Wave of anti-Ponzi laws coming =97 but will they work?

Tresa Baldas / Staff reporter

March 9, 2009

State lawmakers and Congress are trying to = tackle Ponzi=20 schemes through legislation, but lawyers are skeptical about whether new = laws=20 can stop the scams, much less snare them.

With plenty of fraud = statutes=20 already on the books, attorneys argue, it's not more laws that are = needed but=20 more oversight, and more victims who are willing to come forward and = name the=20 con artists.

"Our fraud statutes can certainly cover these = schemes =97 it's=20 just that the government needs to be aware of them, and the only way to = be aware=20 of them is if an investor smells a rat, or an accountant or lawyer = smells a=20 rat," said Paul Monnin, a partner at DLA Piper and a former federal = prosecutor=20 who prosecuted several Ponzi schemes.

"You can have all the FBI = agents=20 in the world, and unless they're involved as investors, they're not = going to=20 know about [a fraud] unless someone drops a dime."

And files a=20 lawsuit.

"A nonlegislative way to address this is to encourage = civil=20 plaintiffs who suspect themselves of having been defrauded in a larger = scheme to=20 contact the authorities," Monnin said.

In recent months, several = Ponzi=20 schemes have popped up across the country. It started with disgraced = financier=20 Bernard L. Madoff, charged in December with running a $50 billion Ponzi = scheme=20 that defrauded millions of investors.

Shortly after came the = arrest of=20 76-year-old Arthur Nadel, a Florida fund manager and philanthropist who = was=20 charged in January with defrauding investors at six Florida-based hedge = funds of=20 potentially $300 million.

January also saw the surrender of = Nicholas=20 Cosmo, who was arrested and charged with running a $370 million mail = fraud Ponzi=20 scam after surrendering to U.S. authorities at a suburban New York train = station.

'Ponzi cops'

Meanwhile, = lawmakers across=20 the country are taking a crack at Ponzi schemes through = legislation.

A=20 proposed bill in Florida would give a special team of elite state = prosecutors=20 the power to prosecute Ponzi schemes by adding securities fraud and = money=20 laundering to the list of crimes they can prosecute.

Proposed = legislation=20 in Connecticut would force hedge funds to provide greater transparency = by=20 disclosing their fees and other information about investment strategies, = and=20 require them to obtain a license and conduct an annual audit. =

Congress=20 has proposed a similar hedge fund bill, which would require funds worth = more=20 than $50 million to regularly disclose the value of their investments, = and abide=20 by stricter oversight and greater transparency in both their operations = and=20 investments.

Also on Capitol Hill, legislators have proposed a = bill to=20 amend the Internal Revenue Code to provide tax relief to individuals = harmed by=20 Ponzi schemes who have paid taxes on "phantom" earned income. Another = proposed=20 federal bill is asking for $110 million to hire 500 new FBI agents, 50 = new=20 assistant U.S. attorneys and 100 new U.S. Securities and Exchange = Commission=20 (SEC) enforcement officials to crack down on Ponzi crimes.

More = Ponzi=20 cops sound good to Florida securities attorney Burton Wiand, who is the=20 court-appointed receiver in the highly watched case of Arthur Nadel, the = Florida=20 hedge fund manager accused of ripping off investors of as much as $350 = million.=20 Nadel is charged with securities fraud and faces life in = prison.

"We need=20 regulators who have their antennae up and are much more vigilant to see = these=20 kinds of things," Wiand said. "We need to have people walking around = with a big=20 stick."

Wiand, a financial services litigator at Tampa, = Fla.-based Fowler=20 White Boggs, believes a main reason Ponzi schemes have exploded in = recent years=20 is a lack of disclosure and registry requirements. Some investment = operators,=20 particularly smaller ones, don't have to register with any state or = federal=20 authorities, he said, nor are they audited.

That needs to change, = Wiand=20 said.

"Investment advisement registry is not that onerous, but it = certainly would let the public and regulators know who is doing this = business,"=20 Wiand said.

Open it up

It would also help = if=20 investment managers were forced to be more open about their investments, = said=20 Stefani Eisenstat, a securities and commercial litigator at Riney = Palter, a=20 Dallas corporate litigation boutique.

"Ongoing disclosure = requirements=20 is what needs to be beefed up," Eisenstat said.

She views = federal=20 legislation that would require investment managers to be more = transparent with=20 their operations as a good thing. But, she stressed, legislation is not = the=20 cure-all for Ponzi schemes.

"There's nothing lawmakers and = regulators can=20 do to protect people from themselves," Eisenstat said. "Investors need = to=20 continually be reminded that no one but them can guarantee their = investments . .=20 . .As the saying goes, 'If something appears too good to be true, it = usually=20 is.' "

Investors also can't count on regulations and federal = reporting=20 requirements to be foolproof, said Frank Razzano, a Washington partner = at=20 Philadelphia-based Pepper Hamilton who focuses his practice on SEC=20 enforcement.

Razzano noted that fraud continues to persist even = in=20 regulated entities. For example, he noted, the cooked-books scandal = involving=20 Enron Corp. and WorldCom Inc. occurred under the eyes of auditors and=20 accountants, despite federal reporting requirements.

So what's = the=20 answer?

"The best solution to inhibiting fraud is vigorous = enforcement,"=20 Razzano said. "It is vital [that] the perpetrator recognize that if he = or she=20 violates society's norms, apprehension and punishment will be certain to = follow."

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