S6:E11 | A Comprehensive Look at Ponzi Schemes – Lessons From The Front Lines | Compliance in Context

Welcome back to the Compliance In Context podcast! On today’s show, we will be providing a comprehensive, deep-dive look at Ponzi schemes—what are they, historical facts and impact, themes and trends, and some best practices to keep in mind to help prevent these types of frauds from occurring inside your firms and with any underlying clients. To help guide us through this important topic and share some fantastic insights for our listeners, we welcome in Daniel Brinks, a Partner with StoneTurn and former regulator who spent more than 15 years at the SEC, most recently serving as a forensic account in the SEC’s Division of Enforcement..

Show

Interview with Daniel Brinks

• Background on Ponzi Schemes
• What are the trends and are there early-detection red flags?
• Why do some fall apart at 18 months versus others that last 10 years?
• How do the feeder frauds operate?
• Why do Ponzi schemes have an air of legitimacy?
• What are the similar characteristics in Ponzi Schemes?
• Custody Rule Impact
• Why has the total number of Ponzi schemes declined in recent years?
• How do compliance officers make sure to prevent these frauds from occuring?

Quotes

05:39: “So his scheme lasted eight months. He raised, you know, $20 million. But I think that the hallmarks of his scheme are still the hallmarks of what we see today. So the hallmarks of the original Ponzi scheme, a promise of high return, low risk…an exotic investment strategy, then the theft of assets, fake account statements. And I think the hallmark of a true Ponzi scheme is the recycling of assets, where you're using the investments of new investors to meet redemption requests from prior investors.” – Daniel Brinks

08:53: “I think the unfortunate and sad truth is that most Ponzi schemes are only uncovered when investors start bringing them to the attention of regulators. So the SEC has a TCR system, and when investors can't get their money back from schemers, they start reporting, 'Where's my money?' And then the SEC starts investigating it. That's unfortunately how most of these schemes fall apart, when they can no longer meet redemption requests and people start making complaints.” – Daniel Brinks

13:44: “I think the two characteristics that exist that investors and investment advisors should be on the lookout for the most is lack of transparency…the hard to get real answers on pieces of paper, statements. Think about as a scheme grows from ten investors to 100 or 200 investors, now you're sending quarterly statements to 200 investors. Like, that's a big administrative lift that probably most schemers don't have the ability to come up with rational answers for, where you're manufacturing complete trading histories that tie out, you know, multiple sets of books. It's really complicated to have multiple sets of books. So when schemes seem to get outside the realm of what people can do easily, information gets harder and harder to come by, and people should take that as a real warning flag when they're not getting, you know, account statements and things like that, or if the account statements look weird, right? They don’t look exactly what you would expect they would look like from a core custodian.” – Daniel Brinks

17:49: “I think another explanation for why [Ponzi schemes have declined] could be because we've generally been in a strong economic cycle. So, economic recessions cause increased numbers of redemption requests, and that puts a lot of pressure on the fund, and it makes them harder to ma- make, to meet those redemption requests. And that's when, whenever there's a recession, we see the number of Ponzi schemes that are prosecuted spike almost immediately. And I think the current strong economic cycle kind of has allowed frauds to go under the radar.” – Daniel Brinks