TORONTO - Police say hundreds, if not thousands, of Canadians have fallen prey to Ponzi schemes in recent years, but experts warn victims looking to reclaim lost investments are unlikely to see a penny.
The structure of the scheme, in which investors are paid income with other investors' money rather than actual profits, and the effects of the global economic recession almost guarantees it, they say.
"I think some of them are unfolding now because the economy's taken a tank," said Tedd Avey, a partner with Deloitte and a specialist in investigative and forensic accounting.
"There's no liquidity so these things can't keep going. They can only go if you attract new investors. If they don't get new investors, it just collapses in on itself because there's nothing there."
Convicted purveyors of the Ponzi include Earl Jones, who duped 158 investors of about $50 million over 20 years in Montreal. Andrew Lech scammed between $50 to 70 million, mostly from Ontario investors, and was handed a six-year prison sentence. Former Nasdaq stock market chairman Bernard Madoff is serving a 150-year sentence in North Carolina for his multibillion-dollar Ponzi scheme.
There are also several cases of alleged Ponzi schemes making their way through Canadian courts.
Toronto financial adviser Weizhen Tang faces a fraud charge for allegedly running such a scheme. Tang, who returned to Canada from China Jan. 13, is accused of defrauding about 100 investors in Canada, the United States and China of some $30 million through his hedge fund, Oversea Chinese Fund Limited Partnership, between January 2006 and March 2009.
Tang, who has said he is innocent of the allegations, also faces trial in April on a dozen charges laid by the Ontario Securities Commission. He was denied bail on Thursday.
In Calgary, Gary Sorenson and Milowe Brost are charged with fraud and theft. Police allege thousands of investors in Canada, the U.S. and overseas were swindled out of about $400 million between 1999 and December 2008. The allegations have not been proven in court.
Many victims of proven Ponzi schemes have lost their life savings or their homes -- the money seemingly evaporating overnight. But experts say the reality is there was never much money in the first place, and the schemer has spent the money on his lifestyle, keeping the Ponzi going, hidden some of it and suffered some market losses.
Forensic accountants blame greed and gullibility, saying people are lured in by the promise of great financial returns often by those seen as trustworthy and pillars in their communities.
Most victims won't ever get their money back, said forensic accountant Al Rosen of Toronto-based Rosen and Associates.
"If you think any authority in Canada is going to help you recover your money you're dreaming," said Rosen.
Often the only option is a class-action lawsuit, he said, but trying to follow the money trail is a daunting task with little payoff.
"In our experience over many cases you don't recover that much," he said.
"You may have to put up $3 million to pursue $5 million. Sometimes you get lucky and you get it with only $300,000 or $400,000 spent but other times you may get nothing," he said.
After losing massive amounts of money, many victims can't fund the lawyer, accountant and private investigators needed to trace the money, said Avey. Putting the investment entity into bankruptcy, so assets are frozen, is the best way to stop the funds from disappearing further, he said.
Forensic investigators can use victims' cheques to trace where money was deposited. But getting the accounts of the fraudster to find out what he did with the money isn't easily done unless a lawsuit is underway or a trustee in bankruptcy is appointed. Banks don't readily give out that type of information to victims, Avey said.
The information is more difficult to obtain when the money is moved offshore to a tax haven or a jurisdiction that's not user-friendly for litigation or investigation, he added.
Smart crooks will set up a network of 50 or 100 relatives or friends in foreign countries who will make arrangements with lawyers or real estate agents to hide money in many places, said Rosen. Investigators often find the money has been shipped to bank accounts controlled by other people that is hard to trace, he said.
One trick used is to send money overseas to buy property but the deal magically falls through, said Rosen. Or they fake a lawsuit where they have to pay out millions of dollars to make the phoney suit go away, he added.
Investigators would have to locate the property, check to see if the property was sold, and if it wasn't, find out which lawyers and real estate agents the money went to and then try to "put some heat on them" to explain where it was.
Documents are created to give people he impression it's legitimate, when it fact it's not.
"The more creative you are in setting up all these ways of hiding it the more impossible it is to trace it," said Rosen.
Canada is ripe for crooks who want to pull off Ponzis, with its lax rules and weak penalties, he added.
Rosen estimates there are well over 100 Ponzis operating in Canada right now that have not been exposed. He bases that estimate on the "tonnes of requests to investigate stuff" his firm gets. Most of them his company can't follow up on because the victims don't want their name used as a representative plaintiff in court, he said.
The Harper government has vowed to toughen up Canada's white-collar crime laws by introducing mandatory jail terms, longer sentences and confiscation of assets.
