US futures regulators are seeing a jump in the number of “Ponzi” schemes coming to light in their markets as the $50bn fraud allegedly perpetrated by Bernard Madoff prompts fraudsters to confess.
The development is a sign that the fall-out is spreading beyond the markets in which Mr Madoff was active as the collapse of his fund prompts widespread client redemptions.
Mr Madoff’s investments were not in futures but overwhelmingly in stocks and options, which are regulated by the Securities and Exchange Commission.
Walter Lukken, who steps down on Tuesday as acting chairman of the Commodity Futures Trading Commission, the SEC’s counterpart in futures markets, said that since news of Mr Madoff’s alleged fraud emerged a month ago, his agency had seen a rise in the number of similar cases.
“We are seeing more of these types of episodes. A lot of it is confessions. They are throwing themselves at the mercy of the CFTC court.”
Many cases were the result of investors, aware of the high-profile Madoff case, challenging their investment managers over the high returns they appeared to be generating for them.
“I think Madoff is getting such coverage that people who are in [futures and commodity-related] funds are saying ‘well, why I am I earning 12 per cent in this [financial] crisis?’ That’s when Ponzi schemes come to light, when everybody hits the exit doors at the same time,” Mr Lukken said.
The CFTC prosecuted 15 cases alleging the running of Ponzi schemes last year. Mr Lukken said the number would be higher this year “if it keeps going at this rate”.
So far this month the CFTC has brought two cases including the largest, involving $50m, against Pennsylvania resident Joseph Forte.
Mr Forte confessed to federal authorities in the wake of his alleged scheme’s collapse.
The CFTC has charged him with solicitation fraud, misappropriation of funds in a commodity futures pool – involving S&P 500 stock index futures, foreign exchange and metal futures – and sending customers false account statements.
The SEC has brought double the CFTC’s number of cases so far this month, one of which also involves the same Mr Forte as a defendant.
In the latest CFTC case, the agency charged a Georgia man and his company with operating a foreign exchange Ponzi scheme involving more than 100 people and about $25m.
The regulator said investors were promised a 10 per cent return on their money within 30 days.