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Investor Beware:

Tough Economic Times Opens up Opportunity for Ponzi Schemes

Kessler International Investigates Investment Scams

New York, New York, July 30, 2008—Kessler International, the world’s premier forensic accounting, computer forensics and corporate investigation strategies firm, has completed a survey into fraudulent loan operations that take advantage of investors seeking a high rate of return. Kessler found that almost 98 percent of the loan operations paying exorbitant rates of return are either Ponzi or pyramid schemes.

Ponzi schemes, named for the notorious 1920s con artist, Charles Ponzi, are a kind of pyramid scheme in which investors are lured with promises of unique opportunities producing high returns.  For awhile they may get those returns, and that’s the hook.  What they don't know is that their money is not really being invested in anything at all.  The interest they receive is money being paid in by later investors.

"In these economic times, people are looking for ways to make their money work for them, and there are companies that prey on that," said President and CEO Michael G. Kessler.  "Through recent investigations, we've found that many of these so-called opportunities are frauds and scams, and any potential investor is susceptible, from the novice to savvy financiers."

Beyond the common risks associated with any investment, a recent investigation into a New York-based firm that deals in commercial and bridge loans—high-interest short-term loans that are used until a person or company secures permanent financing or removes an existing obligation—found questionable practices.  First, its president, like Ponzi himself, had already been convicted of and served time for previous felony offenses related to frauds and swindles in financial dealings.  The company is currently paying 14-15 percent interest on investments, certainly a come-on to attract investors. 

One common type of Ponzi scheme related to such “bridge loan” companies may go as follows: John Doe wants to buy a profitable liquor store business, but in order to get the upfront cash required to do so, he has to sell off a dry cleaning business that he owns.  He is prepared to offer promissory notes paying 20-50 percent within six to nine months.  A loan company provides investors the opportunity to put up the money with the promise of a high return.

However, in this case, there is no John Doe.  The promoter uses the borrowed money for his personal use.  The operation is fueled by the many investors who instead of cashing their promissory notes upon maturity, agreed to new ones that they thought would allow their capital and profit to accumulate. 

"It comes down to greed and it’s only a matter of time before the bubble bursts," Kessler added.  "Many organizations that offer such opportunities to a private lender are dealing in shady if not illegal dealings, and it's risky.  There are ways to protect yourself.  If something seems too good to be true, it is. Follow your instincts, and when in doubt, say no."

The following are some potential red flags and ways of protecting yourself from becoming a victim of such a scheme:

• Does the investment return sound better than what is offered in the marketplace?  If so, you should question its legitimacy.
• Ask questions and request detailed information in writing.  If the promoter is reluctant to provide detailed information, it’s a tip-off that this “investment opportunity” may be a Ponzi scheme.
• Are investors encouraged to reinvest the profits rather than take a payout?  This is a sign that the promoter is using their money to keep the pyramid going.
• Beware of promises of high, guaranteed profits.  If it seems like a get-rich-quick scheme, it probably is, and it will most likely backfire on you.
• Check out the promoter’s background.  Information is power and the key to protecting yourself from becoming party to such a scam.

For years, Kessler International has been using its expertise in accounting, computer forensics and corporate fraud to investigate such scams.  Established in 1988, Kessler International's satisfied clients are comprised of an extensive and distinguished list of Fortune 500 companies and prestigious law firms worldwide.  Its diverse staff includes former prosecutors, former law enforcement agents, attorneys, certified forensic accountants, CPAs, certified internal controls auditors, licensed investigators and researchers.

For more information on investment fraud, visit Kessler International’s website at www.investigation.com or call (212) 286-9100.

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