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Ponzi CD buyers to pay back yields

By Claes Bell, CFA · Bankrate.com
Tuesday, January 29, 2013
Posted: 3 pm ET

Investors who profited from Allen Stanford's CD Ponzi scheme got some bad news Monday. They'll have to pay their CD yields back.

From David Lee at Courthouse News Service:

Hundreds of investors who earned interest on the phony certificates of deposit in R. Allen Stanford's Ponzi scheme cannot keep those profits, a federal judge ruled.

In a 32-page order, U.S. District Judge David Godbey granted partial summary judgment to court-appointed receiver Ralph Janvey.

The Dallas attorney has launched several dozen federal complaints for disgorgement and fraudulent transfer against former Stanford entities and employees, individual investors, and recipients of Ponzi scheme proceeds, including Texas A&M University, the ATP Tour, the Miami Heat, the PGA Tour, the University of Miami, the Republican National Committee and the Democratic Congressional Campaign Committee.

"The court recognizes that forcing net winners to pay back interest payments will cause some pain," Godbey wrote. "But for victims of a Ponzi scheme, everyone is a loser. And the net winners will be in far better shape, having recovered at least their principal, than most Stanford victims, who lost everything."

So what's the rationale for "clawing back" money from investors who unwittingly made money from a Ponzi scheme?

Ponzi schemes work by using the promise of lavish returns as bait and Allen Stanford's "bank" was no different, offering one-year CD rates above 7 percent in 2008, a year in which U.S. CD rates averaged around 4 percent.

There are almost always unwitting investors who pull their money out in time to cash in on those returns and end up ahead. But because those "profits" are made up of the funds stolen from other investors' accounts, courts usually end up clawing back those profits and distributing them to victims.

For CD investors, the take-away is to watch out for CD deals that seem too good to be true. Even if you're smart enough to get out in time to avoid a major loss, you'll still likely end up poorer than you would have by putting your money in lower-returning plain-Jane CDs.

But the list of major institutional investors named in the judgment is a testament to how hard it can sometimes be to distinguish between a great CD investment and a fraud.

Do you think you could scope out fraud?

Follow me on Twitter: @ClaesBell

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