The perpetrators of what might be Canadas largest Ponzi scheme are scheduled to appear todayin a Calgary courtroom on fraud and theft charges. It will be interesting to see what unfolds as the court case progresses. I intend to post on events as they develop.
Those charged in the alleged $400-million scam (by some estimates) have been identified as Gary Sorenson and Milowe Brost. Both say they look forward to clearing their names in court.
If the two are found guilty, the hero in this story will be Graham McMillan, a San Diego-based chartered accountant. When he found out his parents in Manitoba had put $50,000 into the scheme on the promise of earning 40% returns, he raised a stink and got their money back.
Most people would have been content to leave it at that. But Mr. McMillan reported the company to police and regulators, dug up vital informationon his own time, and launched a campaign/websiteto warn the public while police and regulators conducted lengthy investigations. We need more people like him.
Mr. McMillans description on his website of Ponzi schemes rings clear as a bell:
How does a Ponzi Scheme work?
Step 1: Invent a “business” of some kind and convince people it’s wildly profitable. Induce a few people to invest (“early investors”) by promising huge returns and complete safety of investment.
Step 2: Pay early investors huge returns, exactly as promised. They become excited and invest more, and tell their friends and associates, who also invest (“later investors”). Use the funds from later investors to pay returns to early investors. Convince most investors to leave all their money in the scheme allowing it to compound, rather than receiving a regular payment.
Step 3: Repeat Step 2 as long as possible. The scheme will sustain itself so long as a) it continues to grow quickly so there are enough new investors to pay the old, and/or b) Few investors actually demand payment of their principal and income.
Step 4: Since there is no profitable company and therefore no money underlying these false promises, when growth slows and / or investors demand their money, the fraud cannot sustain itself. Promoters freeze payment to investors and begin stalling for time by any number of vague excuses, hoping the authorities step in and shut them down.
Step 5: There are laws against frauds, but not against business failures. So scam artists create a planned business failure “due to unforeseen circumstances”. If authorities shut them down, the scam artists have yet another excuse not to pay (“We’d love to pay you, but those damn securities regulators have frozen all our money”). Many investors will go to their graves blaming the authorities, rather than the actual con artists.
Step 6: Take ill-gotten gains (often people’s life savings) and quietly leave the country.