HOT DEAL OR HOT AIR – Ponzi Schemes Proliferating – The Halachic, legal, and monetary ramifiactions

The point made by one of the speakers that one should not invest with small poorly controlled investment companies was well taken but needs more detail. The following are actual cases I had during my over 25 years of being a CPA that may help illustrate the high risks involved.
A client of mine sold his West Side apartment and gave $400,000 of the proceeds for a partnership interest in an Asbury Park development. He moved to Israel and them came to my office a few years later and told me he is going to see how his Asbury Park investment is doing since he had not heard anything about the progress of his investment. He came back and reported that the building was completed, the complex appeared fully occupied and he expected a great investment return. Next week he came a third time to my office and sadly reported that the developers denied that he ever invested in this Asbury Park project. He showed me the partnership agreement that he signed many years ago. I told him that the agreement was missing the developers’ signatures and only contained his signature. They were able to fraudulently claim that he invested in a different unsuccessful real estate deal and that he had no part in this successful Asbury Park deal.
This same innocent client gave $600,000 to a stock broker who coincidently was also my client. This stock broker bought a house in Crown Heights shortly after he received the $600,000 and told my innocent client that his investment went sour and it was not bashert that he make money. When I confronted this stockbroker and asked how he was able to buy a house that year, he told me that “my account went up and his account went down to zero. “ After I pressured him he admitted to me that he took $500,000 as commission from my innocent client, and invested the remaining $100,000 in Potash options that went sour. He told me he was not a thief because if the options he bought would have gone up ten times then he would have made over a million.
I myself was swindled by a client who told me that in two weeks he will get SEC approval to issue stock for a no-carb food company. He told me he will sell me the stock for 50 cents a share and that the stock’s opening price will be $2 a share. I gave him $5000. A month later, I called him and he told me that the deal fell through but since I was his accountant, he will give me an alternative investment free of charge. A week later he send me an email claiming that it contained a video of him and a Russian oligarch standing on top of hill shaking hands. He wrote that he just bought this gold mine from the Russian oligarch. I never heard from him for six months but then he came to my office and gave me a stock certificate saying that I owned 87000 shares in some unheard of company. He told me that I should look up the symbol and stock value and it showed that each share was worth $4. However, when I tried to sell it I only got 2 cents per share. A year later he was arrested and pleaded guilty. When I read about his arrest, I found that this was the second time he was arrested for the same type of crime.
A relative of mine gave $100,000 to a data compression company for a 10% ownership in the profits. Fifteen years later they sold their company for over 12 million. However, my relative only got $140,000 and not $12 million. They were able to swindle him by claiming that they issued millions of new shares and diluted his ownership percentage to less than one percent.

I was also the accountant for one of the biggest Real Estate investment companies in Boro Park. They owned over 20 apartment houses and each apartment house was owned by a different LLC. When I did the tax returns for these 20 LLC’s I noticed that the return the investors received for their capital contribution averaged only 2%. However, when I did the tax return for the manager of these 20 LLC’s, I saw that he had over 25 million in assets. I questioned how he was so wealthy when his investment returns were below average. I found that for each apartment house he controlled, the investors received an investment return only after depreciation was deducted. For example, if an apartment house made $300,000 profit and the depreciation( an often fictitious expense) was $200,000 then a 10% investor would only get $10,000 return instead of the $30,000 he was entitled to ( ten percent of $300000 and not 10% of $100,000) .
I had two clients that also got very small returns on their real estate investment. I found they inflated the expenses. For example one apartment house listed sidewalk repair as costing $150,000.
In sum, in the vast majority of cases, my clients lost money when they invested in partnerships that were small and had unverifiable profit and loss records.

Regarding the recent podcast on ponzi schemes and dishonest investments I have one comment to make. When it comes to the reaction to the avla, if a qualified bes din Paskins a certain way then of course that din must and should be followed but only as a means of hishtadlus. The absolute FIRST question we are asked when we get to shamayim before any and all din vcheshbon is : were you maaseh umattan b’emunah? The directive to conduct our business with emunah is the real test. When someone steals from you, do you then get the right to do ve over on vahavta lreacha kamocha, lo sikom lo sitor, retzicha, lo yehiyeh kkorach vaadaso, lifnei iver, lo sisna es achicha bl’vovcha, just to name a small potential bucket of aveiros ? We all know that there is no license for that. Very often the real test from hashem is not for the one that does the stealing, but the person that is stolen from. Being maaseh umatan bemuna is real and even shleima, reishis chochma , mesilas yesharim to name a couple of sources recount really serious things about the aveiros associated with the justifications of “liharviach shani”, or, “business is business” if money is gained from another yid’s loss it is stolen hashpaah and it is very scary…. it’s a difficult and very emotional Sugya for people on the other side of a scam or a gzeila, but there’s tremendous olam-habah building opportunities waiting for those who are maaseh umatan beenunah even when facing the challenge of the hishtadlus of recovery. Thank you ! I love listening to the shiurum. -Stuart Zelmanovitz