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Posted on Thu, Aug 6, 2009 : 5:45 a.m.

Russell Long: Beware of Ponzi schemes in Michigan

By Sven Gustafson

Russell Long toned.jpg
The recent arrest of two Southeast Michigan men accused of defrauding at least 440 investors out of more than $50 million once again has turned the spotlight on Ponzi schemes just months after Bernard Madoff made international headlines.

But the latest case, involving an investment office in Southfield, is just the latest alleged Ponzi scheme to originate in Michigan. In recent years, prosecutors have disrupted fraudulent investment schemes in Mason, Southfield, Troy, Williamston and Battle Creek, among others.

Russell Long, a forensic accountant with O’Keefe & Associates Consulting LLC in Bloomfield Hills, has helped prosecutors investigate two Ponzi schemes in Michigan, including two on the state’s west side. He’s currently working on another, long since shut down, that was based in Oakland County.

He spoke with Business Review reporter Sven Gustafson.

Business Review: What are the common characteristics of Ponzi schemes?

Long: It’s always high returns, higher than normal returns, for seemingly secure investments. But secure investments don’t pay high returns. They just don’t. So people get caught up and they’re looking for a way to get ahead, especially in times like today. It doesn’t mater if it’s good times, bad times. They’re looking to improve their position financially. If somebody guarantees a return, it looks good.

How does the case you’re working on compare in size with the one that was broken up and indicted in Southfield?

I would think that it’s probably similar in size. I’ve tried to read up as much as I can but I don’t know how long this was going on. But the other two I have worked on lasted nine or 10 years.

It’s like a snowball: Once it gets rolling, so long as you can continue to pick up new investors, you can make it work, but inevitably they all have to collapse. It’s not if, it’s when they run out of investors. Even in the Madoff case, they just ran out of investors.

How are Ponzi schemes able to stay hidden for so long?

So long as you can continue to pick up more investors that will provide enough capital to pay the promised amounts to the early investors - as you pick up a new investor, in some cases your initial payback doesn’t happen for a period of time. So your money is immediately going to somebody else, or several somebody elses.

What’s your involvement in investigating this alleged Oakland County Ponzi scheme?

The operation is closed down, there’s still an ongoing investigation, and we’re trying to determine who the winners and losers (are). Anyone who ended up with a net gain will ultimately be sued to recover that money. Depending on how large the game was, obviously there’s a cutoff.

Isn’t it unusual to have this much allegedly fraudulent investments activity going on at once in the same state?

Well yeah, they’re not an everyday event. Although if you read the papers over the last six months, you’d think it was happening all over because they are uncovering it seems to be more and more.

It’s the promise of higher-than-normal returns. People get a little greedy by nature, and the scheme itself perpetuates itself by the fact that people who invest in it and are getting these regular checks with substantial returns are telling their neighbors about it. That’s how these things perpetuate themselves, because people talk about it.

In these cases, who are the whistleblowers typically?

Somebody catches on, or somebody doesn’t get a check. Usually it’s the beginning of the end when the promised amounts are not forthcoming, because they run out of potential investors. Or someone will raise a red flag.

By nature, you lose control. It gets so big and so out of hand, and you start making mistakes, and people don’t get paid, and they start asking questions.

Do you think there’s a way to prevent these kinds of scams in the future?

I think investors just have to be a little more diligent in their investigation into something they’re going to put their money into - who the person is, what the investment is, what the track record is, whether or not the entities have had any complaints. They just have to be more diligent and not fall for the sales pitch.

Part of the problem is the built-in sales pitch is ‘my neighbor has been getting these returns for two years.’ So they think, ‘Well, if he thinks it’s OK, it must be OK.’ If someone tells him about it and it’s a trusted friend, then everybody gets caught up.

-Sven Gustafson writes about technology and other topics for Michigan Business Review. Contact him at (734) 302-1732 or sveng@mbusinessreview.com.

Photo: Russell Long