The revelation of Bernard Madoff’s colossal $60 billion Ponzi scheme in December shocked a country that already was reeling from the effects of unchecked greed and speculation on its economy. While the Madoff scandal was still unfolding, the nation learned in February that the U.S. Securities and Exchange Commission had charged billionaire R. Allen Stanford with running a separate Ponzi scheme that could total as much as $8 billion. Ponzi schemes, named for an infamous 1920 swindle conducted by Charles Ponzi, attract investments on the promise of high-interest returns, but actually use money from later investors to pay off earlier investors. Sensational stories of fraud and unscrupulous business practices seem to be commonplace lately in the national headlines, occurring on a variety of scales.
One recently unfolded in North Carolina. On Dec. 5, after a weeklong trial, a Wilson County jury found that two elderly women in their community had been defrauded in a national Ponzi scheme that was responsible for the loss of about $70 million. The jury returned the women’s investments and imposed punitive damages of $1.25 million against the defendant, an investment broker, for taking advantage of the women and knowingly misleading them about their investments.
As the investments were marketed from 2002 through 2004, investors would purchase large advertising billboards in units of $20,000 from Mobile Billboards of America. The “mobile billboards” would be placed as advertisements on the sides of large trucks that would travel through major U.S. cities. Because the investors were technically the owners of those mobile billboards, their investment returns were comprised of lease payments from an advertising-placement company related to MBA.
The monthly lease payments — at a rate of 13.49% annual interest — supposedly came from the advertising revenues. These arrangements are typically referred to as “sale and leaseback” programs. At the end of a seven-year period, MBA would repurchase each billboard unit for the original price paid, so that the investment appeared to be a method of preserving principal while making seven years of competitive interest. Hundreds of North Carolina investors, mostly senior citizens, bought into the mobile billboards scheme, believing that their money was safe.
In reality, the sale and leaseback program was a Ponzi scheme, where the lease payments came from investors’ own money. The company evaded securities regulations by giving investors the option of operating their own advertising business — calling the investments “business opportunities.” The law essentially defines securities as investments made with the expectation of profit from another’s efforts. By including the illusion of direct control over these mobile billboards, MBA and its agents pretended that these investments were not securities. All the defrauded investors chose the passive investment option and had no oversight over placing advertisements on their mobile billboards.
The fraud went unnoticed for a couple of years until MBA and its sales agents could no longer get enough new investors to maintain the monthly “lease” payments and investors started complaining. When regulators pursued MBA, they discovered that millions had disappeared and that the company had run a similar scheme a few years earlier based on the sale and leaseback of pay phones.
The defendant, one of four sales agents in a Cary-based insurance brokerage, would earn the trust of older investors so that he could induce the purchase of these investments. He bought mailing lists targeted at seniors and sent them newsletters and invitations to free lunches and seminars. Religion was a regular topic in the defendant’s sales pitches as he portrayed himself as a trustworthy, pious man. He told investors that there was little or no risk involved in these mobile-billboard investments. However, he failed to disclose he was making commissions as high as 20% and failed to advise senior citizens that the initial “lease payments” would actually come from their own investment money and not from mobile billboard revenues.
The agent’s defense was that he had no way of knowing that these investments were fraudulent and blamed the persons who played a larger role in the Ponzi scheme. According to him, he was one of many small fish in the organization who himself was duped into selling bad investments. Indeed, six MBA representatives and sales agents are now in federal prison. One of those was the defendant’s insurance-brokerage partner, who traveled the country teaching other sales agents how to market the investments.
Nevertheless, the defendant admitted knowing and not disclosing that for the first year, the monthly lease payments would not come from advertising revenues but would instead come from the investors’ own money. More importantly, a week after the N.C. secretary of state issued a cease-and-desist order to MBA in April 2004, the defendant accepted an installment payment of tens of thousands of dollars from an elderly woman. Instead of returning her money due to the secretary of state’s investigation, the defendant passed it on to MBA so that he could be credited with another 20% commission.
In total, the defendant individually was responsible for the loss of roughly $1 million in retiree wealth. Most of the victims were from the Triangle. A court-appointed administrator for MBA has attempted to recover these losses from the company’s assets and the individual sales agents but estimates that less than 5% of the money will be returned. These two women were the only plaintiffs known to reach a civil jury verdict arising out of the MBA fraud. Although recovering their losses was important, these women primarily were concerned with having their day in court and publicly airing the violation of trust from which they suffered. The 12 jurors strongly agreed with them and sent a resounding message that they do not tolerate fraud being perpetrated upon their fellow citizens.
Individuals and smaller business in North Carolina must be especially vigilant about fraudulent investments and business opportunities. The best frauds are disguised as legitimate offerings, and victims only discover that they have been cheated when it is too late for any recourse. The familiar phrase, “If it sounds too good to be true, it probably is,” holds true as ever. If you are ever presented what appears to be a lucrative investment, ask questions until you are satisfied you are being told the truth and consult professionals and government authorities. Yet sometimes even due diligence cannot protect you from being defrauded — and in those cases, swift and persistent legal action will be necessary.
