Financial Fraud Cases

Financial Fraud Cases

The biggest investment fraudsters: Ponzi, Behring, Madoff, and Co.

The Bernard Madoff death brings back memories of one of the biggest cases of investment fraud in history. The recently deceased Bernard Madoff stood out in the ranks of the biggest financial crooks. With his Ponzi fraud scheme, however, he merely imitated a famous predecessor. The exposed deception of the New York financier is anything but an isolated incident. Fraud and embezzlement are as much a part of the stock market as bulls and bears. Ultimately, the greed for quick money is responsible for this – among the financial fraudsters, but also among savers and investors. 

Again and again, it turns out that the latter quickly forget lessons and are too careless with their money and thus fall for financial criminals with their fraud schemes. If something seems too good to be true, it usually isn't. Taking this simple life lesson to heart would have protected the bruised investors from losing their money in almost all fraud cases. This is shown by an overview of some of the biggest investment fraud cases.

Charles Ponzi

Charles Ponzi was born in Parma as Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi and immigrated to the United States in the early 20th century. After different frauds, failures and a prison sentence of several years for a forged check, he saw his great hour come in 1920. He discovered that international reply coupons, which could be used to send letters free of charge to a number of countries, could be purchased in Spain for the equivalent of 1 cent. In the USA, however, these bills were worth 6 cents. 

Ponzi founded the Securities Exchange Company and promised astronomically high returns to investors who invested in the reply coupons. Within several months, he collected $15 million. Today this amount is equivalent to millions of dollars in triple digits. Ponzi paid off customers who wanted to realize their profits with money from new investors.

The fraud scheme named after Ponzi has been copied by many investment fraudsters, from Basel financier Dieter Behring to the recently deceased hedge fund manager Bernard Madoff. When the swindle of the namesake of the repeatedly used scam was exposed, only a fraction of the $15 million was left, also in this the original and its imitators are alike.

Bernard Madoff

Bernard "Bernie" Madoff is the creator of what is believed to be the biggest Ponzi scheme in history. He began his career on Wall Street in the 1960s and defrauded thousands of investors, including charities, out of tens of billions of dollars.

Madoff promised his clients returns of 10 to 20 percent a year, but did not invest their money, instead depositing it in an account at what was then Chase Bank. Investors who wanted to cash out were paid the capital by new investors.

Madoff himself described the returns as nothing out of the ordinary. He managed to cultivate the trust of his clients and create an aura of exclusivity by also turning away interested parties. Politicians also trusted him.

Despite several indications of irregularities over the years, the supervisory authorities could not uncover Madoff's conduct until 2008 when the house of cards collapsed in the wake of the financial crisis. He confessed the fraud to his sons, who subsequently turned him in. He was arrested by the FBI in 2008 and sentenced to 150 years in prison for fraud. 

Allen Stanford

Texas investor Allen Stanford was sentenced to this penalty by an American court in 2012. The court concluded that Stanford had operated a pyramid scheme for around twenty years through Stanford International Bank, which was founded and managed by his grandfather. He had pleaded not guilty, while the prosecution had demanded a prison sentence of 203 years.

The bank sold self-issued money market securities through a network of financial advisors and advertised double-digit returns it claimed to have achieved over 15 years using a "unique investment strategy." More than 30,000 investors were lured by the sound of the bells and whistles and entrusted Stanford with some $8 billion.

Instead of investing the money profitably  (piquantly, part of it was invested with Madoff) Stanford used it for his luxurious lifestyle. Among other things, the cricket enthusiast sponsored various sports and acted as a philanthropist in other ways as well. In 2008, just a few months before the billion-dollar fraud came to light, Stanford had ambitious financial plans to expand the activities of his financial house in Switzerland.

Former Federal Councillor Adolf Ogi was elected to the company's international advisory board, and Stanford made a high-profile donation of around CHF 1 million to the Children's Hospital during a visit to Zurich. When asked about the serious US mortgage crisis, which at the time was spreading far and wide, Stanford stated that he had never invested a dollar in the US mortgage market because it was not a business that could be understood in 15 minutes with all its risks.

Dieter Behring

Switzerland has also produced an investment fraudster who can be mentioned in the same line. In the early 2000s, Dieter Behring, a financier from Basel, claimed to have developed his own trading system that excluded human emotions and thus the biggest source of investment mistakes. 

The promise was that by deciphering the genetic code of the financial markets, it would be possible to achieve high returns without having to take increased risks. Investors were attracted as if by a magnet by the proven returns of the Behring system called Swisspulse. Between 1991 and 2004, it is said to have generated average annual growth rates of over 56%.

The only catch: the astronomically high returns were never verified and confirmed by an independent body. The few doubters were convinced by promised fixed returns of 6% per year. These "guaranteed" returns were paid out punctually for years, and even terminated commitments were reliably serviced.

In 2004, the house of cards collapsed and Behring was targeted by the judiciary. It took the Federal Prosecutor's Office twelve years to unravel the "Bering system," which included a complicated corporate network with outriggers in the British Virgin Islands. In September 2016, Behring was sentenced to five and a half years in prison.

Most of the customer funds were never invested, but were used to pay out promised returns and plug holes, the indictment said at the time. The verdict spoke of a "sophisticated deception machine" and a "palace of lies". The court estimated the damage at an amount in the mid three-digit range, which could not be precisely quantified; in the media, there was repeated talk of 800 million Swiss francs, of which there was no trace.

Behring, who had enriched himself to the tune of 170 million Swiss francs, appealed against the verdict. This appeal was rejected by the Federal Supreme Court in January 2019. Behring was unable to serve his sentence for health reasons, and died in March of the same year at the age of 63.

Helmut Kiener

Helmut Kiener went down in history as the German "mini-Madoff." Helmut Kiener lured buyers of his K1 investment fund with dream returns in the double digits. The now 61-year-old psychologist falsified accounts and bank statements to conceal his financial machinations. Through his fraudulent construct, Kiener financed a lavish lifestyle with villas, private jets and helicopters. 

His investors were given the impression, based on the fictitious monthly profit notifications, that their investment was actually yielding the promised return. In reality, however, it was a classic Ponzi scheme in which profit payments were financed by the deposits of new investors.

He was exposed in 2009 and was sentenced to ten years and eight months in prison for financial fraud, professional document forgery and tax evasion. Thousands of investors and several banks suffered losses of over €300 million. The case caused an international sensation.

Damara Bertges and the European Kings Club

In Central Switzerland, the keyword snowball system brings back bad memories. Especially in rural cantons like Uri or Glarus, the European Kings Club (EKC) had successfully relieved investors of their savings.

At the beginning of the 1990s, the German housewife Damara Bertges and her partner (in crime too) Hans Günther Spachtholz advertised in pubs and multi-purpose halls in Germany, Austria and Switzerland for share certificates at a price of 1400 francs plus 200 francs handling fee. These so-called letters of the EKC should yield an amazing return of 70% per year.

Amazingly, thousands of people fell for the EKC boss and her promises. But when, over time, the repayments fail to materialize, the system collapses and the financial scam is exposed. Damara Bertges is arrested in 1994 and later sentenced to eight years in prison in Frankfurt for fraud and founding a criminal organization.

The gloating media reports about the naive mountain people who had entrusted their money to the EKC scratched their self-confidence in some places. This was the case in the Schächen valley in Uri, for example, which at times was also nicknamed "Letter Valley" because of the high proportion of EKC members.

Gregor MacGregor

While many financial scammers just ‘offer’ their victims the prospect of high and secure returns, the Scotsman Gregor MacGregor invented an entire country to go with it. The fantasy state called Poyais was supposedly rich in mineral resources and fertile soil for agriculture.

Around 1820, the resourceful businessman in the financial metropolis of London sold bonds with high interest promises, but from a state that did not even exist. Poyais was a stretch of land in Central America that consisted mainly of jungle – as those unlucky people found out who had bought a parcel of land from MacGregor in the promised land and had taken on an arduous journey by ship. They had previously exchanged their pound savings for worthless Poyais dollars.

What are the lessons for investors to avoid financial fraud?

How can investors protect themselves from such scams and fraud? After all, there is a high probability that somewhere investors are being defrauded of their money right now according to the Ponzi scheme. It is not always easy to recognize the financial criminal machinations, because trustworthy personalities often appear around the charismatic perpetrators, or a well-known bank acts as a depository, which gives the whole thing a serious appearance.

As mentioned in the beginning, alarm lights should flash for investors when someone promises double-digit returns. This is even truer if the financial returns are to be generated with low risks. Dieter Behring would have turned 100,000 Swiss francs into more than 50 million Swiss francs within 14 years. Who needs to open the apparently ingenious trading strategy to a broader public?

To guard against financial fraudsters, the Swiss Financial Market Supervisory Authority (Finma) advises investors to take their time and think twice before investing, not to let themselves be pressured and to spread their money widely. If the providers are not established, it is important to obtain as much information as possible about them: research on the Internet, check the extract from the commercial register, take a look at the warning list it has compiled and the Iosco Investor Alerts portal.

Nowadays, more and more victims of an online trading scam are coming forward. Victims can contact the website to conduct their own in-depth research on this topic. The more the victims of fraud know, the more targeted action can be taken against the financial criminals behind the fraudulent trading platforms.

Immediate measures after an online trading scam

Persons affected by fraud should take some steps to be able to reclaim the money from the broker if possible. If you wait too long, you give the perpetrators many opportunities to "make off" with the loot literally. 

  • Secure your online banking from any third-party access. Accounts on crypto exchanges should also be protected accordingly via login data.
  • Save all communication data with the perpetrators. This includes mail traffic, chat messages, videos, phone numbers and website addresses.
  • Do not believe anyone who proactively approaches you after the scam. It could be the same perpetrators with a false identity.
  • Have criminal and civil prosecutions initiated against the perpetrators and assets.
  • Get a specialized lawyer involved. Your lawyer should have experience with trading scam cases and cryptocurrencies.
  • Inform legal protection insurance about the online trading scam.
  • Engage financial regulators internationally.
  • Prevent further financial asset damage. 
  • Recognize identity theft as a threat and respond accordingly.

Online trading scam: this is how the scam actually works

From a large number of fraud cases, there is a pattern behind the online trading scam. The perpetrators are well networked and well organized.

First, the financial fraudsters create real-looking online trading platforms. The design of these websites is appealing. They resemble real trading platforms. Then the perpetrators proceed to the marketing phase. They place targeted video advertisements promoting financial services on YouTube, Facebook, Instagram and other social networks. These professionally created videos give the impression that it is a reputable provider of financial services. 

In some cases, the fraudulent traders also use direct contact via WhatsApp or Telegram. They write promising messages to the potential scam victims and draw their attention to the created trading platform.

A fraud starts with small deposits of 250 euros. After the later scam victims have taken a closer look at the online trading platform, they are offered the possibility of a test small deposit. It is said that one can "start" with only 250 euros in order to sound out and get to know the trading options.

These manageable sums of money are initially insignificant for many investors. They therefore deposit the money – either into a foreign account communicated to them, or into a crypto exchange. 

Trading is then allegedly conducted with this initial investment. In the online trading scam, the affected parties can apparently follow price trends and profit increases on the fake trading platform. They see that something is happening. However, the perpetrators have merely created digital fakes of returns, price gains and chart trends. These forgeries look deceptively real (dubious trading platforms), but they are just numbers and graphs on a screen. 

Trading platform refuses to pay out: the scam finally catches your eye!

For quite a while, things go "very well" for the later aggrieved investors. After all, they see the profits suggested to them on the trading platform every day. When finally a repayment or payout is demanded, this does not happen. The broker refuses the payout. Of course, the financial criminals are creative enough to come up with all kinds of reasons.

For example, they say that the payout is only temporarily blocked and will be carried out soon. Or, allegedly, tax payments, mirror transactions, proof of liquidity or fees would have to be paid first. All of these are just further scams.

The victims of the scam understandably react in shock. They have been presented with profit increases for months, but real money does not come to their own checking account. Instead, only further deposits are demanded, and they were not previously agreed upon.

Victims are downright threatened in the online trading scam!

But that is not all. The perpetrators increase the pressure and inform the fraud victims that there is allegedly a suspicion of money laundering. This is to achieve psychological pressure so that the fraud victims trust the perpetrators again.

The dubious traders and fraudulent brokers then offer their "help". Foreign money is moved, which is to be forwarded. This is supposedly to circumvent the money-laundering problem. However, these transactions with money or cryptocurrencies from unknown persons are the opposite. Money laundering is carried out with the accounts of the fraud victims.

Furthermore, it happens that the fraud victims are threatened to file criminal charges against them. Thus, the victims are not only financially damaged, but also manipulated. The already-damaged investors are not only deceived by the broker, but also threatened and coerced. 

Do not underestimate the psychological effects of an online trading scam!

The perpetrators use purposeful techniques of manipulation to fleece their victims. Here, you can notice not only the financial loss for the fraud victims, but also trust abuse. 

Anyone who has been harmed by this type of trading scam should talk to a trustworthy person about it. This is because the rogue brokers and fraudulent trading platforms speculate on the fact that the fraud victims do not turn to outsiders. Those who just take out their "frustration" on themselves sometimes do not take the correct action. The perpetrators, on the other hand, do not act alone. They are very organized and interconnected in their fraud networks.

Cryptocurrencies cause uncertainty among inexperienced investors!

The perpetrators exploit the media hype around Bitcoin and other cryptocurrencies. The fraud victims are persuaded that they can now finally invest in the digital assets "without complications" via a certain trading platform. Many rather inexperienced investors take up this offer. 

However, the financial fraudsters can create further uncertainty in the course of the online trading scam. This is because only a few have mastered the technically charged "blockchain language". Thus, the fraudulent brokers and dubious trading platform can tell the fraud victims anything. 

Allegedly, "on the Blockchain" the transaction is currently blocked and must first be released by another deposit at the "Blockchain company".  Or there are payout delays because the mining companies are currently facing technological difficulties. All the justifications sound convincing and are only superficial for the scam victims. In such Bitcoin trading scams, it is not uncommon for documents to be falsified, supposedly "from the blockchain". 

Obtain a free initial assessment, then decide!

Parties affected by fraud should obtain appropriate financial advice in the event of an online trading scam. It is important to clarify to what extent there are realistic possibilities to get back the money thought lost or the crypto currencies used.

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