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01 Sep 2014

Melbourne ponzi scheme sent to jail

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2 min

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5 years and 3 months for fraud

In a long running matter in our Melbourne office, the director of a company that we alleged was a ‘Ponzi scheme’, has pleaded guilty to ten counts of ‘obtaining property by deception’, one count of ‘fraudulently inducing a person to invest money’ and eleven counts of ‘obtaining financial advantage by deception’.

A Ponzi scheme is characterised as a fraudulent investment operation where the operator pays returns to its investors from capital received from new investors—rather than from profits earned. Notably, over time this requires an ever-increasing flow of money from new investors to meet the interest payments from the ever-increasing pool of old investors.

Our investigations identified the company was borrowing funds from generally unsophisticated investors, and offering returns well above market rates. The contributions funded various business ventures of the company and used by the director to fund lavish lifestyle expenses. Inevitably the company's business ventures proved unprofitable and in order to meet interest payments to old investors we alleged that the director sought to secure fresh capital from new investors.

We also found the perpetuation of the scheme where initial investors were being offered returns around 10% per annum in comparison to investors solicited closer to the collapse who were offered returns of anywhere up to 980% per annum! At the date of the liquidation investors were owed around $4 million.

Our detailed investigations were only possible through the Australian Securities Investment Commission’s (ASIC) assetless administration fund. We recovered significant records of the company from various sources and allowed the tracing of some 5,000 cheques. Our investigations culminated into a report, which ASIC relied on in mounting the prosecution against the director. The limited funds that were available in the liquidation meant that such investigation would not have been possible but for the funding.

This case stresses that the assetless administration fund is a powerful weapon in the arsenal of a liquidator to investigate corporate wrongdoing where those investigations may not have otherwise been possible.

We know from experience that a sentence carrying a jail term of five years and three months, with non parole for three years and three months is significant, and we applaud ASIC in delivering justice for those investors.

And always remember, if a deal sounds too good to be true it generally is.

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