According to the federal complaint filed, Morris sold unregistered and non-exempt promissory notes to dozens of investors between March 2007 and January 2009.  Investors were told they were investing in “risk free” high-yield notes. The principal was to be deposited into a secure account and only used for “verification of deposit” purposes. Leveraging the money in the account, Morris promised returns of 20% per month.

Morris guaranteed the deposits would never leave his account. According to the SEC, Morris used the money to purchase a luxury home and several sports cars. Like most Ponzi schemes, Morris also used a portion of the money to pay early investors who wished to cash out.

Fraudsters will frequently pay a few investors the promised rate of return. These happy customers create an illusion of safety for the investors that follow.

Morris isn’t the only one charged in this Ponzi scheme. He had help. The government has charged James Haley, Jay Linford, Cornerstone Capital Fund and Vantage Point Capital with selling the bogus high yield notes. Morris’ own lawyer, Luc Nguyen, was also charged in the scheme.

Although every Ponzi scheme has common characteristics, the greed in this case is exceptional. The government says that co-defendant James Haley was himself scammed by Morris, although that didn’t stop Haley from compounding the fraud.

Prosecutors says that Morris told Haley that he had come across an “exclusive investment opportunity” started by the owner of the Houston Astros. The fund was closed to new investors and was claimed to have generated 20% monthly returns for the preceding 8 years. Conveniently, Morris called Haley several days later and said one of the investors had died creating an opening.

Without performing any due diligence, Haley began soliciting investment funds from his friends and neighbors. The government says that Haley simply repeated Morris’ ridiculous claims.  At some point, Haley crossed the line from negligence and became an active fraudster himself by telling later investors that he “owned” the fund.

The greed doesn’t stop there. Around June of 2007, Morris and Haley hired Nguyen to perform legal work. Nguyen apparently did more than just represent the two. He began soliciting additional investors, telling them that he had verified the legitimacy of the fund and had spoken with the banks and private traders involved in the fund. He also told investors that he had invested his own money in the fund. All false says the SEC.

Nguyen was paid $58,000 for his legal work but received an additional $330,000 in commissions.

The greed still doesn’t end. Morris met co-defendant Jay Linford at an investor seminar. Not satisfied with claims of 20% returns in just 30 days, Linwood raised another $1 million by telling some investors that the fund paid returns as high as 100% in just 7 days. That is an annual rate of return of over 5000% without compounding!

No Ponzi scheme can last long with the rates that Morris and the others were advertising.  The scheme began to unravel in April 2008 when some investors were unable to cash out. Morris began spinning a variety of tales including a story that “Homeland Security” had frozen the accounts. By October of 2008, Morris was allegedly forging phony bank statements in an effort to buy time. Even while the fraud was unraveling, Morris continued to take in additional funds.

The government has charged the group with multiple counts of securities fraud. The FBI and local officials are assisting in the investigation.

Unfortunately many of the investors who lost their money had minimal net worth and marginal earnings. Some even borrowed money to fund their investment. Many lost their entire life savings.

[Note: This story is based on court records and published reports. The case was just filed on January 7^th of 2011]

Step Two: Wire $100 million to outside bank account.

Step Three: Repeat as necessary.

Sixty Minutes ran a terrific segment about Marc Dreier yesterday. He masterminded a Ponzi Scheme that totaled $400 million and funded his once powerful law firm on Park Avenue (now defunct). If you haven't seen the report, take a look. It's worth watching.

A few of Dreier's charades fall into that hallmark category of financial scandals—you can't make this stuff up. He describes one hedge fund that invested $100 million, even though it performed virtually no due diligence. His explanation:

The more money you look for, the fewer questions people ask sometimes.

Elliott Associates, the fund that invested $100 million, was not alone. Here is a list of the other gods of Greenwich, hat tip to Wall Street Folly, that took financial hits. Among them is Paulson & Co., which almost seems like poetic justice in the wake of the Abacus CDOs.

 

• Paulson & Co
• Elliott Associates
• Davidson, Kempner
• Baupost
• DellaCamera
• Sandell Asset Management
• Fortress Capital or Fortress Investment Group
• Perella Weinberg
• Eton Park
• GSO
• Meyer Venture Partners
• Concordia Partners
• Enterprise Fund Ltd
• Archery
• MEA Properties
• Four Winds
• Bennington
• Novatar
• Verition
• Berdon LLP
• Whippoorwill
• Bell Canada
• Ontario Teachers Pension fund

The television show, Inside Edition, conducted an excellent interview with multiple contributors. I won’t get the following exchange 100 percent right. But these words are really close.

Inside Edition: “It’s been reported that Madoff said, ‘Screw the victims.’ What’s your response?”

Answer in chorus: “He already did.”

The gathering was no “pity party.” Nor is the book as one of the authors, page 145, asserted. I came away from the event with at least three nagging questions that transcend personal reversals of fortune:

1. Can the distribution of assets be fair when a) the trustee is paid by SIPC and b) SIPC’s interests run counter to those of the victims?
2. Why are investors in feeder funds not eligible for SIPC payments? Their money was green, too, right?
3. When will we see a hard separation between the custodial and money management functions so that one entity never controls the entire flow of information to investors?

It’s been about eighteen months since Madoff’s confession. Now he’s talking trash behind bars, and there’s a financial reform bill on the way to the White House for the President’s signature. But I still wonder if investors are any safer from financial predators.

What do you think?

Norb Vonnegut