by James Walsh
The suit claimed that Bennett established a toll-free telephone number staffed by Prudential employees, who took calls from investors with questions about accounts. Prudential told investors their funds were being held safely in escrow accounts when New Era was actually using the money to pay off early participants.
Finally, the lawsuit argued that Prudential made more than $740,000 in interest from millions of dollars in loans. “Prudential knew, should have known, or had a reasonable basis to suspect that New Era was operating...a scheme to defraud its creditors,” the suit said. Charles Perkins, a spokesman for Prudential, said:
I sympathize with the charities that have invested their people’s money with the foundation. They were victimized. They were victimized in a very sophisticated scheme that took in some of the most sophisticated financial investors in the country, people like Lawrence Rockefeller and William Simon, but I think that they should be directing their anger at the people who are responsible, which is the foundation and Jack Bennett.
In August 1996, the bankruptcy judge presiding over the New Era case approved a partial settlement—with the understanding that the lawsuit against Prudential would continue. The brokerage began negotiating a settlement.
In March 1997, facing 82 criminal counts of fraud, filing false tax returns and related offenses, Bennett pleaded nolo contendere and turned his focus toward convincing the federal judge hearing his case to be lenient.
In an ill-advised move, he tried to argue that, having grown up in povery with an alcoholic father, he had a delusional mental disorder which limited his responsibility for his actions. Aside from outraging burned New Era investors, this tactic had little effect.
In September, he was sentenced to twelve years in prison.
This satisified some of participants. As one group had written the court: “...the tremendous negative impact of Mr. Bennett’s actions on hundreds of non-profit organizations...and on the image of those associated with philanthropy in general warrants severe punishment.”
Contrary to this sentiment, some of the most observant of the people affected by the New Era debacle doubted that the non-profit sector would recognize another Ponzi scheme—if it were executed as carefully as New Era.
“It’s hard to say what everybody learned,” said Kathryn Coates of the Greater Philadelphia Cultural Alliance. “There weren’t any groups that participated in this that didn’t check [Bennett] out thoroughly. So I don’t know what’s changed. What else do you do? The only recourse is that, if you feel nervous about something, don’t do it.”
In the wake of New Era’s collpase, the Pennsylvania Joint State Government Commission considered changing state laws regulating NFPs. But it concluded...rightly...that the laws weren’t the problem:
[New Era] continued as long as it did due to the combination of its ostensible performance as promised, exceptional references, inadequate regulatory and enforcement efforts, and careless practices by boards of directors or some of the contributors....
CHAPTER 17
Chapter 17: www.ponzischeme.com
The Internet is undoubtedly a commercial marketplace, which means it attracts gamblers, hustlers, Ponzi perps and other crooks.
“We are seeing a number of pyramid schemes taking to the Internet,” says Andrew Kandel of the New York State Attorney General’s Office. “One of the reasons this poses a particular problem for regulators is that they can reach an increasingly large number of people.” “[We’ve] established an Internet surveillance program.”
For most of the people who turn to the Internet for business or personal reasons, it is a useful tool for sending and collecting information. Some people get more intensely involved, however, spending long hours communicating with other people.
This split approach to Internet use is part of the reason that the thing has been such a challenge to businesses looking for commercial applications. The technology exists to buy and sell just about everything on the net. But only a few people trust it enough to use it to the full capacity.
“The comparison you keep hearing is to VCRs,” says an executive for a big West Coast Internet Access Provider. “Though a lot of people in this business don’t like the comparison.”
What he’s talking about is the familiar—and partly true—story that the application which made video cassette machines truly household appliances was pornography. In other words, the desire to watch dirty movies on tape (at home, rather than in a seedy theater) drove the first wave of consumer VCR purchases.
For the Internet, two vulgar applications are driving the fullest technological uses of on-line commerce. One is, as with VCRs, sex. Pornography (usually still photos) and on-line sex talk are big applications on the net. The other is get-rich-quick schemes, most of which are simple variations on the basic Ponzi premise.
Through the mid-1990s, two key characteristics of the Internet have acted as partial checks on fraud. Unfortunately, both of these checks may weaken over time.
First, Ponzi perps who use traditional media (telemarketing, direct mail, MLM) seek out investors aggressively. Perps on the Internet make offers on their websites—and then wait for consumers to find them—clearly, a much slower way of reaching people. This check is likely to weaken as so-called “push technology” makes it easier to send junk mail on the net.
Second, most users remain reluctant to give out their credit card numbers and other personal information over the Internet. This check is likely to weaken as legitimate businesses refine transaction security and people have a higher level of general comfort with the system.
Trust is a difficult Issue
While many investors know the Internet contains a wealth of investment information, they often don’t know how to find what they’re looking for and have no way of knowing whether the information is reliable when they do find it.
Overall, few people—only about one in eight—say they would invest money based on anything they read or heard on the Internet. But, according to a 1996 survey by Massachusetts-based Dalbar Associates, demographic groups that tend to use the Internet the most trust what they read on it more. And another factor troubles many regulators. Heavy users of the Internet share a libertatrian, frontier mentality that is conducive to investment frauds.
And more than a third of people under 35 years old—Generation Xers—told the Dalbar survey that they considered the Internet a reliable source of investment information. This level of trust is music to Ponzi perps’ ears. From a crook’s perspective, there are suckers born every time a new person goes on-line. And more are going on-line all the time.
In 1995, about 40 million people used the Internet at least once in a while. That number was only a hint at what could be, though. Some marketers were predicting that by the new millennium, the number could be several hundred million.
The SEC has dedicated an entire unit to investigate and prosecute on-line investment fraud and is stepping up its own on-line presence to raise consumer awareness and access to the agency.
“It’s becoming a bigger and bigger problem,” says John Stark, who oversees Internet fraud for the SEC. “But they’re just the same old swindles with a new medium.... These [perps] are not like hackers, who can be difficult to track down. As long as they’re located in the U.S., it’s no different from any other fraud case. They need to advertise to lure victims, which means they need to post a phone number or an address or a post office box.”
On a more optimistic note, Internet regulars don’t yet seem to have developed the shame that shuts up burned Ponzi investors in other environments. The SEC has been surprised by the amount of information some web users are willing to disclose about themselves and their experiences.
“This is a very sophisticated group of self-policing individuals, and they’re willing to identify themselves to help us because they don’t like fraud,” Stark says.
He tells the story of one group of crooks that not only created a professional-looking web site, it even created links to
bogus investment newsletters that touted the offering as a good investment. Some of the people conned by the set-up showed a refreshing outrage at having been ripped off.
Cyberspace Ponzi Perps Learn Quickly
Jeff Herig, a computer evidence analyst for the Florida Department of Law Enforcement, says: “The time it takes for criminals to learn a new way of beating the system is compressed down considerably from what it used to be. It used to be year to year that criminals would find a new hole to get through. Now a new way to beat the system is being developed from month to month.”
In the early stages of the Internet, much of the financial fraud was based on hyping stocks. “When we see a stock fluctuating wildly, we go into the chat room and take a look at what’s being said,” said Mike Robinson, spokesman for NASDR, an independent regulatory arm of the National Association of Securities Dealers (www.nasd.com).
But, as more people logged on and technology advanced, the Ponzi perps started getting active.
Internet Fraud Watch (www.fraud.org), a project of the National Consumers League, was launched in the mid-1990s to discourage online fraud before it gets a hold in the workplace. “Our Web site alone has received more than 300,000 visits from consumers and averaged 25,000 hits a week,” said NCL president Linda Golodner.
Cleo Manuel, an Internet fraud specialist with NCL, offers an explanation for all the interest:
The Internet is the new frontier. For con artists, it’s the natural next step. It’s the evolution of fraud. People see a sense of credibility when they see something on the ‘net because they trust the technology and trust the people on there. It’s a new marketplace and people need to be as careful there as they are in other marketplaces.
“The Wild West of Fraudulent Schemes”
“Cyberspace is a new frontier for advertising and marketing,” said Jodie Bernstein, director of the FTC’s Bureau of Consumer Protection. “But the Internet will not achieve its commercial potential if this new frontier becomes the Wild West of fraudulent schemes.”
Ponzi schemes crop up all the time. “It’s interesting that over the years, the scams remain the same,” says William McLucas, director of the SEC’s enforcement division. “It’s just the pitch that changes.”
The Internet combines various attributes of publishing, broadcasting, public space and private commerce. This melange confounds many legal theorists—to say nothing of law enforcement officials.
Among the specific issues that perplex law enforcement agents:
• the distinction between advertising and fact (and what this means for free speech) on the Internet,
• the liability of Internet Service Providers for fraud committed through their networks, and
• what constitutes a “clear and conspicuous” on-line consumeralert warning.
At the state level, some regulators are more aggressive about Internet Ponzi schemes than others. Larry Cook, director of the enforcement division of the Kansas Securities Commission, explains that his agency looks at three kinds of Internet frauds:
You have the scams, you have the misinformed who need to find legal advice in putting together an offering to solicit investors, and then you have the pie-in-the-sky people who are not necessarily [Ponzi perps], but they don’t have a clue how to run a business.
The dilemma for regulators and law enforcement officials: It’s an impossible task to monitor every investment-related posting in the dozens of chat rooms, news groups, bulletin boards and Web pages on the net.
The SEC and the North American Securities Administrators Association have set up informal Internet surveillance programs, often cruising around user groups and examining the messages posted there. But this is—at best—a random sampling process.
The SEC admits there’s no way of knowing how many scams are operating on-line, so there’s no way to know for sure whether the fraudulent offers are increasing or decreasing. The only thing the regulators do know is that complaints are rising as Internet use increases.
SEC regulators say that Ponzi-type fraud is well-suited for the world of on-line computing, because a perp can easily send messages to thousands of people with the touch of a button. One example: An ad titled “How to Make Big Money From Your Home Computer,” in which a promoter claimed investors could turn $5 into $60,000 in three to six weeks, was sent to thousands of Internet users in a few days in 1996. The pitch was a crude six-level pyramid scheme.
MLM on the WWW Multi-level marketing programs—both legit and not—abound on the Internet.
The Health Club Network, which called itself “A Price Club for Health,” used the Internet to accomplish the near-impossible. It combined sex and multi-level marketing. The company claimed that Internet users would get a special discount of 60 percent off the price of products and make money 24 hours a day, “even while you’re sleeping!” Among Health Club Network’s products: Passion Tonic, which was supposed to improve orgasms, overcome female frigidity and male impotence and release libidos. Though perhaps not in that order.
For Ponzi perps, the advantages of plying their trade on-line are many. For a few hundred dollars—and sometimes less—their scams are delivered straight into a person’s home or business with all the glitz of a Fortune 500 company.
California-based Dennis Enterprises told Internet users that its system of auto-responders could send out 10,000 e-mail messages a day for a single client. For an up-front fee of between $12 and $200, an aggressive Internet MLM entrepreneur could send out over three-and-ahalf million e-mails a year. This electronic version of junk mail is what on-line enthusiasts call “spamming.”
But one user’s spam is another’s filet mignon. With just a tenth-of-1 percent response rate, the e-mail barrage would mean 3,500 sales. The Dennis Enterprises pitch was for selling computer hardware, peripherals...and even the company’s own e-mail services. But some MLM programs don’t seem to care much about what they’re selling.
In general, Ponzi perps would rather focus on the size and shape of the pyramid—and the money at the top—than pestering details like product line specs. That’s why so many Internet Ponzi schemes involve surprisingly low-tech pitches.
Fortuna Alliance was an alleged pyramid scheme based on the Fibonacci numbers sequence (each number is the sum of the two preceding numbers). Fortuna—which started in Washington state and quickly spread through the Pacific Coast—promised investors profits of up to $5,000 instantly.
According to the FTC, Fortuna separated more than $6 million from roughly 17,000 members and diverted at least $3.5 million to a bank in the Caribbean.
Some Simple Issues Persist
However an investment is promoted—in person, by mail, telephone or over the Internet—the SEC recommends that an investor ask the following questions before plunging in:
• Is the investment registered with the SEC and state securities regulators—or is it subject to an exemption?
• Are the people pitching the investment registered with the securities regulators? If so, is there a record of any complaints against them?
• Who is running the company? What experience do they have? Also, how long has the company been in business?
• How liquid is the investment? Can an investor sell his or her position easily—without paying unusual penalties or premiums?
• What level of detail does the company offer about itself in promotional literature? Also, does it make reviewed or audited financial statements available to investors?
Generally, if the answers to these questions are no, not yet, it’s unclear or no one else in the business does that, you should steer clear of the investment.
A note: There are many legitimate start-up companies that are using the Internet to raise development capital inexpensively. But, these companies tend to talk about themselves to a fault. They’ll usually post detailed biographies of principals, business plans (even if these are largely prospective) and information on money raised to date.
Be careful of any investmen
t opportunity offered over the Internet that’s in any way vague about the people involved or how money raised will be spent. According to Russell Damtoft, an assistant regional director in the FTC’s Chicago office, “Most of the scams on the net are old wine in new bottles. They’re Ponzi schemes, creditrepair scams, vacation frauds.”
There are no laws specifically governing Internet use, so states are trying to use their laws to root out cyberspace hucksters who promote get-rich schemes, phony health cures and other scams. In 1996, Minnesota Attorney General Hubert Humphrey III became the nation’s first to file consumer fraud complaints against Internet firms. One involved a pyramid scheme that promised participants $157,900 in taxfree income. Illinois A.G. Jim Ryan, an established Ponzi scheme buster, described the Internet as an “unregulated and unmonitored territory where scam artists and other lawbreakers roam freely.”
Jim Jacobson, special assistant attorney general in the consumer division, said the state isn’t interested in regulating everything on the Internet, or in stifling free speech. “All we’re talking about here is exercising our normal powers to protect the public from fraud and false advertising in commercial activity,” he said.
Case Study: Western Executive Group
In October 1996, a federal judge issued a temporary restraining order against two Nevada companies for running an ATM investment Ponzi scheme that used an Internet website as part of its pitch for investment dollars.
U.S. District Judge George King froze the assets of Cash Systems USA Inc. and Western Executive Group Inc. (WEG). The SEC had asked for a court order to stop the two related companies from selling investor contracts for ATMs.
The suit, filed in federal court in Los Angeles, was one of the first SEC actions to implicate an Internet website with a Ponzi scheme. It was also one of the first to involve the newly deregulated ATM machines. A 1995 deregulation rule had allowed individuals to own the machines; until then, only banks and other financial institutions had been allowed to own them. “As of late 1995, you saw ATM’s only at banks,” said SEC spokeswoman Lisa Gok. “They had to be affiliated with a bank. Then there was deregulation and now you see these freestanding ATMs at even convenience stores.”