Their names have become legendary. Charles Ponzi. Bernie Madoff. Samuel Bankman-Fried. Enron. Their Ponzi schemes and fraud that have tricked people into worthless investments have made them forever infamous.
Investment scams and Ponzi schemes are, unfortunately, widespread in our communities as well. So are cases where people give their money to people who aren’t con artists but don’t really know what they are doing.
Experts in scams say that even the smartest people—even experts on scams—can be fooled. Con artists use a number of techniques to get money out of their marks. And sometimes we end up in deals that are wrong for us, even if they technically aren’t scams, because of the same psychological phenomena that scammers use.
Targeting people in their own community—known as affinity scams—helps, because people trust people from their own communities. They use language that touches on our biases and how we think about ourselves, whether we think of ourselves as savvy investors or as people with a lot of empathy.
There is a common bias toward optimism; we all believe that things will turn out well for us. That blinds us.
Sometimes we feel pressured to do a deal quickly. Sometimes we feel desperate for money. Scammers know how to target these pressure points on their victims and get money out of them.
In the following pages, we look at stories of fraud and foolish investments, and we speak with experts about the scams and dangerous investments that exist in our communities, as well as what we need to do to keep ourselves safe from them.
Do you think there’s been an uptick in scams in our community, or is history just repeating itself?
I wouldn’t necessarily say that there are more of these cases, but the punishment is more severe than it was years ago. Many years ago, if you committed fraud within the community, you either worked out a payment plan with the victims or they didn’t go to the government because you were a friend or neighbor or because of the issue of mesirah, so people didn’t know about it. Today, these types of things are publicized, so knowledge of them has increased.
There are two elements to a Ponzi scheme. There’s the crime, and then there’s the civil aspect, where people try to recover their money. I would imagine that the investors aren’t interested in putting the guy in prison, because the possibility of recovery would be reduced.
That has not been my experience. When a Ponzi scheme fails, it’s very rare that the investors are able to get their money back unless the person pleads guilty and the court orders restitution. I just had a case where a victim received several million dollars because the court ordered restitution. Some people in the community created a fund and the perpetrator ended up repaying the victim a couple of million dollars, which wasn’t all of the money he lost. As a result, the judge gave the defendant a year behind bars. Had the defendant come to court owing all that money without making an effort to pay it back, I think the sentence would have been substantially harsher. In federal court, a lot depends on who your case is assigned to.
Is there a difference between state and federal criminal prosecutions?
Yes. In a state prosecution, you can work out a plea in advance with a promise of what the sentence will be, and that becomes part of the plea agreement. In federal court, however, that’s never the case. Rarely will a prosecutor agree to recommend a specific sentence. If you are cooperating and provide what they call “substantial assistance to the government,” they can recommend leniency or a lower sentence, but the ultimate decision is up to the court. In my experience, the difference between judges may determine whether you receive ten years or 18 months.
Some judges have a very sympathetic philosophy when it comes to imposing sentences, whereas other judges aren’t at all sympathetic, especially in a case where you take advantage of people who aren’t very sophisticated or have a lot of money. The defendant’s actions are therefore seen as more egregious. A lot of people in the community who agree to invest in what turns out to be a Ponzi scheme simply rely on the representations made by the guy who’s committing the fraud.
My advice is that if you’re sitting next to someone in shul who approaches you with an investment opportunity that sounds too good to be true, it often isn’t true. You really need to do some investigation. Speak to a lawyer or accountant to have him or her examine the proposal. If a frum lawyer who is really good and honest looks at some of these investment opportunities, I think he can spot red flags and advise you to stay away.
You said something very interesting about the difference between federal and state court. When a person is being prosecuted in federal court there’s less of an incentive to plead guilty than in state court, and it might pay to just go through the trial and hope for the best.
That’s not always the case. You do get credit for accepting responsibility. There’s a feeling among most federal judges that someone who accepts responsibility and is able to show the court real contrition and remorse is deserving of a break on sentencing. Some judges will even give a substantial variance from what the guidelines would suggest for the crime. Sometimes if you go to trial and are convicted, the judges won’t punish you for going to trial, but it does create a whole series of issues that you don’t confront when you plead guilty. When you go to trial, if you can show that you did not intend to defraud anyone, then G-d bless you. But if you go to trial and choose to testify and the jury doesn’t believe you, the court can consider what they view as perjury in deciding what sentence to give you.
That’s why some of these cases can’t be tried. Some cases just can’t be won, because you’re going to have ten people come into court and tell the same story and show that the payments that were given to the first group of investors came from later investors. Eventually, in a Ponzi scheme, the whole investment comes apart. The late investors didn’t get anything and the early investors got some payments, but nowhere near what they invested. If someone comes to you and says, “If you invest a million dollars, I’m going to give you 12% every month,” I think you should look at that with some degree of skepticism.
You said that in most Ponzi scheme cases there’s no pot of gold at the end of the rainbow; all of the assets are depleted and there’s nothing left. However, in the case of the most recent famous schemer, Bernie Madoff, they were able to collect a lot of money from him.
The Madoff Ponzi scheme was different from the way Ponzi schemes usually work. A lot of money was ultimately recovered for Madoff’s victims, but that’s because there were a lot of lawsuits against banks and brokerage houses that should have known that it was fraudulent. In other words, it wasn’t really recovered from Madoff. He did invest certain monies, and there were assets they were able to look to recover money from, but it took years and didn’t diminish the crime he was accused of. In most Ponzi schemes, such as smaller ones that affect the frum community, there’s no money available at the end of the day. The assets always go to pay older investors with any money they retrieve from newer ones. They borrow money from A, then they get investor B and use his money to pay the interest they promised to investor A.
There’s a new term that at least one judge has used in a case I was involved in as an attorney. She used the term “affinity fraud.” That was a case where someone from the Orthodox community preyed on people he knew. These were the people he davened and learned with, so no one suspected him. In the end, there was very little if any money to pay anyone. They could sue him, of course, but suing someone who’s sitting in prison is a difficult undertaking. Many lawyers don’t want to take these cases because there’s really no point.
Benjamin Brafman is an American criminal defense attorney and founder of the Manhattan-based law firm Brafman & Associates.
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