Uncovering local corruption

By Leslie Wayne

Fraud, it seems, is breaking out all over. While the mega-fraud of Bernard L. Madoff captures the headlines, smaller, but similar Ponzi schemes – mini-Madoffs – are now being uncovered by regulators across the country.

Warren Buffett famously said that when the tide goes out you can see who’s been swimming naked. He was referring to the ebb and flow of financial markets. Now with the recent market collapse, these words from 2002 are certainly true today. A large number of fraudsters whose activities were hidden – and abetted – by the sky-high financial markets of the last for years are now being exposed and rounded up by federal authorities.

That gives reporters outside of the Madoff orbit of New York, the Hamptons and Palm Beach a chance to find out about shameless schemers operating in their own backyards. A deteriorating economy, greater investor skepticism and more regulatory oversight are combining to shine a light on con artists and slicksters who have been operating quietly and in the shadows for years.

As a result of the falling economy, and the Madoff scandal, a lot of innocent investors in these fraudulent schemes have been asking for their money back. These withdrawals then cause the enterprise to collapse. In a Ponzi scheme, new money comes in to pay off old investors. This fresh cash allows the scheme to flourish, while withdrawals can cause it to implode.

One place for reporters to start hunting is on the website of the Commodities Future Trading Commission, the main federal regulatory body. Not only is the C.F.T.C. stepping up its efforts, but the lawsuits posted on its site provide a road map for reporters, replete with colorful details of fraudulent promises that are often so outrageous, it is hard to imagine investors falling for them. But the carnival-like quality of the financial markets of the last few years caused many investors to throw caution out the window and believe promises too good to be true.

Fraud extends from coast to coast and beyond: From Hawaii to North Carolina, Texas to Florida. In big cities and small towns, smooth-talking confidence men offering returns of up to 100 percent a year stood ready to fleece trusting consumers. Collectively, these schemes have run up into the hundreds of millions of dollars – money that the government is trying to get back, often to no avail, for stricken investors. The Securities and Exchange Commission and the U.S. Attorney’s offices around the country work with the C.F.T.C. on these cases and are also sources of information.

Nearly forty cases enforcement cases have been posted on the C.F.T.C’s website since the start of this year. In Florida, millions of dollars remain unaccounted for in an allegedly fraudulent commodity scheme called Capital Blu Management. Around 100 investors lost $17 million from what they were told would be investments in foreign currency futures and options.

Instead, the money went to pay for luxury autos, private jet charters and a two-night $40,000 spree at a “gentleman’s club” for the three defendants charged by the government.

Capital Blu is fairly typical. In rural St. George, Utah, the government brought charges against a promoter offering “astonishing” returns of over 100 percent a year to investors in a commodity pool “superfund” that was open to investors with less than $100,000.

And in Texas, charges were brought against a promoter who, between 2001 and 2008, took in over $88 million by telling investors he could deliver 22 to 99 percent a year annual returns. What the promoter’s false financial statements did not show was that the money went to buy a 300-acre ranch, Tiffany jewelry and even an almost-completed airplane hanger.

Just as in the big Madoff scandal, the mini-Madoffs bring together human tragedy, complicated finances and real-life victims – rich themes for reporters to explore. Typically, the victims were not the wizards of Wall Street, but rather small investors who wanted to get a piece of the financial froth that they thought was only available to wealthy investors on an inside track.

In some cases, victims have banded together and filed lawsuits, which provide an avenue for reporters to locate some of the defrauded. Promoters often preyed on affinity groups – for instance, in South Florida, a smooth-talking Haitian preacher stole millions from trusting Haitian immigrants who handed him their hard-earned money, sometimes their life savings. These groups have frequently banded together in civil litigation.

As with any reporting, honing in a financial fraud – regardless of where it is – is a “connect the dots” kind of journalism. For a start, much of the basic scheme and compelling details are laid out in government documents. But that is just the beginning. Far too often, it seems like major financial stories take place in the financial capitals of the world. But the mini-Madoff phenomenon shows a way to localize a national story since the wreckage of these fraudsters actions is stretched, sadly, from coast-to-coast.

Leslie Wayne reports on business, finance and politics for The New York Times.