SOURCE: Marks Paneth & Shron LLP

Marks Paneth & Shron LLP

October 11, 2011 09:06 ET

Ponzi Schemes Continue to Thrive in Economic Downturn -- Investors Need to Watch for 10 Signs That an Investment Opportunity May Be Too Good to Be True

Due Diligence Can Help Investors Avoid the Worst, Says a Forensic Accountant and Authority on Fraud at New York Accounting Firm Marks Paneth & Shron

NEW YORK, NY--(Marketwire - Oct 11, 2011) - Ponzi schemes are back, and investors need to exercise their own due diligence to make sure they're not caught up in a "too good to be true" financial fraud.

The Ponzi scheme, a classic con that typically surfaces in economic downturns, made a dramatic reappearance in landmark cases involving now-convicted financier Bernard Madoff, who defrauded investors of an estimated $65 billion, and Robert Allen Stanford, who stands accused of falsifying financial statements to investors who bought $8 billion worth of certificates of deposit said to be "inflated"; he is currently in prison awaiting trial.

These high-profile frauds are just the tip of the iceberg: According to the U.S. Department of Justice 2010 Annual Statistical Report, during a three-and-one-half month period in 2010, 343 criminal defendants in 231 criminal cases were charged, convicted or sentenced for participation in investment fraud schemes, including Ponzi schemes, resulting in $8 billion in losses to investors. In addition, there were more than 60 civil enforcement actions involving an additional $2.1 billion in investor losses. In all, there were more than 120,000 victims.

Ponzi schemes are much more widespread, and investors should be ready to protect themselves, says Sareena Malik Sawhney, MBA, CFE, CFFA, a forensic accountant and authority on financial fraud who serves as a director in the Litigation and Corporate Financial Advisory Services Group of New York accounting firm Marks Paneth & Shron LLP (MP&S).

"Ponzi schemes typically start in an economic boom, then are exposed when the economy stalls and investors demand return of their capital -- which of course no longer exists because it has been used to pay fraudulent 'dividends' and 'interest' to new investors," Ms. Sawhney says.

According to Ms. Sawhney, investors need to be wary, but they can protect themselves by doing their own due diligence. In particular, there are 10 warning signs of Ponzi schemes that investors need to watch out for:

1. High returns with little risk - "Be wary of investments with high yields that have little or no risk. There is no such thing as a guaranteed return," Ms. Sawhney says.

2. Investments with too-consistent returns - "Be highly suspect of investments that generate consistently positive returns regardless of economic conditions. No investment is immune to economic effects."

3. Investments you don't understand - "Stay away from complicated investments that you don't understand. Complex, obscure strategies can be a cover for fraud."

4. Not getting enough information - "Be wary if you are consistently requesting information about an investment and the investment representative is not being responsive or is avoiding you."

5. Inaccurate or questionable investment account statements - "Miscalculations on statements may be a sign that you need to start asking questions. They may also indicate that your money may not be used for its intended purpose. Of course, finding miscalculations requires that you review your statements in detail -- something you should do with every investment account, but it's a step that too many investors skip."

6. Difficulty receiving payments - "Be extremely concerned if you are not receiving payments on your investment, or you have problems cashing out your investment."

7. Funds that are not deposited in a separate custodian account - "If your funds are being deposited directly with your investment advisor, that means that he or she has access to your funds. And that in turn means that your advisor has the opportunity to commit fraud."

8. Statements that are sent directly from your investment advisor - "In any legitimate investment, you would receive monthly statements from a third-party custodial institution rather than directly from your investment advisor. That's because these functions should remain separate. If your advisor sends statements directly, there is cause for alarm."

9. You're told that you are now part of an exclusive investment club - "If someone approaches you and tells you that you can be part of an exclusive investment -- be suspicious. That's a classic fraud approach -- the idea that you're getting privileged information or access. Skepticism is in order."

10. The advisor is recommended by word of mouth - "Friends and acquaintances can provide legitimate advice. But often, enthusiastic friends serve as unwitting recruiters for Ponzi schemes. The person recommending the investment may be getting high returns, but may not have done any due diligence. You need to do your own."

"Ponzi schemes are widespread -- in spite of high-profile convictions and prosecutions, the danger is still out there," Ms. Sawhney says. "Investors need to protect themselves by maintaining a healthy skepticism, and subjecting every investment opportunity to due diligence. It's important to remember the tried-and-true warning that investments that seem to be too good to be true usually are."

Ms. Sawhney is available for interviews and can author a bylined article on the steps investors can take to guard against Ponzi schemes and other forms of fraud. For more information or to schedule an interview or arrange a bylined article, contact Itay Engelman of Sommerfield Communications at (212) 255-8386 or itay@sommerfield.com.

About Sareena Malik Sawhney, MBA, CFE, CFFA

Sareena M. Sawhney, MBA, CFE, CFFA, is a Director in the Litigation and Corporate Financial Advisory Services Group at Marks Paneth & Shron LLP. She has more than 10 years of litigation experience. Ms. Sawhney focuses on providing forensic services in the areas of complex fraud investigations, including white-collar crimes, and forensic accounting examinations.

Ms. Sawhney has served as a testifying expert witness and has worked with legal counsel to develop case strategies, assisted counsel with depositions and with preparing reports and exhibits for trial. She has earned the designations of Certified Fraud Examiner (CFE) and Certified Forensic Financial Analyst (CFFA). She is a member of the Association of Certified Fraud Examiners and the National Association of Certified Valuation Analysts.

About Marks Paneth & Shron LLP

Marks Paneth & Shron LLP is an accounting firm with nearly 475 people, of whom approximately 60 are partners and principals. The firm provides businesses with a full range of auditing, accounting, tax, consulting, bankruptcy and restructuring services as well as litigation and corporate financial advisory services to domestic and international clients. The firm also specializes in providing tax advisory and consulting for high-net-worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit, professional and financial services and energy clients. The firm has a strong track record supporting emerging growth companies, entrepreneurs, business owners and investors as they navigate the business life cycle.

The firm's subsidiary, Tailored Technologies, LLC, provides information technology consulting services. In addition, its membership in JHI, the leading international association for independent business advisers, financial consulting and accounting firms, facilitates service delivery to clients throughout the United States and around the world. Marks Paneth & Shron LLP, whose origins date back to 1907, is the 30th largest firm in the nation and the 13th largest in the New York area. In addition, readers of the New York Law Journal rank MP&S as one of the area's top forensic accounting firms.

Its headquarters are in Manhattan. Additional offices are in Westchester, Long Island and the Cayman Islands. For more information, please visit www.markspaneth.com.

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