investing

5 ways to recover from a Ponzi scheme

Highlights
  • Go to the shoebox.
  • Visit the courthouse.
  • Claim losses for previous tax years.

Hey you, got some money you want to invest? This is a can't-miss deal; good, no, great returns; stable performance even in bad times; and to top it off, everything is guaranteed.

Interested?

Unfortunately for many investors, the answer was yes. But what they invested their money in wasn't some sort of special high-interest CD or high-tech stock trading system that couldn't lose. It was a Ponzi scheme, a fraud that uses cash from newer investors to pay those attractive returns to older investors.

That is, until the scheme collapses.

In the past several months, thousands of investors who thought they had accounts worth billions of dollars have discovered it was all illusory. Earlier this month, Bernard Madoff pleaded guilty in federal court to running a Ponzi scheme that prosecutors said could involve more than $64 billion, by far the largest such fraud ever. In February, regulators charged Robert Allen Stanford and several of his companies with operating an $8 billion investment fraud.

Government regulators and prosecutors also recently filed civil and criminal cases against a handful of other money managers involving tens to hundreds of millions of investors' dollars.

"They're all depressed," said New York tax attorney Harold Levine of his Madoff investor clients. "Clearly people's lives have changed. Some people are in denial. Some people understand it. They're all angry."

So what do you do if you've been caught up in one of these scams? Here are five suggestions that might help.

1. Go to the shoebox. The first thing a victim should do is collect as many records as he or she can find relating to the investment, according to Boyd Page, an attorney who specializes in representing investors at the Page Perry law firm in Atlanta.

That's important, because those involved in investment schemes often don't keep records, have destroyed them or the files are in disarray and not complete, Page says. Gather account statements, canceled checks you sent or checks sent to you. Also look for anything acknowledging your investment such as emails or letters that may have trumpeted the alleged performance.

2. Visit the courthouse. You can file a lawsuit to try to recover your money, but there are lots of variables with this avenue that can make a big difference in the end. Much of it has to do with who you sue and how much assets they have.

"Generally speaking, legal actions directly against the perpetrator have little likelihood of being economic," Page says.

There are several reasons for this. First, chances are good that whoever ran the Ponzi scheme was living life high off the hog -- private jet flights, fancy vacations, lots of lavish spending. Second, once a fraud is exposed, the remaining assets of the firm and its operators almost always are seized by the government or court-appointed trustee in bankruptcy court.

However, others who were involved in varying degrees with the fraud may also be liable and have additional assets, says Alan Cosner, a former IRS agent and attorney in East Brunswick, N.J. Perhaps there were people who took part in transactions related to the scheme who knew about it but didn't act, says attorney Ron Geffner, a partner with Sadis & Goldberg in New York and a former lawyer with the Securities and Exchange Commission.

In the Madoff case, there were "feeder funds" that placed money from their investors with Madoff, perhaps without those investors' knowledge. Unbeknownst to Loretta Weinberg, a New Jersey state senator, her financial adviser in California invested her money with Madoff. The result: Her life savings, more than $1 million, is gone.

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There also may be accounting firms, banks or other individuals who were negligent in not spotting the fraud, Page said. In February, the charitable foundation of Sen. Frank Lautenberg, D-N.J., and two of his children sued Madoff's brother Peter, who was the chief compliance officer and general counsel of Bernard L. Madoff Investment Securities. Peter Madoff has not been charged criminally in the case.

Some situations may exist in which individual victims have claims unique to them or a small group of investors, depending on how they became involved in the scheme and other factors, Page said. That could be helpful, especially if a fraud impacted hundreds or thousands of investors, all of whom are looking for ways to recover their money.

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