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Ponzi Schemes Going Green?

According to its website, the SEC has "charged four individuals and two companies involved in perpetrating a $30 million Ponzi scheme in which they persuaded more than 300 investors nationwide to participate in purported environmentally-friendly investment opportunities."  At last, the politically correct Ponzi-scheme. 

Returns over 100% to good to be true?  According to the SEC press release, investors were allegedly promised abnormally high returns "ranging from 17 percent to hundreds of percent annually" by Wayde and Donna McKelvy who promoted Mantria Corporation, a Pennsylvania-based company, "as a supposed carbon negative housing community in rural Tennessee and a biochar charcoal substitute made from organic waste."  If you find this hard to decipher you're not alone.  From the SEC release it remains unclear exactly what was being sold to investors.  But that's really not surprising.  Typically, Ponzi schemes tend to get started based on "big picture" concepts.  It's when the details are reviewed that things don't really add up.  Indeed, if the SEC's allegations are true, this Green Ponzi scheme bears many classic signs of a Ponzi scheme - "falsely promised returns ... fraudulent exaggerations ... and high-pressure sales tactics."

Newly discovered Ponzi schemes are hitting the news almost weekly.  Is there an end in sight?  Probably not.  According to various news media outlets, general investor sentiment is one of cautious optimism, but with health care reform and other large issues issues predominating the political arena and news coverage, general optimism about the economy just can't seem to gain traction.  Arguably, in the short run this is good for detecting Ponzi schemes, which rely on an influx of capital from new investors to pay early investors.  In troubled times, people (after a while) tend to hold onto their money tighter, thus making it more difficult for perpetrators to attract new capital to supply the scheme, thereby exposing the schemes when they start to fail.  In the long run, however, the damage Ponzi schemes create may have long lasting impacts.  Investors who have lost their retirement money in Ponzi schemes can't readily replenish their investments to put back in the market when it turns around, and even individuals with the resources to re-invest may be more cautious with their money and less willing to invest. 

While only time will tell how and to what extent the mass uncovering of Ponzi schemes will affect the average investor psyche, no doubt the effects will be felt throughout the market in the coming years.  Stay tuned...

Full post as published by OverRegd - Securities Regulation and Litigation Blog on November 18, 2009 (boomark / email).