Another Ponzi schemer steals millions by writing his own report card
The Securities and Exchange Commission is an unindicted co-conspirator in the Ponzi schemes that have emerged over the last few years. It created the conditions that left huge opportunities for the ambitious and unscrupulous to dupe investors. And it shows no inclination to fix the problems. What I'm talking about -- as I've posted many times before -- is that unlike in school, where teachers write students' report cards, in money management, the managers grade themselves.
This huge flaw in our regulatory system comes to mind with the discovery of this latest little Ponzi scheme. In this one, as Fortune reports, a piece of Georgia trailer trash made his way north to Pennsylvania and wormed his way into the good graces of the old-money, polo-playing set south of Philadelphia. This character -- dubbed Tony Young -- then persuaded his new-found admirers to invest $120 million of their great-great-grandfathers' money with his company, Acorn Capital Management LLC. Of that, Young allegedly stole $23 million.
According to Fortune, Young allegedly used millions of that money to buy himself huge homes in Chester County, Pa., ($4 million); Palm Beach, Fla., ($2.1 million), and Northeast Harbor, Maine ($1.3 million). How did he do it? Using a script that has been followed by Ponzi schemers through the ages -- most dramatically by Bernie Madoff: Take investors' money and create fake account statements to convince them that everything is fine.
To be fair, Young differed from Madoff in one crucial respect. While Madoff used a hole-in-the-wall accounting firm, Young hired prestigious accounting and law firms -- Master, Sidlow and Associates and Dechert, respectively, which evidently failed to detect Young's fraud. (I think it would be worth investigating what these firms did to "earn" the fees Young paid them).
The SEC alleges that Young routinely sent false information to the accounting firm; created fake performance and account statements to investors; and regularly gave fake 13Fs -- reports on Acorn's holdings -- and other documents to the SEC, according to Fortune.
Like Madoff's con game, Young's little scheme fell apart when investors got nervous and demanded their money back -- $11.5 million that Young didn't have readily available. But Young was able to scrounge up the money from other investors' accounts. Eventually, another investor had a question about a transaction in a tax statement he had received from Young, and asked Master, Sidlow to explain.
The accounting firm noticed a discrepancy between the client's tax statement and the one that Young had sent to it.
As long as the SEC permits schemers like Madoff and Young to generate their own financial statements, we are sure to see more investment scams. Sure, they eventually got caught, but not before causing lots of pain for everyone involved.
Wouldn't it be better to close the loophole that lets these scams get off the ground? All we'd have to do is create a totally independent organization to produce money managers' financial statements. But that might put a crimp in the business of audit firms -- the same firms that failed to stop Madoff and Young. We wouldn't want that, would we?