Craig Carton is just the latest reminder to avoid Ponzi schemes at all costs.
Carton is the co-host of "Boomer and Carton" on New York sports radio station WFAN, but he was arrested Wednesday morning by the Federal Bureau of Investigations. According to a complaint filed by the Securities and Exchange Commission, the WFAN host and a partner took at least $3.6 million from two investors and took another $2 million from another investor on his own, to cover his own gambling debts.
As with any Ponzi scheme, this one started with a bogus business built to attract investors. Carton and his partners claimed they ran ticket-resale companies with access to tickets for Katy Perry, Justin Bieber, Roger Waters, Metallica, Barbra Streisand and Adele shows that could be resold at huge profits. Investors were promised minimal risk and huge rewards, though the SEC claims Carton forged ticket-sale "agreements" between his companies and concert promoters.
According to Bloomberg, one of the victims of this scheme was Brigade Capital Management, a hedge fund. Though the scheme ate up less than half of a $10 million credit facility provided by the fund had been tapped, the firm was able to seize some of that money and hold onto the collateral to limit potential losses. However, according to the SEC, Carton and a third conspirator were knowing participants in the ticket fraud, with Carton complaining in mid-2016 that he owed about $3 million and a casino had frozen his account. In September, the three conspirators met and hashed out the ticket plan "to clean up the debt." Brigade Capital offered its $10 million in revolving credit in December but only after Carton allegedly offered up fake documents and emails pointing to a glut of nonexistent tickets.
"Guys. I've done it," Carton wrote. "One investor ready committed $10m liquid and $40m LOC [line of credit] with $50m if needed. I need some info. List of shows we can 100% prove access to tickets. How many when and how it's returned and predicted success."
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So how do you make sure that you or your investments don't get tangled up in the kind of scheme that Carton is accused of running? Well, the SEC says there are a bunch of red flags to watch out for if you're being pitched an opportunity directly. Every investment carries a degree of risk, so don't believe that any investment has "guaranteed" rewards or no risk. Also, if an investment has yielded overly consistent returns regardless of how the market has performed around the same time, be wary. Perhaps the best way to sniff out a Ponzi schemer is to search for them in the SEC database for all Registered Investment Advisory firms. Smaller firms (with under $25 million under management per current legislation) are registered directly with the states and can be vetted through your state securities regulator.
Finally, if an investment seems overly complex, if you don't have access to paperwork and if you encounter accounting errors or late payments when you've already invested, those are all good reasons to stay clear.
Before you invest in something that sounds like a Ponzi scheme, the SEC suggests asking five questions:
- 1. Is the seller licensed?
- 2. Is the investment registered?
- 3. How do the risks compare with the potential rewards?
- 4. Do I understand the investment?
- 5. Where can I turn for help?
Unlike Carton, these five cars won't let you down.
The American Association of Individual Investors is more than happy to answer that final question. The national organization says that the SEC's questions are a good start but suggests there should be far more questions when you're about to hand over your money for a deal that doesn't smell right. Even if a hedge fund is telling you it can't miss, ask how much you're expected to invest, what the returns will looks like, when those returns will show up, if those returns are guaranteed (and by whom), what the potential rewards and risks look like and when you can get your money out. If the answers are unclear or you hear the words "Don't worry about it," walk away.
You should also ask what company will be holding your money (as a financial institution should have it in any standard investment), how you can contact this firm/broker/bank/trust company, and when you will be receiving financial statements directly form that firm. If the account isn't in your name, if you don't have access to the account or if you don't have the daily ability to make withdrawals, ask for more information and leave if it isn't provided. If it's a firm, look for the degrees, certifications, designations and work histories of those in charge of your account. If those histories look shaky or if if the firm is fairly new and doesn't have its own office, leave.
If you don't trust yourself to distinguish any of these traits, feel free to bring a financial advisor or even a trusted personal advisor with you to catch what you aren't hearing or seeing. If the person pitching the investment won't allow someone else in the room, tells you that you can't take notes or tells you that you aren't allowed to take anything from the meeting, that isn't a great sign.
Finally, if you wouldn't stand for certain behavior at a car dealership, don't do it here. If there are a whole lot of unsupported promises, evasive answers and high-pressure pushes for you to sign a deal immediately, it's going to be as bad a deal as it sounds.
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Editors' pick: Originally published Sept. 7.