SEC FINDS A DIAMOND PONZI SCHEME

It is easy to believe that over the front door of every trading house in America there is a bust of Charles Ponzi. It seems that there are Ponzi schemes everywhere. There are Ponzi schemes involving insurance, real estate, bonds, commodities and stocks. The following case involves generating cash payouts to clients using profits from trading in diamonds. In fact there does not appear to be any evidence of profitable trading going on at the firm. Instead, like in the Madoff case, the diamond traders were just cutting checks to old investors using the money from new investors. In this case, the SEC had to get a court order to freeze the assets of the owner and his company. The following is an excerpt from the SEC web page:

“Nov. 23 2010 — The Securities and Exchange Commission has obtained an emergency court order freezing the assets of a Colorado man and his company charged with running a Ponzi scheme with money invested for diamond trading.

The SEC alleges that Richard Dalton and Universal Consulting Resources LLC (UCR) raised approximately $17 million from investors in 13 states for two fraudulent offerings that were generally referred to as the “Trading Program” and the “Diamond Program.” Investors in both programs received monthly payments which Dalton told them were profits from successful trading. However, there is no evidence to substantiate the $10 million in claimed profits from the two programs, and the vast majority of funds that came into UCR bank accounts were from new investors instead of actual profit-generating activity. Dalton used money from new investors to fund the monthly payments to existing investors while continuing to recruit new investors in order to keep his scheme going. Meanwhile, Dalton stole investor funds to purchase a home and a vehicle and pay for his daughter’s wedding reception.
Investors often learned of Dalton through a friend or family member who had previously invested with him. These new investors placed great weight on the fact that someone they knew and trusted received regular monthly payments from Dalton. Some investors even invested funds from their self-directed IRA retirement accounts.
“Dalton made his Ponzi scheme falsely appear profitable by continuing to bring in new investor money,” said Donald Hoerl, Director of the SEC’s Denver Regional Office. “Investors should be skeptical when someone promises low risk and high guaranteed returns, and focus on the details of the investment being offered rather than the lure of profits paid to friends and family.”
According to the SEC’s complaint filed in U.S. District Court in Denver, Dalton told investors in UCR’s Trading Program that their money would be held safely in an escrow account at a bank in the United States, and that a European trader would use the value of that account — but not the actual funds — to obtain leveraged funds to purchase and sell bank notes. According to Dalton, the trading was profitable enough that he was able to guarantee returns of 4 to 5 percent per month — or 48 to 60 percent per year — to investors. Dalton claimed that he had successfully run the Trading Program for nine years.
According to the SEC’s complaint, UCR began offering the Diamond Program in early 2009. Dalton claimed the program would profit by using investor funds for diamond trading. Similar to the Trading Program, Dalton claimed that investor funds would be safely held in an escrow account. Under the Diamond program, Dalton enticed investors with a guaranteed 10 percent monthly return — or 120 percent annual return.
The SEC further alleges that Dalton, who had no other employment or legitimate source of income, funded his personal life at the expense of investors. Dalton spent or withdrew in excess of $250,000 from UCR accounts that held investor money and used those funds for personal expenses, including paying $5,000 for his daughter’s wedding reception and $38,000 to purchase a vehicle. Dalton also transferred more than $900,000 from another UCR account in order to purchase a home. The home was purchased solely in the name of his wife, Marie Dalton, in an attempt to protect it from creditors. The asset freeze obtained by the SEC extends to the assets of Dalton’s wife, who is named as a relief defendant.
The SEC’s complaint alleges that Dalton and UCR violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint names Marie Dalton as a relief defendant in the case in order to recover investor assets now in her possession. The SEC’s investigation is ongoing.”

It is a comment on how some investors think when they pick either super glamorous assets or really odd items to buy into with their hard earned dollars. Something glamorous like diamonds is hard to turn down as an investment because it seems obvious that you can’t loose money betting on diamonds which are sometimes as good as cash (better than cash in some countries). An example of an odd item that my uncle invested (lost) money in was a beach towel with a pillow sewn into it. It seemed like a great idea at the time and everyone encouraged him to keep pouring money into the pillow beach towel. My uncle had an overseas partner in the deal and that partner eventually disappeared and my uncle never heard from him again.