“Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, (March 3, 1882 – January 18, 1949), commonly known as Charles Ponzi, was an Italian businessman and con artist in the U.S. and Canada. His aliases include Charles Ponci, Carlo and Charles P. Bianchi. Born in Italy, he became known in the early 1920s as a swindler in North America for his money making scheme. Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage. In reality, Ponzi was paying early investors using the investments of later investors. This type of scheme is now known as a “Ponzi scheme“. His scheme ran for over a year before it collapsed, costing his “investors” $20 million.” — see Wikipedia.
Editor’s Comments: The Supreme Court is going to hear a case involving a Ponzi Scheme that once upon a time was considered huge, until it was dwarfed by Madoff, which in turn was dwarfed by the Wall Street firms. The interesting thing about the original Ponzi Scheme is that it involved the promotion of false derivatives, which is exactly what happened in the mortgage meltdown.
Ponzi’s scheme was based upon the false premise that certain certificates could be purchased at one price in one place and sold at a higher price in another place because markets vary from one place to another. Had he actually believed the false premise he would have invested according to plan.
But there is no question from anyone about the fact that the plan was unworkable and Ponzi knew it. So he never invested the money and simply relied upon continuing sales of his “securities” in a private investment scheme to fund the illusion of payments as promised; as sales progressed he was able to pay investors their expected return in order to encourage additional sales and word of mouth success. When investors stopped buying the scheme quickly collapsed. Look back on the mortgage bond market. When investors stopped buying, the entire system collapsed.
Ponzi’s derivatives were fake. They were not derivatives because he never invested in the plan. He just kept the money and managed it until the scheme collapsed. The Mortgage Bond market was virtually identical to Ponzi except that it was more complex in terms of the number of moving parts. The mortgage bonds and credit default swaps were not derivative products either because the bonds never derived their value from actual mortgage loans. The “derivatives” that were allegedly exempt from securities regulation, the insurance products that were allegedly exempt from insurance regulation, were in fact not derivatives in most cases. The REMIC tranche that issued the bonds was a creature of the investment banks and the money advanced by investors never made it to the trust.
Like Ponzi the investment banks pocketed the money and then funded only what they needed to fund to give investors the false impression that their money was being invested in the manner required by the enabling documents — the Pooling and Servicing Agreement, Prospectus and the use of an Assignment and Assumption agreement that was used to cover the movement of money. Everything they did was designed to encourage the sales of additional bogus bonds. Profits were made primarily by the cloud of players created by the Wall Street banks, while the losses from the inherent false premise of the “investment” plan fell to investors and borrowers in “loans” that were virtual gifts to cover up the theft of principal by the banks.
Now the question before the Supreme Court is not whether the principals are liable to victims of the fake investment scheme, but whether the professionals and affiliates are liable for their negligence or fraud in helping the Ponzi scheme to progress. To put it in lay terms, the question before the court is whether an accountant or lawyer for the Ponzi scheme can be liable if they negligently or knowingly assisted in the Ponzi scheme.
The very question testifies to the state of our tolerance for misbehavior and why our current foreclosure mess has failed to yield criminal prosecutions on mass fraud. Iceland put their bankers in jail and now enjoys a growing economy and a stable banking environment. In the United States there has been nothing. The FBI has stated that 80% of mortgage fraud is committed by the banks. Yet prosecutions have only been on the other 20%.
So the question is whether a lawyer or accountant negligently or knowingly assisted in defrauding the public should be liable for their actions. To put it more simply, will that lawyer or accountant be liable for actions that we know were wrong and caused and contributed to extensive damage, and without which the scheme could not have operated. The answer seems obvious — except when you consider our awe of large schemes. The larger the scheme, the less likely is the prosecution. This in turn has resulted in the incentive for Ponzi operators to become as large as possible. In turn that means the incentive to escape prosecution requires that the scheme have massive scope and injuries.
If the Supreme Court hands down a decision favorable to investors, it will likely be that the liability extends only to private investment schemes that are not fully registered with the SEC. And if that happens then investors will be able to prove the Ponzi scheme and prove the accountants and lawyers were criminally and civilly liable.
This has everything to do with the mortgages and foreclosures. If the loans were window dressing on a Ponzi scheme instead of real loans by the originators and underwritten in accordance with industry standards, then the securities (mortgage bonds) issued from Wall Street were not derivatives. The impact travels all the way down to the closing table at which the closing agent applied money from investors held by investment banks to fund loans that were doomed to failure not only because of economic factors but also because the control over whether the loans would fail lay with the investment banks — not with the borrower, the lender investor, or anyone else.
If the loans were faked — in terms of NOT being funded in accordance with the indentures on the bonds — then clarity opens up in the mortgage mess, to wit: the loans were made from the pocket of investment banks and not the REMIC trusts. They were using investor money as their own, which is why the banks received insurance proceeds and proceeds of credit default swaps, and the proceeds of sale of the bogus mortgage bonds to the Federal Reserve.
The damage to investors occurred as a result of alleged loans. But the loans were in essence payment to or on behalf of people who believed they were borrowers when in fact they were being used in the Ponzi scheme — and had been exposed to risks that they knew nothing about because despite Federal and State law to the contrary, disclosure was withheld about the identity of the parties to the “loan” transaction, the fees paid to numerous parties, and the nature of the roles of the players that created the appearance of a loan transaction and a false chain of securitization.
The investors money was used to fund the alleged loans and fees but the documentation gave the loan to the Wall Street banks — a practice prohibited by the Truth in lending Act and the deceptive lending practices acts in many states. The point here is that the documentation — the note and mortgage — were executed in favor of a party who was a non-lendor nominee of a non-lender nominee of the investor lenders. And that is why it is nearly impossible to get a valid satisfaction of mortgage on payoff or on short-sale. The “satisfaction” is directed at a recorded instrument that is a lie, which means that the mortgage was not satisfied because it was never a perfected lien in the first place. The money currently being paid on the payoff is going to parties who were strangers to the mortgage transaction.
Thus the decision by the Supreme Court in the Stanford Case could and should have impact on the auditors and attorneys and other professionals that currently enjoy a weird sort of immunity despite their obvious wrongdoing in deceiving the public and enabling the fraud. A proper audit would have revealed that bonds on the balance sheet of the banks were in fact owned by investors and were worthless creating a potential liability that should have been reported. A proper review by the ratings agency would have identified the proposed plan as nonconforming when in fact they granted a triple A rating. These “third parties” were paid to violate the standards of their profession and they knew it. Whistle blowing memos went unheeded in all such organizations.
The ability of investors to prove the existence of a Ponzi scheme would have huge consequences on the foreclosure procedures. The focus would properly shift from “deadbeat” borrowers to felonious tricksters. A proper ruling in the Stanford case would thus open up the possibility for direct communication between investors and borrowers, enabling settlements that would enable investors to mitigate their damages on a large scale with the help of borrowers who are still willing to sign “modifications” that would result in the recording of actual perfected mortgage encumbrances eliminating nearly all of the foreclosure docket.
Filed under: CDO, CORRUPTION, Eviction, evidence, foreclosure, GARFIELD GWALTNEY KELLEY AND WHITE, investment banking, Investor, MODIFICATION, Mortgage, Pleading, securities fraud, Servicer, STATUTES, trustee Tagged: | derivatives, Madoff, Ponzi, Stanford