This content is from: Portfolio

Not Another Ponzi Scheme

This Time it's a Case of Blame the Victim

I don’t know about you, but I am getting sick and tired of reading every week about another Ponzi scheme uncovered by the SEC or Justice Department.

No, I am not that disgusted with the criminals who think they can get away with this. Rather, I am disgusted with the greedy jerks who actually believe the marketing spiel and hand over their hard earned money.

The latest example almost reads like a satire — a Saturday Night Live sketch spoofing Madoff and the sudden spigot of schemes that suddenly surfaced afterward.

On Monday, the SEC announced fraud charges and an emergency asset freeze against some a Daniel Spitzer, who passed himself off as a fund manager based in the U.S. Virgin Islands. He is accused of perpetrating a $105 million Ponzi scheme against 400 very, very gullible investors.

The SEC alleges that Spitzer, who lives in St. Thomas, used several entities and sales agents to misrepresent to investors that their money would be invested in investment funds that, in turn, would be invested primarily in foreign currency.

In its complaint, the SEC said Spitzer’s marketing materials — he never actually calls himself a hedge fund manager, nor did Madoff — claimed that global currency should be the “crucial third leg” of an investor’s “investment triangle” that provides stability “independent of the volatility of stocks and bonds.”

Well, maybe that is a partially valid argument and some people who have diversified hedge fund portfolios include currency trading as a small part of it.

But, wait ‘til you hear what Spitzer told these $105 million worth of investors what he could do for them. According to the SEC, Spitzer asserted to potential investors that as a result of his investment methodology, from 1981 through June 30, 2009 he never suffered a losing year and had three years with annual returns in excess of 100 percent. His said his peak return was 184.15 percent.

And 400 people believed him.

When you stop laughing, I’ll continue.

Now, you may say: Didn’t David Tepper of Appaloosa Management have triple-digit returns, including one year up near 180 percent? Yes. He twice was up well over 100 percent.

However, there is one big difference. The year before Tepper racked up these gargantuan returns, he was down 25 percent. In fact, he dropped 25 percent three different years.

Guys who rack up these kinds of returns are inherently volatile and also frequently suffer some bad years. You know, more risk, higher return.

No one in the world, however, has come close to matching Spitzer’s purported record. Not even the great James Simons.

Did these 400 lazy investors ever do their homework, or even a Google search, to find out why the financial press never wrote a single article about a guy with the greatest 19-year record of all time?

Obviously not. I’ll bet they bragged to their friends how much money their “secretive investor” was making for them, and probably flaunted their so-called wealth.

I have no sympathy for them.

In fact, I would like to see the Securities Investor Protection Corporation, whose job it is to recover lost funds for clients of failed brokers, the SEC and FINRA, the securities regulator, mandate a Too Good to Be True policy.

It would go like this: If a person loses money in an investment scheme that the average person in the street laughs at and says they would never give a dime to, they don’t get any money back. No money from the SIPC insurance fund. No Ken Starr rescue fund. Nada.

This is the penalty for being greedy, arrogant and stupid, all rolled into one. Because, that is what it takes to believe Spitzer’s spiel.

In fact, I have much more sympathy for Madoff’s victims. They, at least, gave money to a guy who promised consistent 12 percent to 15 percent returns. Not as audacious as you might think. This is more or less how luminaries like Bruce Kovner, Paul Tudor Jones II and Izzy Englander have performed for most of the past decade.

So, let’s institute that Too Good to Be True policy now. I’ll bet it cuts down on the number of potential Ponzi schemes.

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