Enduring Lure of Ponzi Schemes
Common Fraud
Ponzi Endures With Lure of Riches
03/12/07
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| James E. Brown Jr. spent money obtained from investors to buy 28 luxury vehicles for himself and his staff. Brown’s investment ploy was a classic Ponzi scheme that brought in about $8 million. His seized vehicles, including a $450,000 Mercedes-Benz, are to be auctioned this month. |
The sales pitch was seductive: the young visionary behind Brown Investment Services in Virginia guaranteed investors he would double their money in 30 business days by tapping into the complex world of foreign currency trading.
In investment seminars in the Richmond area last summer, James E. Brown Jr. freely displayed the trappings of his own financial success—luxury cars, jewelry, and a doting staff—as he educated potential investors about his expertise trading on the Foreign Currency Exchange Market (FOREX). Lingering doubts about the 21-year-old financial guru’s legitimacy were softened somewhat by happy investors who had already received their promised returns—and then some.
At its peak, Brown Investments had over 350 investors, including churches and small businesses, who entrusted the company’s president and owner with about $8 million. There was a major sticking point, however. While he dabbled a little in foreign currencies market, he was putting the majority of the money into his own bank account and paying “dividends” to old investors with the cash from new investors. This was a classic Ponzi scheme.
“Each month he was probably sweating,” said Special Agent Sherri Onks, who investigated the case and specializes in white-collar crimes in our Richmond field office. Had all his investors cashed in at once, Brown’s scheme would have come crashing down. But the essence of Ponzi schemes is to dangle the promise of riches down the line—if you can double your money in a month, imagine the return after two months, or three—so many investors let it ride.
“A lot of the people weren’t cashing out,” said Onks. “They wanted the big pay-out.”
It was Brown, however, who was getting rich. While he spent about $2.6 million paying off investors, he spent another $1.9 million on 28 luxury cars for himself and his staff, including a Mercedes-Benz worth about $450,000. He paid his staff handsomely, with each earning about a $115,000 salary. He freely withdrew tens of thousands of dollars in cash and debited proceeds from the investment fund. Brown’s own salary was $640,000.
Following our work on the case, Brown was arrested and charged in September on mail fraud charges. He pleaded guilty to money laundering and mail fraud in December. Seized were the 28 vehicles, jewelry worth $200,000, and bank and trading accounts containing about $1.2 million—a fraction of the funds invested.
“At the end of the day, when the jig is up, you are left with a whole group of people and have no money to pay them,” Onks said. The FBI, along with the IRS and U.S. Postal Inspectors, learned of the scheme last summer when people called asking if Brown’s company was legitimate.
Onks said the old cliché has never been truer: If it looks to good to be true, it probably is. “No one can guarantee any kind of return,” she said. “And he guaranteed to double everything.”
The scheme is named after Charles Ponzi of Boston, Massachusetts, who in the 1920s guaranteed investors a 50-percent return on their investment in postal coupons. Although he was able to pay his initial investors, the scheme fell apart when he couldn’t pay investors who entered the scheme later. There is scant data tracking Ponzi schemes and annual losses, but headlines about recent arrests show the illegal practice endures.
Brown, meanwhile, is scheduled to be sentenced in federal court next month in Richmond. The property seized—including all the cars Brown bought with his investors’ cash—will be auctioned this month by the U.S. Marshals Service. Like many Ponzi scheme investors seduced by promises of easy money, in the end Brown was left with nothing.
Resources:
- Common Fraud Schemes
- Financial Crimes Report to the Public