The Year of Ponzi Schemes Ushers In Tighter Regulation

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Financier and fraudster Bernie Madoff was the worst but far from the only Ponzi purveyor nabbed in 2009. (Chris Hondros/Getty Images)

NEW YORK—2009 may go down in the annals of business notoriety as the “Year of Ponzi schemes.”

In early 2009, Bernie Madoff’s $65 billion Ponzi scheme unraveled to a world in disbelief. The former Chairman of the NASDAQ stock exchange in March pleaded guilty to defrauding investors and turning his asset management business Bernard L. Madoff Investment Securities into one giant Ponzi scheme.

In total, the $65 billion in fabricated gains were the largest investor fraud in history, and Madoff is currently in prison serving a 150-year sentence.

But that’s not all. Sir Allen Stanford, a Texas billionaire, was arrested last summer on charges of inventing an $8 billion pyramid scheme. His Stanford International Bank, an offshore holding company based in Antigua, allegedly sold more than $7 billion in CDs to unsuspecting depositors, promising sky-high interest rates.

In addition, Stanford will stand trial for bribing Antiguan finance officials.

Another prominent fraud involves Tom Petters, CEO of the Minneapolis-based Petters Group Worldwide LLC. Petters was convicted on Dec. 2 of carrying out a $3.65 billion Ponzi scheme.

Petters was guilty of wire and mail fraud, as well as money laundering. According to reports, Petters falsified documents to obtain huge loans to support his scam and his venture, which employed more than 2,000 people.

House of Cards

So why were so many frauds uncovered in 2009? The answer lies in that Ponzi schemes require new investors to fund old ones, and as the global recession hit, more investors than usual sought to withdraw their funds.

During boom years, investors have little use for their savings. But during a recession as money is drawn and no new investors can be found, Ponzi schemes are often uncovered.

"I think this has been an incredibly difficult year," former U.S. Securities and Exchange Commision (SEC) Chairman Harvey Pitt told Reuters Television. "We've seen a lot of financial scandals, a great deal of misconduct, an economic meltdown and a concerted push now for meaningful regulatory reform."

In total, the SEC filed 664 civil complaints in 2009 against alleged fraudsters. In 2009, more than 150 Ponzi schemes collapsed, compared to about 40 in 2008, according to the AP’s examination of court records and FBI filings.

And that will heighten regulators’ vigilance against fraud schemes in 2010.

On Dec. 16, 2009, the SEC installed new rules for money managers—investment managers will require surprise inspections by the SEC. The ruling comes more than a year after Madoff admitted to his sons that his business is “one big lie.”

Mary Schapiro, current Chair of the SEC, said in a December meeting that the new guidelines came about from “the Madoff Ponzi scheme and other frauds in which investor assets were misappropriated by investment advisers. Such frauds have caused investors to question whether their assets are safe when they entrust them to an investment adviser.”

Previously, the SEC was criticized for not reining in Madoff earlier, despite several leads and tips that the SEC received but ultimately dismissed in prior years.

Buying and Selling Thesis Papers Common in China

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The buying and selling of academic thesis papers has become so common that in 2007 alone the sales revenue was between 180 million and 540 million yuan (S$26 million to $79 million), according to Chinese media reports.

Buyers from universities and research institutes purchase the theses they need over the internet, according to Associate Professor Shen Yang from Wuhan University School of Information Management, quoted in a Yangtze Daily report.

'Mindboggling' corruption

On Dec. 17, Sound of Hope radio interviewed two professors in China to find out more about the practice.

Dr. Sun, a retired professor from Shandong University, said it’s one of the ways that corruption in academia manifests. “Students, professors, and researchers—they are all involved. Students need to have their papers published in order to graduate,” he said. Professors and scientists need published papers to obtain promotions that reflect the status of their titles, and some Communist Party officials need an academic degree to gain a promotion, Sun explained, all of which drives the market. “The range of needs dictates the phenomenon of publication sales—a multi-million dollar business in Chinese society.”

It shows the corruption of Chinese society, Sun continued. “Plagiarism has always existed in China. Directors of academic departments are often politicians with power, but they lack an academic background. When they push for a promotion, besides bribing members of review boards, they pay for people to write research papers for them,” he said. With a loose review process for research papers, an ample sales market for them has formed. “The extent of the corruption within academic institutions is mindboggling.”

Dr. Jiao Guobiao, associate professor of Beijing University’s Department of Journalism, says that the evaluation process for the promotion of teachers, as well as prospective graduating students, all depends on whether they have published papers.

Jiao was blacklisted in China, meaning his name cannot appear in any Chinese media reports, after he published a scathing critique of the role of the Central Propaganda Department in 2004.

“China has rigid standards for who should write what kind of papers and under which circumstances. For students who also need to work part-time, it’s evident that they have neither the time nor the resources to write papers,” he said “They will end up buying their semester, year, or graduation papers. I know this is what happens.”

The Ministry of Education in China apparently plays at least a tacit role in the paper sales scheme. “The Ministry of Education or the universities only expect you to meet the requirement for the number of papers; their expectations are not based on whether you write them or not,” he said. “As long as you have a paper to meet the evaluation criteria, everyone is happy.”

Thousands in New Year Hong Kong March for Democracy

Pro-democracy demonstators march in Hong Kong on January 1, 2010 calling for universal sufferage and the release of political prisoners. ( Anthony Dickson/AFP/Getty Images)

[www.theepochtimes.com] HONG KONG - Thousands of Hong Kong residents appealed to China on New Year's Day to allow full democracy to be introduced soon in the city, as opposition lawmakers pressed forward with a mass resignation plan later this month.

Congregating outside the city's historic domed legislature, protesters carried colourful banners with slogans such as "Democracy Now!" and made their way to Beijing's representative office.

Some demonstrators held aloft portraits of Chinese dissident Liu Xiaobo, demanding the release of the prominent activist and writer, jailed last week for 11 years on a subversion charge.

Organisers said more than 30,000 protesters turned out for the New Year's Day "return our right to universal suffrage" march. Police put the number at around 9,000.

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• Chinese Authorities Tighten Their Grip on Legal System in 2009

Hundreds of police erected steel barricades as protesters with loudhailers converged on Beijing's liaison office in the former British colony, returned to Chinese rule in 1997.

There were minor scuffles when police tried to prevent a small number of protesters from storming the office.

A group of five pro-democracy legislators plan to resign en masse from the city's legislature, following the release of a political reform blueprint for elections in 2012, which democracy advocates say does not go far enough.

The subsequent city-wide by-elections in Hong Kong's five major districts will trigger what the liberals say amounts to a symbolic referendum on full democracy.

Beijing has already promised to allow a full-scale election in Hong Kong in 2017 for the city's leader. But recent signs, including comments by pro-Beijing figures, have suggested Beijing may only allow a power-preserving version of democracy with rules stacked against opposition candidates.

Hong Kong's mini-constitution guarantees full democracy as an "ultimate aim" but the city's seven million people now have no direct say in their leader.

Beijing remains wary of upsurges of public discontent in Hong Kong, with Chinese premier Wen Jiabao recently warning Hong Kong's bowtie-wearing leader Donald Tsang to be wary of "deep-rooted conflicts". In 2003, half a million protesters spilled onto the streets in anger at the administration of Hong Kong's then-leader Tung Chee-hwa, who resigned soon afterwards.
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