Accounting Expert Examines Financial Transfers Used by Ponzi Scheme


Accounting Expert WitnessIn this case, an accounting expert was called in by the plaintiff in order to examine financial records detailing alleged irregularities by the defendant. The plaintiff was the receiver appointed to oversee proceedings to benefit hedge fund investors in Ohio who lost millions in a widespread Ponzi scheme perpetrated through several hedge funds over the course of 10 years. The fund managers collected fees from the hedge funds for their purported investment management services, utilizing numerous software appliances including Quickbooks to track their business enterprises. Approximately $100 million of investor funds were paid in management fees. The hedge funds paid approximately $50 million in false profits to net winners of the scheme. Losers incurred losses of at least $168 million. The funds’ owner and Ponzi scheme operator pleaded guilty to securities fraud, mail fraud and wire fraud and was sentenced to prison.

Throughout the scheme, the funds allegedly used several bank accounts at a bank to move the money. The receiver has sued the bank alleging it had actual knowledge of conversion of breach of duty, knew the scheme operator’s background and that his account opening documents had discrepancies, failed to implement adequate account monitoring programs, participated in investments in two of the hedge funds, knew the operator was commingling money across several accounts, and knew of transfers between non-matching trading and shadow accounts.

The receiver filed claims of negligence, fraudulent transfer and unjust enrichment against the bank.

Question(s) For Expert Witness

  • 1. How were the bank funds used?
  • 2. Could the scheme have operated without the bank accounts?

Expert Witness Response

In my opinion, based on the extensive information that I have reviewed, it is evident that the scheme operator ran a classic Ponzi scheme. This Ponzi scheme collapsed because the hedge funds paid management fees (based on inflated balances from purported gains) of approximately $100 million and transferred monies to investors as purported trading gains and principal redemptions when the hedge funds, in fact, had actual trading losses of more than $24 million. At no time could the hedge funds meet their obligations to investors for the principal they invested. The hedge funds never produced profits to pay investors.

The operator indiscriminately commingled investor funds regardless of the hedge fund in which an investor invested. The data reviewed clearly shows that he operated the hedge funds as one continuous Ponzi scheme.

The operator maintained shadow bank accounts at the defendant bank. The use of these shadow bank accounts permitted the furtherance of the Ponzi scheme by facilitating the surreptitious transfer of funds among the various hedge funds. The operator would have been unable to operate his Ponzi scheme without access to and the use of the shadow accounts.

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