Every cloud has a silver lining, even the black cloud of recession.
One of the upsides is that fraudsters running Ponzi schemes hit a wall, as they can’t keep the scheme as their cash dries up.
The latest allegations of property fraud with a Ponzi scheme surround Canadian father and son team Frederick and Derek Elliott.
Lawyers have filed evidence at a Miami Court claiming the pair embezzled $100 million from more than 2,500 investors from all over the world in two separate fraud plots.
The first case, according to the court documents, involves $32 million raised from 1,600 investors between 1987 and 2001 for developing the Sun Village Resort in Puerto Plata, Dominican Republic.
The resort is advertised online by leading UK travel agents Firstchoice .
The Elliotts sold the resort hotel in 2004 as a timeshare. The resort remains unfinished with major buildings still under construction.
In a second case, the father and son are accused of raising millions in a similar scheme in Juan Dolio, also in the Dominican Republic, when they bought a former Sheraton hotel site in 2004. The development is unfinished.
Lawyers for the investors claim the pair spent the cash raised on both developments on a jet set lifestyle of private planes, yachts and gambling, as well as buying property for themselves instead of repaying investors.
A preliminary hearing is planned in Miami for April.
How do Ponzi schemes work?
The scam is named after Italian emigrant Charles Ponzi, who moved to the US in 1903.
Basically, the schemes offer a high return on investments that are impossible for the people running the Ponzi to fulfil.
The original investors pay in small amounts, generally to test the water and get their cash back, usually with a profit of more than 20%. They tell their associates, and more money comes in and then rather than withdrawing their cash, the original investors leave their money in.
The scheme issues them regular statements showing how much profit their ‘investment’ has made.
Unfortunately, only the first few investors receive anything back because the scammers pocket the money from the new investors.
This works fine while plenty of investors have cash to put in the scheme, but when a recession hits, cash is tighter and investors want their money out – only to find the scheme collapses because the scammers have emptied the coffers and disappeared.
A recent example of another failed Ponzi scheme is the $50 billion Madoff scandal in New York.
To be a successful Ponzi scammer, you have to know when to ditch the scheme, because eventually the fraud will collapse leaving the investors with little or no chance of regaining their cash.
Avoiding Ponzi schemes
Carry out your own due diligence about the firm and key people before investing any cash.
Also remember the old adage – if anything sounds too good to be true it usually is.
Photo credits: Larry via Flickr