Florida Keys News - Key West Citizen
Friday, February 1, 2013
'Ponzi scheme' requires constant cash

One red flag that a business opportunity is merely a Ponzi scheme is the promise of a "guaranteed" return, according to the U.S. Securities and Exchange Commission.

"Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk," the SEC says on its website, www.sec.gov, under a section called "Ponzi Schemes: Frequently Asked Questions."

The Ponzi breed of investment fraud involves paying "returns" to early investors with the new money handed over by fresh investors.

"In Ponzi scheme fashion," Cay Clubs used investors' money to pay returns to early investors, according to a 23-page SEC complaint lodged against five people who purported to be real estate developers between 2004 and 2008.

But in order to keep the fraudulent money-maker alive, scammers must continuously attract new investors by promising them high returns at little or no risk of financial loss simply by forking over money.

Since there are no real earnings, a Ponzi ruse dies quickly without a constant flow of new money -- used by the hucksters to live off of or to invest into other schemes kept hidden from investors.

But a Ponzi can also flourish into the millions if investors keep coming.

In the Cay Clubs case, according to SEC investigators, the directors were able to artificially inflate the values of condos by selling them back and forth to each other before pawning it off on an "investor."

Using a different company name in 2004, three of the Cay Clubs directors now charged with fraud reportedly bought a Clearwater condo for $490,000 and sold it to another partner a month later for $859,900, the SEC said.

Later the same partner sold the condo for more than $1.2 million to a Cay Clubs investor, picking up a $38,000 commission.

That type of investing creates a false impression that the condos are appreciating in value.

Fraudsters often win over new fish by dazzling them with complex, intricate explanations of the purported business, or they pay off early investors as promised to earn a good reputation from satisfied customers.

"You keep getting new investors and in the meantime, nothing is really happening," said John Dick, who for years suspected a Cays Clubs-related investment by the Monroe County School Board in Marathon was too good to be true. "It almost always folds up."

The $7.4 million Marathon Manor purchase by the board, before Dick was elected, remains in dispute and essentially in the same condition as it was when purchased by the board in 2006.

Still, the five former Cay Clubs directors accused this week of violating the Securities and Exchange Acts between 2004 and 2008 are not facing criminal charges.

But the SEC complaint is in federal court and can lead to a trial in the civil realm.

If so, a civil trial can divulge signs of whether the case is headed to criminal prosecution, said Miami attorney Jay Tome, who handles securities litigation.

One telltale sign of possible criminal behavior, according to Tome is when a client invokes his constitutional right to remain silent while on the witness stand.

"That is when you know there is potential criminal activity afoot," said Tome. "A good lawyer will tell a client, you're going to lose the civil case but if you answer that question you're going to go to jail. So plead the Fifth."

Investors of Cay Clubs came from across the country. The complaint was filed in South Florida because Fred "Dave" Clark managed Cay Clubs' operations primarily out of an office in Key Largo, and three of the five defendants have lived in the Florida Keys.

A Ponzi scheme differs from a "pyramid" scam, which requires investors to make a payment and recruit other "distributors" in order to receive payment, the SEC said.

Ponzi scammers don't require recruitment and it is never disclosed that one investor's money is helping pay back an earlier investor.

The scheme's name comes from Charles Ponzi, who in the 1920s duped thousands of New England residents into investing in a postage stamp speculation deal. At a time when the annual interest rate for bank accounts was 5 percent, Ponzi promised a 50 percent return within 90 days, according to the SEC's account.

Bernard L. Madoff is serving a 150-year sentence in federal prison for orchestrating a multi-billion dollar Ponzi scheme that swindled money from thousands of investors. Unlike the promoters of many Ponzi schemes, Madoff did not promise hefty short-term investment returns. Instead, he provided phony account statements showing his investors moderate but consistently positive returns even when the market plummeted.

gfilosa@keysnews.com

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