Investment Fraud – The Right Response Pays Dividends

The term ‘Ponzi Scheme’ is appearing in the news more frequently than ever before. Is there a sudden increase in the number of fraudulent investments these days? External market forces, such as the contracting economy, have put pressure on capital markets, forcing investments of all types to take a beating. With the recent decline in the economy, investors are choosing to withdraw their funds based on underlying market fundamentals. 

While investments based on solid business foundations will likely rebound out of the economic downturn, other “investments”, like Ponzi Schemes, are getting exposed for their false principles and subsequently collapsing. As the prevalence of broken Ponzi Schemes emerge, lawyers need to take a collaborative approach to increase the likelihood of assisting their clients who may be entrenched in this type of situation.

If an investment seems too good to be true, it typically is. Ponzi schemes and other investment frauds share an underlying principle -- new investors pay the “returns” to old investors. Ponzi schemes often offer attractive features such as high rate of returns and preferential tax treatment. Generally, early investors receive the promised returns and become the best source of recruiting new investors as they tend to refer personal contacts to invest as well. To attract new money, those behind the scheme use powerful tools of demonstrating wealth and success to lure in high-profile individuals. The system becomes flawed when it becomes difficult to attract new investors, like in times of an economic downturn. This forces the scheme to collapse when the old investors can’t receive their returns.

In the situations where legal action is required, criminal investigations around investment fraud are very time consuming. Due to the lack of resources, law enforcement is not mandated to ensure financial recovery for investors. This requires lawyers to play a larger role in bringing justice to their clients. For lawyers, a little strategy early on will improve the chances of litigation success. Legal options can include:

• Bankruptcy and Insolvency Act – contingent upon the structure of the scheme, this may be an option to consider as it preserves the assets and provides additional tools to help gather evidence.
• Civil action – the best approach for a quick action is a tort or class action
• Injunctions – A variety of injunctions can be issued to help gather evidence and take legal action:
  • Mareva will freeze world-wide assets of the rogue.
  • Norwich Pharmacal orders third party sources, like banks, to help gather evidence.
  • Anton Pillar orders to gather evidence from the rogue directly.

A partnership with an Investigative and Forensic Accountant (IFA) can prove to be your best asset in responding to investment fraud. IFAs can help to identify deviations from normal business practices and accounting standards and assess the viability of the business operation reportedly supporting the investment scheme. This is critical to distinguishing between a failed business venture and a scam. They can also trace the flow of funds from investors to its most recent location, identifying and tracing global assets controlled by the rogues. Through the use of computer forensics, investigative interviews and other techniques, not traditionally employed by auditors, it is possible to uncover key evidence towards proving your clients’ case and satisfying a judgment.

Ponzi schemes and other investment frauds are typically motivated by greed. In many cases, identifiable assets can be used to restore a portion of investor losses. The key to a successful outcome for victims of investment fraud depends on the early assembly of a multi-disciplinary team to develop and execute a winning strategy.

Greg Draper, CGA, DIFA, CFE, is the Investigative & Forensic Services Leader at Meyers Norris Penny LLP. He is a former RCMP officer who investigated money laundering and capital market fraud offences.

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