Ponzi schemes seem to be everywhere. Since the Madoff fraud was discovered they have become the new staple of SEC enforcement. Many are frauds from the beginning, nothing but schemes through which fraudsters fleece unsuspecting investors, using their hard earned cash to live the good life until the fraud collapses.
Others stem from a legitimate businesses which encountered difficulty. Two recent cases illustrate how this can happen, one brought by the U.S. Attorney in Manhattan and the other by the SFO in London. The first centers on accountant Alan Ritter. For years Mr. Ritter operated a small accounting practice in Rockland County, New York. In 2001 he suffered more than $500,000 in losses from an unrelated business venture. To cover the losses he borrowed money from friends and clients, telling them it would be invested in real estate ventures. In fact he used the funds to cover the losses and finance his living expenses. Interest payments were made to the investors in true Ponzi fashion, with funds obtained from other investors.
As the scheme continued things got worse for Mr. Ritter. He began embezzling funds from several clients. Over the eleven year history of the scheme he misappropriated about $6 million. Eventually the scheme crashed. Mr. Ritter pleaded guilty to three counts of wire fraud. U.S. v. Ritter, Case No. 1:12-cr-00704 (S.D.N.Y. Sept. 14, 2012). He is scheduled to be sentenced on January 16, 2013.
The second centered on Andrew Lit, also an accountant and, in addition, a director of JD Lit (Firearms) Ltd. of New Port, South Wales. Since 1976 the family operated business sold sporting firearms and accessories and stored guns for clients. In 2004 the business encountered financial difficulty. He began disposing of firearms or retaining the proceeds which belonged to clients, falsifying the books to cover the malfeasance. Mr. Lit also began taking short term loans based on the claim that the funds would be used to purchase high value firearms that would be resold. Investors were to receive rates of return well above market by splitting the proceeds from the sales. In fact much of the money raised was used to repay other investors in Ponzi type payments.
Over all Mr. Litt raised about £57.8 million. The SFO estimates that investor losses will total about £8.2 million. JD Lit (Firearms) Ltd, is in bankruptcy. Mr. Litt pleaded guilty to two counts of fraudulent trading. He was sentenced to serve 32 months on one count and 16 on the other. The two sentences will run concurrently. The SFO is not seeking a forfeiture.
In the end the motivation for the scheme – simple greed or to try and salvage a business – is of no import, the result is the same. Investors lose their cash and the fraudster gets caught when the scheme collapses.