually funnel money away from the scheme. Ponzi schemes eventually collapse when there are insufficient new investments to cover payouts or when regulators step in.
According to the Ponzitracker.com blog, the number of Ponzi schemes surged in 2022 following a brief decline in volume during the height of the Covid-19 pandemic. Ponzi schemes last year accounted for more than $5.3 billion in potential losses, and the data “ominously shows that more than one in four of the new schemes were related to cryptocurrency,” the blog said. The following are just a few recent variations on the Ponzi scheme:
• In September and early October, the operators of the “AirBIt Club,” were sentenced to prison for swindling as much as $100 million from investors. The club had promised to invest victims’ funds in legitimate cryptocurrency trading and mining operations. Instead, the money was funneled via crypto coins, attorney trust accounts, and shell companies into the pockets of the club’s founders and promoters.
• Also in September, the Securities and Exchange Commission charged the host of “The Cash Flow King” podcast with fraudulently raising as much as $11 million from more than 50 investors. The host allegedly bolstered his reputation as an investing expert via podcasts and social media and then used investor money to fund his own lavish lifestyle.
• In June, a California federal court sentenced a man to six years in prison for running a Ponzi scheme that promised to create green energy out of cow manure. Preying upon environmentally conscious investors, the man raised nearly $9 million. Unfortunately, manure was the only thing the man was spreading. He spent investors’ money on a 3,700-square-foot custom home in California, 12 acres in Montana, and new Dodge Ram pickup trucks.
How Forensic Accountants Can Help
Forensic accountants are experts in examining and analyzing financial data to identify and quantify financial fraud, such as Ponzi schemes. They can assist lawyers in:
1. Detecting a Ponzi Scheme. Forensic accountants employ various tools and techniques to recognize signs of a Ponzi scheme, such as:
- Analyzing financial documents to identify discrepancies.
- Examining cash flow patterns for irregularities.
- Scrutinizing inter-company transfers and transactions.
- Reviewing bank statements, investment documentation, and other financial records.
2. Tracing and Quantification of Fund Flows. Forensic accountants meticulously trace fund flows within a Ponzi scheme to quantify the scale of the fraud, determine the source of funds, and establish the destination of misappropriated assets. This data is essential for litigators to recover funds from the fraudster and distribute them among defrauded investors.
3. Asset Recovery. After identifying misappropriated assets or funds, forensic accountants can help lawyers develop strategies for asset recovery. These strategies may include filing claims against the accused or third parties, pursuing legal actions to freeze assets, or working with law enforcement and regulators to recover misappropriated assets.
4. Expert Testimony. Forensic accountants may also testify as expert witnesses, providing valuable insight into the intricacies of the Ponzi scheme, validating the investigation’s findings, and explaining complex financial concepts to the judge and jury.
A Collaborative Approach
Lawyers and forensic accountants can form a collaborative and formidable team in Ponzi scheme investigations and litigation. While lawyers navigate the legal proceedings and provide overall direction in the case, forensic accountants bring their specialized skillset to demystify the financial aspects of the case, empowering the legal team to forge ahead with confidence.
A forensic accountant’s expertise in financial fraud detection, fund tracing, asset recovery, and expert testimony is vital to resolving Ponzi scheme investigations and litigation successfully. Working together, forensic accountants and lawyers can ensure that Ponzi schemes are effectively addressed with the best possible outcomes for defrauded investors.