Ponzi schemes are an investment fraud involving the payment of purported returns to existing investors from funds contributed by new investors. In most Ponzi schemes, the fraudster uses the funds received for personal expenses, instead of engaging in legitimate investments.
With little or no legitimate earnings on funds involved in a Ponzi scheme, and the theft of the principal amount invested, investment firms employing these fraudsters are at great risk for exhausting their fidelity insurance limits and in such cases may not be able to fully cover business losses (see note 1). As a result, some of these companies may be forced out of business. That's why more brokerage firms are looking to outside forensic accountants to establish the right safeguards.
"As we have seen in some of the recent large fraud cases, this can happen to any company," said
Thompson said brokerage firms can do the following to help themselves to identify and deter having a fraudster in their midst:
- Look for material discrepancies in the volume of Investment Advisors' accounts compared to overall average of all such accounts.
- Incidence of transfer of funds from individual customer accounts to employees.
- Establish a fraud hotline.
- Look for material variances in the percentage of total commissions earned by the
- Aberrations in the relationship of total commission earned to the overall funds managed or changes in the fund balance.
- Issue periodic customer account confirmations.
- Conduct periodic revenue audits of the
"As the market rebounds, it provides further motivation for fraudsters to entice investors into schemes promising great returns," said Thompson. "As a result, more stock brokerage firms are proactively seeking our services to minimize their risk from one reckless employee."
According to the
Thompson said Ponzi schemes typically share similar characteristics. Some of the warning signs the investor can look for that an investment may be at risk are:
- Unusually high returns
- Efforts to convince investors to reinvest returns instead of receiving a cash payout
- Using investment vehicles outside of the in-house broker dealer programs
- Lack of paperwork and delay in reporting accounting specifics
- No volatility in the rate of returns realized
- A perceived absence of risk
About RGL Forensics
RGL Forensics is an international firm of accounting, valuation and corporate finance professionals who are specially trained in discovering and defining financial value. The firm establishes relevant facts and reliable figures for corporate, legal, insurance and public sector clients and has done so for more than 30 years. For more information about RGL Forensics, please visit www.rgl.com.
Note 1: Fidelity insurance would likely not cover the thefts of an owner of a brokerage firm, and would typically only consider the thefts of their employees.
SOURCE RGL Forensics
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