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Investing Your Life Savings – Be Careful of Ponzi Schemes


Bruce Gleeson
Bruce Gleeson

On 15th December 2020 Daniel Soire and myself were appointed Provisional Liquidators of Maliver Pty Ltd and Receivers to the property of Melissa Caddick by the Federal Court of Australia pursuant to an application by ASIC. The Caddick case continues to attract significant interest, particularly given the recent announcement by NSW Police that they have found certain body parts of Ms Caddick on the NSW South Coast. The cause of her death has not as yet been determined. Relevantly, it also an important reminder of the continuing existence of "Ponzi Schemes".

 

What is a Ponzi Scheme? And where did the name come from?

Wikipedia indicates that a Ponzi Scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from legitimate business activity, and they remain unaware that other investors are the source of funds.

Ponzi Schemes are named after Charles Ponzi who in 1919 led investors to believe that they could earn a 50% return in as little as 90 days. Mr Ponzi was convicted and jailed in 1920 for financial fraud.

Some readers may also recall a more recent and notable Ponzi Scheme operated by Bernard Modoff. The estimated cost of his scheme (which involved almost 8,000 clients) is in excess of $50billion. Mr Madoff was arrested in 2008 (after the Global Financial Crisis), pleaded guilty and was sentenced to 150 years prison.

But not all Ponzi Schemes are as significant as the Madoff scheme and it is what we have seen over the past couple of years that has particularly caught our attention. My Firm over the past couple of years has been appointed to several matters which have in effect been Ponzi Schemes. The Caddick case is the most recent and more significant of them without doubt. However, irrespective of the number of investors and monies invested, the emotional and financial devastation is very real in each and every case.

Could the rise be partly due to the low rates investors are getting on safe investments, ie term deposits and where we are at in the investment cycle - I think so. And that is why investors need to exercise extreme caution when it comes to investing their life savings because such investments are typically made at a point in their life where the ability to fully recover from the non-recovery of such investments becomes problematic.

Our appointment to the Caddick case was taken understanding the very deep emotional and financial impact on investor creditors, many of whom were family, friends and or former work colleagues of Ms Caddick. These investors have invested hundreds of thousands of their dollars both individually and also via their Self-Managed Superannuation Funds. The investor creditors were informed by Ms Caddick that her company, Maliver Pty Ltd held an Australian Financial Services Licence when it did not.

Our appointment has required us to prepare and file detailed reports to the Court in each administration during February 2021 covering a range of issues. In preparing and filing these reports, we have undertaken a deep and rigorous forensic review of 1000's of documents and in many circumstances had to reconstruct financial records to explain transactions which occurred over the seven (7) period that Ms Caddick was purportedly providing financial services via her company. In addition, we have interviewed many investor creditors to understand who they came to invest with Ms Caddick. In a future article and when the case is further advanced, I will explain to readers how the scheme ran for so long.

What are the motivations of a Ponzi Scheme operator?

They are financial. Their urge to make money takes precedence over any risk consideration, usually because of their need to finance lavish lifestyles without regard to consequences.

Who are Ponzi Scheme operators and what are some main traits?

Research undertaken shows that most operators are:

  • Likely to be between 36-55 years of age;
  • Who act independently and generally locally;
  • Have a finance background and/or experience in the finance industry; and
  • Are motivated greed and opportunity.

To be able to sell the scheme the operator typically is a very charismatic individual, persuasive and good at closing a sales pitch. The operator tends to focus their attention on targets related to them either socially or professionally. They approach these targets on a more psychological nature rather than factual, and they exploit the trust between them and the targets. This is what happened in the Caddick case.

The Caddick case is a very timely reminder for anyone considering how they might invest their money (either within or outside of superannuation), particularly given the insignificant amount that is being earned on term deposits, etc. Some of these considerations are:

  1. Never feel rushed - take your time and verify the offer or other investment details. It is your money!!
  2. Only use a licensed financial adviser - whilst we have many excellent financial advisors in Australia, you should also use the strong regulatory framework that exists and check that they are in fact registered. If they are not, give them a wide berth. This is not negotiable. A go to website: https://moneysmart.gov.au/financial-advice/financial-advisers-register
  3. Watch for factors that seem too good to be true - every scam seems to have certain factors that give it a sense of believability. Be pragmatic and apply a sceptical mind to it. Again, it is your money!

The Caddick case is back before the Court on 7th April 2021. The hearing may include appointing myself and Mr Soire to be Liquidators of Maliver Pty Ltd as opposed to the current position whereby we are Provisional Liquidators. Such appointment would likely enable us to start realising assets of Maliver Pty Ltd. However, as was indicated in Court on 22 February 2021 many of the assets which Maliver Pty Ltd has an interest in are held in the name of Ms Caddick. There are also assets which are held directly in Ms Caddick's name. Importantly, at this stage, our appointment as Receivers to Ms Caddick's property does not authorise us to sell her assets.

So, stay tuned and we look forward to being able to discuss the matter more fulsomely over the coming months as the matter progresses so as to continue to educate investors on what to look out for.


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