Ponzi Victims Become Ponzi Schemers

A Pair of Victims
Become a Couple of Cons

01/19/10

Bernie Madoff stole billions, but two brothers in Michigan recently put a different twist on the traditional Ponzi scheme. They started out as willing participants in a get-rich-quick oil and gas scheme, only to learn it was all a fraud. Then, they decided to turn the tables...

Over the years, Jay and Eric Merkle had become well known and well liked in the community of Williamston and the surrounding area. They were successful and charismatic businessmen running their own company. They were active members of their church with plenty of family and friends.

But in 2004, they decided to take their lives in a different direction. That’s when they realized that they had invested in an oil and gas exploration venture that was nothing but a scam. Instead of contacting authorities, the brothers chose to take a criminal turn: they continued working with those who had conned them in the first place...in the hopes of keeping the scheme afloat and recouping some of their losses.

Stack of Cards in Pyramid Shape (Stock Image)

What is a Ponzi Scheme?

A Ponzi scheme is essentially an investment fraud wherein the operator promises high financial returns or dividends that are not available through traditional investments.

Instead of investing victims’ funds, the operator pays “dividends” to initial investors using the principle amounts “invested” by subsequent investors.

The scheme generally falls apart when the operator flees with all of the proceeds, or when a sufficient number of new investors cannot be found to allow the continued payment of “dividends.”

This type of scheme is named after Charles Ponzi of Boston, Massachusetts, who operated an extremely attractive investment scheme in which he guaranteed investors a 50 percent return on their investment in postal coupons. Although he was able to pay his initial investors, the scheme dissolved when he was unable to pay investors who entered the scheme later.

Tips to Avoid Ponzi Schemes:

- As with all investments, exercise due diligence in selecting investments and the people with whom you invest.

- Make sure you fully understand the investment before you invest your money.

See more common fraud schemes

Apparently, that wasn’t enough, as the Merkles decided to take their criminal activity to the next level—by launching their own Ponzi scheme.

They started by setting up their own front company—Platinum Business Industries (PBI)—ostensibly in the business of oil and gas exploration in Texas and Oklahoma. They promised potential investors high rates of return—up to six percent a month or 300 percent over three to five years. And they said that the risk was low, because even if no oil or gas was found, the land could be sold to recoup any money spent.

And where did they turn for their initial investors? To their family, friends, and fellow church members.

In traditional Ponzi style, it was all a house of cards. The investors’ money wasn’t used for oil and gas exploration. Instead, the Merkles used some of the funds to pay initial investors and used much of the rest to gamble on still more bogus get-rich-quick schemes (the brothers apparently didn’t learn their lesson as previous Ponzi victims).

After bleeding their own clients dry, the brothers recruited crooked brokers, tax advisors, investment advisors, and other financial representatives—some in other states and even Canada—to find more investors. Eventually, that well also ran dry. To calm investors down, the brothers claimed they had a Nigerian buyer for their previous oil and gas assets and just needed some more money to get his $400 million into the United States.

Our investigation of the Merkles began when we were tipped off by a bank that noticed more than a million dollars had been moved through an account owned by the brothers. And after painstakingly questioning hundreds of witnesses, examining thousands of bank documents, reviewing e-mail correspondence, and interviewing victims, we determined that the Merkles’ schemes were responsible for about 600 investors in more than 20 shell companies losing upwards of $50 million—many their entire life savings, including IRAs.

In the end, the brothers were convicted in court and given 10-year sentences (two other men who helped them also landed in jail).

Their story is a lesson for us all. First, contact the FBI or other authorities if you suspect criminal activity. And second, beware of scams that sound too good to be true. They always are.

Resources:
- Press release

07.13.10