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If it seems too good to be true, it probably is.

The trial date has been set for Perth businessman, Chris Marco, for 50 counts of fraud associated with seeking members of the public to invest in an investment scheme which alleged to be able to leverage international debt markets for mega returns. It is a timely reminder that these types of matters can occur in your own backyard, and one should familiarise oneself with the characteristics of Ponzi schemes to minimise your risk of falling victim to one.

What is a Ponzi scheme?

A Ponzi scheme is a type of investment scam where the returns for early investors are paid with the money from later investors, rather than from actual profits. A typical timeline of a Ponzi scheme, would be:

  1. Someone promises high returns on investments with little to no risk;
  2. Attracted by promised return, people invest their money with the person;
  3. Instead of actually investing the money and generating profits, the person uses the money from the new investors to pay returns to earlier investors (creating the illusion that the investments are profitable, attracting even more investors); and
  4. Ultimately, the scheme collapses under its own weight when there aren’t enough new investors to pay returns to earlier investors, and the person runs off with whatever money is left, leaving most investors with significant losses.

Where did the Ponzi schemes get its name?

The term Ponzi Scheme is named after Charles Ponzi a man who became infamous for orchestrating one of the earliest and most notorious examples of this type of fraudulent investment scheme in the early 20th century.

In 1919, Charles Ponzi promised investors in Boston huge returns on investments in postal reply coupons. Ponzi promised investors a 50% return in just 90 days or double their money in 45 days.

Ponzi used money from new investors to pay returns to earlier investors, rather than generating legitimate profits from the investments. He created the illusion of success, in turn attracting more investors eager to cash in on the seemingly rewarding opportunity. When it reached the inevitable point that he could no longer attract enough new investors to sustain the payouts, his scheme unravelled in 1920, and investors lost an estimated $20 million dollars.

The term “Ponzi scheme” was coined to reference any fraudulent investment operation that pays returns to earlier investors with the capital from newer investors, rather than from genuine profits.

What are the warning signs of a Ponzi scheme?

Recognizing the warning signs of a Ponzi scheme can help you avoid becoming a victim. Here are some common red flags to watch out for:

  1. investment opportunities that promise consistently high returns with little to know risk;
  2. steady returns are promised notwithstanding the condition of the market. Legitimate investments typically have fluctuating returns based on the performance of the market;
  3. there is a significant lack of transparency regarding the investment, details of where your money will be invested are vague, unclear or withheld, or they are “too complicated to explain”;
  4. you are pressured to make quick decisions, or pushed to “act now” due to limited availability;
  5. someone you know tries to recruit you, or the investment opportunities rely heavily on personal recommendations or relationships with friends and family; or
  6. the person recruiting you has already invested in the scheme and received a great return.

Ponzi schemes in Perth

Recently, Perth has seen the arrest of two prominent businessman on fraud charges alluding to Ponzi schemes, one being Jack Endersby who is accused of fraudulently receiving $2 million using a fake trading business, and Chris Marco, whom it is alleged deceived nine investors out of $36.5 million.

Jack Endersby before the age of 25 had an apartment at the The Towers at Elizabeth Quay, a flashy office at The Esplanade, drove a Maserati and made regularly trips to Dubai and New York. From the outside, it looked like he was running a very successful investment business boasting huge returns on blue-chip stocks that quickly garnered a large client base of keen investors.

One of the ways Endersby brought in new investors to pay the ‘non-existent’ profits to the earlier investors was by offering a friend referral scheme where if you provided him a referral, you would receive 10% of whatever they invested with him. This kept the money flowing to allow him to pretend he was profitable by distributing this ‘new money’ to the earlier investors.

Some early investors got their money back from Endersby. One even reported they invested $31,000 in 2021 and by June 2023, his statement showed he was $80,000. This type of activity often occurs in Ponzi schemes to lure in more significant investment to the scheme.

But the wheels then began to fall off and whenever investors tried to speak to Endersby about getting their money back, he was either in “in New York or on a plan to Dubai”. He has now been charged with multiple counts of fraud and is awaiting trial.

Other recent prominent alleged Ponzi schemes include Sam Lee, an Australian block chain entrepreneur charged with conspiracy to commit fraud in the US for $2.86 billion. In November 2020, Australian police searched the Sydney home of Melissa Caddick who had been running a Ponzi scheme thought to have taken about $30 million from her own family her close friends. This was the subject of very interesting podcast “Liar, Liar: Melissa Caddick and the Missing Millions”.

In the current market, and the advancement of the digital age, it is prudent to be aware and do your research if making large investments.

If you are unsure if an investment, we recommend you seek legal and financial advice for a second opinion about the proposed arrangement.

About the Authors: This article has been co-authored by Chanelle Kane and Steven Brown. Chanelle has been in the industry since 2013 and graduated with a Bachelor of Laws in 2020.  Chanelle completed the Graduate Diploma of Legal Practice with the College of Law in 2020 and was awarded the 2020 PLT Professional Excellence Award for the cohort.  Chanelle was admitted to practice in the Supreme Court of Western Australia in November 2020 and to the High Court of Australia in January 2021. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.

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