Although, there are not many complimentary things to be said about Bernie Madoff , perhaps his most positive contribution to the investment community has been to increase awareness about ponzi schemes and other investment scams. Consequently, there has been increased scrutiny of investment companies by the SEC and other financial regulatory bodies, and ensuing prosecution of fraudulent activities. One such fraud relates to two Certified Public Accountants (CPAs), who were charged, on July 22, 2010 with running a ponzi scheme.
Laurence M. Brown and Ronald Mangini, both CPAs from Westchester County N.Y. who run their own accounting firm, Marshall Granger & Co, were charged with selling investments in what they claimed to be a profitable gas pipeline company in Tennessee, but was atually an inoperative company and had been so for more than a decade. Some of the more interesting details of the case are as follows:
- Investors were told that the gas pipeline company, Infinity Reserves, had a captive market in its area and a stable minimum rate of production with quality gas that could be sold well above (at a 20% premium)market prices. The company, Infinity Reserves, was actually owned by a client of their accounting firm and was used by Brown and Mangini without authorization. Infinity Reserves owns one principal asset — a gas gathering and trunk pipeline system located in Tennessee that it has not operated for more than a decade. Brown and Mangini represented themselves as President and Vice President respectively, despite have no ownership in the company.
- Investors, including 13 clients of their firm, were sold common stock and fake promissory notes from April, 2008 to June, 2010. The proceeds, after being deposited into an Infinity Reserves account at Wachovia Bank, for which Brown was the sole signatory, were diverted to personal and family member bank accounts. The promissory notes promised investors a 10% annual return, and had a stated one to two year maturity.
- A total of $2.133 million was bilked from investors and deposited into the Wachovia bank account. Of this $136,000 was returned to investors. Approximately $1.7 was used for personal purposes and was disbursed as follows:
- Brown directly received $523,000 in cash
- Mangini received $174,600
- Maylil Inc., an account where Mangini and his wife are the only signatories, received $291,800
- Infinity Farms, owned by Brown's daugher, Sloan, received $228,900
- Sloan Brown directly received $261,400 and another $100,000 was paid to fund her Equestrian activities
- Personal Amex bills were paid totalling $108,000
- Brown had already been charged in 1994 with fraud in connection with another investment offering. As a result of this he had been barred from associating with any broker, dealer, government securities broker or dealer, investment company, investment adviser, or municipal securities dealer.
- SEC's complaint seeks permanent injunctions, disgorgement of the defendants' and relief defendants' ill-gotten gains plus prejudgment interest, and financial penalties from the defendants. In addition to the SEC charges of securities fraud, the US attorney's office has brought criminal charges against Brown. If convicted of all charges he faces up to 50 years in prison.
Although the magnitude of the fraud does not come close to the billions that Madoff bilked from his investors, several people still lost a significant amount of money, including assets held for retirement. Of the 13 victims of the fraud, 6 actually had long standing relationships with Brown and Mangini and their accounting firm. One cannot help but wonder how the likes of Brown and Mangini and Madoff are able to justify their facade of trusted advisor to their clients, while essentially stealing from them . Also, given that the potential for a ponzi scheme to be discovered is extremely high (about 100% if you give it long enough), I find it difficult to understand how the perpetrators plan to avoid getting caught. (It would perhaps be a little more understandable if, after amassing a sufficient amount, they flee to South America). The accused in this case seems particularly short sighted, in that the promissory notes had repayment periods of 1 to 2 years, although it seems they were confident in their ability to con additional investors into buying into their pipe(line) dream.