Ponzi Scheme Update: CFTC continues to prosecute forex Ponzi cases

There are not many certainties in life, but one thing that you can take for granted is that forex Ponzi schemes are alive and well in the United States. There is a special allure when it comes to foreign exchange that the criminal element in our society loves to leverage to its benefit. Promises of high returns with absolutely no risk is the constant siren call that draws in the greedy among us with hopes of wealth beyond any of our imaginations. Unfortunately, the dreamed of wealth never materializes.

Phony accounting reports may keep smiles upon our faces, at least for a limited period of time, until the scheme unravels, which they eventually do. A quicker end can arise if customers get suspicious, blow the whistle to authorities, or in those rare instances when the CFTC ferrets out the criminals through investigative groundwork. In any event, by the time the crooks are arrested, most all of the funds have either disappeared or been used to finance lavish lifestyles, expensive trips to exotic locales, or, in rare instances, actual trading losses in the market.

A Ponzi scheme is characterized as a “fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.” The name of this scheme is attributed to Charles Ponzi, who notoriously profited from these techniques as far back as 1920. Its popularity has mushroomed, despite the diligence of the CFTC, the FBI, and the SEC.

If there is anything worth selling, especially an investment security of any genre, then crooks have devised a Ponzi type technique to promote it to unsuspecting consumers. The CFTC is solely focused on shutting down schemes that involve foreign exchange, commodity pools, or futures contracts, and, over the past quarter, a number of these cases have reached a conclusion in our justice system. Our courts can move at a slow pace, but justice will be done.

The following four cases appeared in press releases over the past quarter. The schemes stretch back as far as 2008 with some operations making it to 2013 before the crooks were apprehended. The good news is that these guys are off the street. The bad news is how many other Ponzi protagonists are still in operation and only in the early process of unraveling. If you think you might be in one of these, call the authorities now. Otherwise, review the following recaps for lessons to be learned and how to spot the red flags of a fraud in process before it is too late.

#1 – “Court Orders $76 Million in Civil Monetary Penalties against Keith F. Simmons, Deanna Salazar and Their Companies in Connection with Foreign Currency Ponzi Scheme”

The defendants in this case are spread out over three states. Defendant Keith F. Simmons and his company, Black Diamond Capital Solutions, LLC, operated out of North Carolina. Deanna Salazar and her companies, Life Plus Group, LLC and Black Diamond Holdings, LLC, operated out of Yucca Valley, California. In related complaints, the CFTC is also litigating against Bryan Coats of Clayton, North Carolina and his company, Genesis Wealth Management, LLC, and Jonathan Davey of Newark, Ohio and his companies, Divine Circulation Services, LLC, Divine Stewardship, LLC, Safe Harbor Ventures, Inc., Safe Harbor Wealth Investments, Inc., and Safe Harbor Wealth, Inc. If you have ever heard of any of these entities, beware.

Both Simmons and Salazar are already behind bars, serving time. The court order indicates that Simmons and Salazar through these companies and their agents raised over $35 million from 240 clients from 2007 through 2009. The funds were to produce extraordinary returns from their proprietary “Black Diamond” forex trading platform, but not one dollar was ever traded in the market. Funds were misappropriated for personal expenses, expensive trips, cars, and other luxury trappings. False accounting reports were issued to customers, and a portion of the funds from newer customers was paid back to older ones, as in the typical Ponzi scheme. The Court ordered restitution of customer deposits and $76 million in civil penalties.

#2 – “CFTC Sues NY Firms Over $1.5M Forex Ponzi Scheme”

This scheme originated within the Korean community in New York. The defendants were John Won, Sungmi Kang, and Tae Hung Kang, along with their related companies, Defendants Safety Capital Management, Inc. and GNS Capital, Inc., both doing business as FOREXNPOWER. These crooks raised $1.5 million from October 2010 through December 2013, promising outrageous returns at little risk to 90 customers. In this case, funds were actually lost in forex trades, while $622,000 was misappropriated.

The complaint detailed a continuing saga of a Ponzi styled sales pitch: “In furtherance of the fraudulent scheme, Defendants made material misrepresentations and omissions in solicitations to actual and prospective customers, including but not limited to falsely guaranteeing 10 percent profits per month with no risk of loss.” These promises were placed in ads in Korean newspapers, on the website, in written materials, and touted in local seminars. Litigation is continuing and will take years to reach resolution, but this type of affinity fraud “target members of identifiable groups, such as the elderly, or religious or ethnic communities.” Trust becomes the overriding issue in these crimes.

#3 – “Millenium Capital Exchange CEO Sentenced to Federal Prison for Running Forex Ponzi Scheme”

Stafford S. Maxwell, the former owner and Chief Executive Officer of Millennium Capital Exchange, Inc., ran his illicit Ponzi operation out of Atlanta, Georgia. Maxwell has been sentenced to spend nearly four years behind bars, but, from 2008 until 2012, he raised over $2 million from clients across the United States. He claimed to be an expert at forex trading and promised annual returns in the 48% to 72% range that would reside in Swiss bank accounts. In actual fact, Maxwell lost money on his trades and spent the rest of the funds on personal expenses.

The local FBI agent in charge, J. Britt Johnson, stated that, “The FBI continues to see such investment based fraud cases that offer their investors high rates of returns with minimum or no risk.  While many of the victim investors are still trying to recover financially, it is hoped that they find some solace in today’s sentencing of Mr. Maxwell to federal prison.” U.S. Attorney John Horn also chimed in that, “To those tempted by investment schemes that seem too good to be true – be cautious – because promises of high rates of return are often red flags for fraud.” Is the lesson clear to you now?

#4 – “CFTC orders Georgia man to refund monies in fine of over $500K for Forex pool con”

Lastly, these crooks do not always think big and try to act like Wall Street’s finest. Many of these con men are satisfied with small time gains reaped within the confines of small town America. For example, the CFTC recently ordered Michael E. Simmons and Global Consortiums, LLC, both of Fayetteville, Georgia, to pay $360,000 in civil penalties and to repay ten investors $229,660 of ill-gotten funds. Simmons actually had already returned a few hundred thousand to his clients, never traded a dime in the forex market, and used over $200,000 for his personal expenses. He operated his small town fraud scheme from March 2010 through July 2012.

As with most Ponzi schemes, false customer statements were prepared that showed profitable gains were being produced. The difference in this case, however, was that Simmons never registered either his company or himself to operate a forex commodity pool under the law. A new service from the CFTC would have informed potential customers that this was the case. Small time crooks rarely obtain the proper licenses to operate in their state or within federal statutes. The time to discover this mistake is on the front end of your due diligence, not after the fact.

What are Ponzi Red Flags and how do these schemes unravel?

You may have noticed many common elements in each of the above stories of modern Ponzi on the move. Here is a list of “Red Flags” that are tip offs that Ponzi is at work:

• High returns with little or no risk
• Overly consistent returns
• Unregistered investments
• Unlicensed sellers
• Secretive, complex strategies
• Issues with paperwork
• Difficulty receiving payments

You can rest assured that the CFTC, NFA, FBI, and the SEC are always on the look out for these warning signs in their investigative activities. It also helps when a “whistle blower” provides a helpful clue, but Ponzi schemes also have a way of unraveling over time, all on their own. There are usually three reasons:

1)     The promoter or chief con man suddenly flees from town, taking the remaining money, records, etc., never to be seen again;

2)     The scheme will eventually run out of money to pay old investors promised returns and honor withdrawal requests, especially if the pool is not making any money or losing it in the market;

3)     A sudden downturn in the economy will trigger an avalanche of withdrawal requests that cannot be honored. Bernie MaDoff, the greatest Ponzi con man of all time, fell victim to this same event.

Concluding Remarks

Ponzi schemes may seem outdated in today’s modern society, but, when an idea has worked well for decades, why give it up? Today’s con men have definitely refreshed the Ponzi approach, but the theme still remains the same – promise the world, fake the results, and then run off with the money. In some cases, even the crooks get too greedy, get caught, and get put behind bars. Their clients, however, will rarely get any of their money back, while those few old customers that received payouts may have a judge ask for them back, a double whammy of sorts.

Law enforcement officials are your friends in these circumstances. In the forex world, you can rely on the CFTC and the NFA to guard your interests, but they need your support as well. At the end of the day, Ponzi schemes only work if your greed overpowers your judgment. In other words, if it sounds too good to be true, it more than likely is, and you would be advised to turn around and walk the other way.

Chris Lee

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