The Securities and Exchange Commission (SEC) has filed suit against Nationwide Automated Systems, Inc., for allegedly operating a nationwide Ponzi scheme that bilked investors out of more than $100 million. The scam, simple in design, promised investors 20% annual returns for purchasing ATM machines and then leasing them back to Nationwide. With a guaranteed profit of 20% annually, investors flocked to the doors of Nationwide, which was more than happy to take their money.
The ATM machines were supposed to spit out money, like a money machine. Investors were told that they would split the fees with Nationwide 50/50. The only problem--there weren't any machines. Well, not exactly. The SEC alleges that of the hundreds of millions of dollars raised, 1.64 percent might have gone into actual machines.
In its complaint, the SEC said:
"In short, Defendants have 'sold' and 'leased back' tens of thousands of ATMs to NASI investors that they never owned, that they never operated, and that may have never existed."
I was approached by a friend to invest in Nationwide ATM machines several years ago. When I heard about the 20% guaranteed annual returns, my fraud antenna went up. Why? Because I have prosecuted Ponzi schemes before--and the pitch fit the pattern.
Ponzi schemes are named after the Italian emigrant, Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, who, in the early 1920's, promised investors a 50% return by buying discounted postal reply coupons in other countries and redeeming them at face value in the U.S. In reality, Ponzi merely used new investors money to pay earlier investors.
Ponzi schemes all end the same way. They work until new investors dry up and there isn't enough money coming in to pay the promised returns to the earlier investors.
One of the more notorious Ponzi schemes I prosecuted was against Morgan Stanley (formerly Dean Witter, Inc.). It went on for over ten years. The promised returns from stock investments were incredible. The bogus monthly statement that the fraudster created were 100% accurate. Investors were only too happy to share their statements with their friends who were beating down the door to invest. The only problem was that everything on the statements was a fabrication. No stocks were ever purchased. The money went in the front door and out the back door into the perpetrator's pocket, who spent every penny he got.
It always seems to work that way.
So, what was it about the pitch that made me suspicious? The old saying that if things sound too good to be true, they probably are. Twenty percent returns in today's investment climate are virtually impossible. Add to that the concept of ATMs placed throughout the U.S.--all always paying 20% per year. Common sense would dictate that a machine at Grand Central Terminal, New York, would perform better than a machine in the lobby of a hotel in Grand Rapids.
I asked my friend if he had gone to visit one of his money machines to see it at work. Why bother, he said, after all he got monthly statements showing how well his machines were doing. My last question: How did he know whether or not the same machine had been sold over and over again?
It sure sounded like a Ponzi scheme to me. It had all the right moving parts.
My friend was one of the lucky ones. He got back more than he put in. Unfortunately, he may end up getting sued for the return of anything in excess of his investment. The last investors to get in lost everything, and they may want those who made back more than they invested to pay them back.
So the next time someone offers you unbelievable returns, just walk away. You will avoid the pain of Ponzi.
John Lawrence Allen, a nationally recognized legal expert, represents investors nationwide in securities arbitration. Mr. Allen’s second book, “Make Wall Street Pay You Back,” was just released. For more information visit www.MakeWallStreetPayYouBack.com.
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