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Ponzi schemes probably trace back to caveman days

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My attorney friends are probably comfortable with the word "scienter," but I first discovered it during my many visits to the website for the Securities and Exchange Commission.

According to the SEC, the word scienter means to "act with an intent to deceive, manipulate or defraud, or with severe reckless regard for the truth."

Sounds like a pretty good description of the Ponzi scheme put together by Bernard Madoff, right? Well, Bernie cannot lay exclusive claim to the term as there are more and more people out there playing free and easy with the truth and scamming investors.

A spin through the litigation section of the SEC website (sec.gov) will find an almost daily example of another adviser bending the truth and using scienter to perpetrate a fraud.

I could have selected dozens of situations but I thought it might be enlightening to just break down one scam that did $40 million in damages to unsuspecting investors.

Earlier this month the SEC brought charges against Luis Felipe Perez alleging that he arranged "no-risk" loan agreements with investors from the Hispanic community in Miami to purportedly support his jewelry and pawn shop businesses.

What drew in these investors? The SEC claims that Perez was offering guaranteed annual incomes from the investment of 18 percent all the way up to 120 percent. Remember, these victims were told the investments were risk-free. You have to wonder when the disconnect occurred between risk-free and returning 120 percent. The two circumstances are mutually exclusive.

As is the case with all Ponzi schemes, Perez was allegedly using money from new investors to pay interest to older investors in his plan. But, that's not all he was doing with the money.

The SEC claim says, "Among his lavish personal purchases with investor funds were a $3.2 million home, $1 million worth of jewelry, and exotic vacations that cost him $200,000 a year. Perez also spent investor money to travel by private jet, buy expensive artwork, and make $100,000 in political contributions."

That sounds very much like Madoff's scheme. And, like Madoff, the Perez plot collapsed when he could no longer recruit new investors into his web.

Perez also used a novel approach to attract investors. When the promise of 120 percent returns wasn't enough to get them to hand over their money he would promise to add their names as beneficiaries to his life insurance policy. According to the SEC, the promise was that "if anything happened to Perez, the investor would collect the proceeds of the policy equal to the amount of the investment."

Of course, no insurance policy existed. One documented investor, based on the promise of the insurance guarantee, gave Perez $200,000. For a few months he received payments -- other people's money -- but in 2009 the checks started to bounce and the money was lost.

As I say, this is just one example of many similar schemes. Nothing has changed from the early 1900s when Charles Ponzi first operated such a scam, although I'm sure you could probably trace such deals back to caveman days.

Despite warnings from every government regulator, people will continue to invest in these types of bogus investments. In a world where safe investments earn little or no interest, it is temping for many people to buy into plots that promise such big benefits.

But the simplest advice still rings true: If it sounds too good to be true, it probably is.

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