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A Ponzi-scheme epidemic

The sad tale of Bernard Madoff — a multi-billion dollar swindle in which trusting investors lost huge sums — is only the most prominent of many such stories, reports Dow Jones columnist Al Lewis.

Confessed Ponzi schemer Sean Mueller received a 40-year prison sentence last week.

I watched as he pleaded for mercy in Denver District Court, but the damage was done. He'd fleeced the Mile High City's elite, including football great John Elway, and many not-so-elite, out of more than $70 million.

Mr. Mueller, 42 years old, did this with one of the oldest tricks around: A classic Ponzi scheme, taking money from new investors to pay off the old. He touted an amazing, risk-free stock-trading strategy until April, when he sent his investors an email saying he was sorry he blew it. He was then intercepted by police while considering a jump from a parking garage.

Lewis notes that the Justice Department recently announced the results of a crackdown on financial fraudsters called Operation Broken Trust. The effort "rounded up 343 criminal defendants and 189 civil defendants," he reports, with a tally of "120,000 victims and $10.3 billion in losses."

In remarks (text) at a Dec. 6 news conference, Shawn Henry, executive assistant director of the FBI, noted that the most successful financial fraudsters excel at building trust.

The perpetrators of these crimes are those who you might trust: friends and colleagues, people from your workplace, your child's soccer team, even your church.

Criminals have always preyed on the trust of individuals with offers too good to be true — and while the schemes might change, the underlying greed does not.

One victim of a large Ponzi scheme in Tennessee said, "He sat about four rows behind us in church. We were very good friends. We went to his house often. He was a brilliant man. That's how he was able to con people for eight years."

The FBI offers this summary of some of the frauds stopped by Operation Broken Trust and suggests a few ideas (at right) that can keep you from being taken.

And keep in mind, as columnist Lewis points out, that that most financial fraud is small-scale, not large.

[There are] penny-ante Ponzis just about everywhere.

You know, $10 million here, $50 million there. Many of them get only a brief in a local newspaper, aren't a matter for the Feds and don't generate loud complaints from victims.

The characters, the settings and the dramas differ, but Ponzis are all the same. Someone gains trust, promises profits that are too good to be true and fabricates statements. The money is then either blown in desperate trades or on mansions, cars, planes, art and jewelry....

Why do people keep falling for these sorry characters after Charlie Ponzi pulled his frauds a century ago? Colorado Securities Commissioner Fred Joseph, who has handled his share of Ponzis, puts it this way: "People want to believe."

Be wary.

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