Police Blotter: Ponzi Schemes, Theft, Death

BOSTON ( TheStreet) -- Bernie Madoff's $65 billion Ponzi scheme almost had been forgotten when, last month, Kenneth Starr -- a financial advisor to Hollywood stars including Sylvester Stallone, Ron Howard and Martin Scorsese -- was arrested on charges that he stole more than $30 million from clients.

His money-making acumen, it was alleged, was often no more than just a pyramid scheme.

Still, the media's focus on high-profile cases and stepped-up enforcement may do little to stem financial fraud. There are hundreds, if not thousands, of mini-Madoffs plying their fraudulent schemes across the country. Many prey on victims with less ambitious, but no less damaging, scams.

The Federal Bureau of Investigation doubled to 314 the number of investment-fraud cases in fiscal 2009 from a year earlier. The federal Financial Crimes Enforcement Network has said more than 1.28 million "suspicious activity reports" were filed in 2009 regarding terrorist funding and mortgage, check and credit-card fraud, among other cases.

The following is a sample of the fraud investigations announced by law-enforcement officials within the past 30 days:

Gold-mining shaft

Four Canadian men and two others living in Florida were charged by the Securities and Exchange Commission with perpetrating a $300 million international Ponzi scheme that revolved around a purportedly successful gold-mining operation. It is alleged that Milowe Allen Brost and Gary Allen Sorenson of Calgary were the primary beneficiaries of a scheme that persuaded more than 3,000 investors across North America to invest their savings, retirement funds and home equity.

Brost and his sales team held seminars in which investors were promised they could earn 18% to 36% annual returns. They were actually investing in shell companies owned or controlled by Brost or Sorenson who, in turn, diverted investor funds for their personal benefit, using millions of dollars to purchase and renovate extravagant homes, ranches and recreational vehicles. Sorenson also bought and outfitted a luxury fishing resort in South America.

Pawn shop ripoff

A Miami man was charged with orchestrating a $40 million Ponzi scheme with funds raised from investors in the local Hispanic community to purportedly support jewelry businesses and pawn shops. The SEC alleges that Luis Felipe Perez arranged "no-risk" loan agreements with investors and promised to pay them guaranteed annual returns of 18% to 120% through monthly interest payments.

Perez told investors that their investments were collateralized by diamonds, and even led some to falsely believe they were beneficiaries on his life-insurance policy. Rather than financing his jewelry businesses, Perez misused new investor funds to pay prior investors and spent at least $6 million for limousines, restaurants, bodyguards and political contributions intended to bolster his image in the local community.

Financial investing

According to the U.S Department of Justice, Gregory Scott Dixon, who served as treasurer for Financial Investing Inc. of San Jose, Calif., admitted that he and a colleague made false representations to investors and diverted money for personal use and paying off earlier investors. He is accused of sending out false IRS 1099 forms and monthly earnings statements.

The investigation was, in part, conducted by the of the work being done by the government's Financial Fraud Enforcement Task Force.

Virgin Islands shakedown

On June 28, the SEC announced fraud charges and an emergency asset freeze against a fund manager based in the U.S. Virgin Islands who was behind a $105 million Ponzi scheme.

It is alleged that Daniel Spitzer, a resident of St. Thomas, misrepresented that investor's money would be invested in foreign-currency funds. Investors were told that Spitzer's funds had never lost money and produced profitable annual returns that a year reached over 180%.

According to the SEC, Spitzer invested only about $30 million of the more than $105 million he raised from nearly 400 investors. Roughly $900,000 was spent at a Las Vegas casino.

Murdered man charged

On June 25, the SEC charged K. Wayne McLeod with his role in a Ponzi scheme that used his Florida-based FEBG Bond Fund to rook more than 250 government employees and law-enforcement agents. McLeod, in part, lured victims by purporting that his fund was a safe alternative to the epidemic of Ponzi schemes, falsely claiming that his investments were secured by the government. At the time his firm's assets were frozen, it had $43 million under management.

There is no prospect of seeing McLeod face his day in court, however. He was found shot to death earlier this month.

Investment clubs

Florida-based Trade-LLC's managing members, Philip W. Milton and William Center, were charged with convincing three private investment clubs, with more than 800 members nationwide, to entrust them with money so they could trade securities using a purportedly proprietary software-trading program.

According to the SEC, between 2007 and 2009, the investment clubs invested nearly $28 million of their members' funds with Trade-LLC. On a monthly basis, the clubs received reports from Trade-LLC falsely showing that they were making returns of up to 8% a month.

The complaint alleges that Trade-LLC, Milton and Center were operating a Ponzi scheme by using the funds received from the clubs to pay back to them more than $1 million in fictitious profits. They also used the clubs' funds to pay themselves salaries of between $1 million and $2 million.

Protect yourself

In their new book, Financial Serial Killers (Skyhorse Publishing, 2010), to be published in August, attorney Tom Ajamie and journalist Bruce Kelly offer advice on how to avoid the thousands of mini-Madoff's out there.

If it looks too good to be true, it probably is. Beware of investment advisors who are too perfect. Are they generating returns that, year in and year out, closely resemble each other or are "achieved" when the overall market is going down and other professional investors are losing money? Is the broker or advisor telling you the investment has a guaranteed return of 10% or higher and repeatedly tells you there is no risk and a guaranteed return? Does the broker or advisor avoid explaining his investment strategies, saying they are either too complex or proprietary?

Con artists will use religion, community standing and political connections to their advantage. Simply because you attend church or synagogue with someone does not alone make that person qualified to handle your money. Never write a check to a broker or advisor in his or her name, and be skeptical of any investment opportunity that is not in writing.

Beware of hype and media attention. Fraudsters often target young journalists eager to break stories to establish credibility. Just because a reporter wrote an article about a company or financial transaction does not mean it is on the up-and-up.

-- Reported by Joe Mont in Boston.

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