.htm_cmp_willow000_vbtn.gif){kind=small}
March 17, 2005
WHO IS CHARLES PONZI?
Charles Ponzi in September 1919 was a 42-year-old ex-vegetable dealer, forger, and smuggler, who decided he would become a wealthy financier. Described as handsome and quick-witted, he had only $150 in cash to his name. But he had a scheme.
Ponzi’s scheme was to offer investors returns as high as 50% for a 90-day investment. Many investors were skeptical at first. But soon the word spread that they had earned 50% and money poured in from investors all over the country. What Ponzi told his would be lenders (mostly Italian immigrants) was that he would be buying International Postal Union reply coupons overseas, and then send them elsewhere to be redeemed. As Sobel writes in his book, "The Great Bull Market: Wall Street in the 1920s," "In this way, (Ponzi) could take advantage of differences in currency quotations to make profits." At least that's what he told his investors.
What this really amounted to was paying off the initial investors with borrowed money from the new investors. As long as the steady flow of new investors kept coming, there would always be money to pay off the old investors.
The Boston district attorney began an investigation. Edward Dunn of the Boston Post also began an inquiry. Dunn discovered that less than $75,000 worth of reply coupons were printed in most years, and in 1919 there were only $58,560 worth issued. Ponzi said he took in millions and invested them in the coupons. Clearly, Dunn reasoned, money had been used for other purposes.
It was finally resolved that Charles Ponzi had taken in some $15 million in 8 months, and that his books showed a deficit of $5 million; less than $200,000 was eventually recovered from his holdings.
While out on bail pending appeal, Ponzi figured out another way to make money. He sold underwater lots in Florida to the unsuspecting, thereby making another small fortune His appeal was denied and Ponzi went to prison until 1934. Upon his release he was deported to Italy. Later, his employer, LATI Airlines sent him to Rio de Janeiro, where he became a fixture in the social set. He died of natural causes in 1949.
Today the “Ponzi Scheme” is the number one rated scam, scheme and scandal for 2004 according to the North American Securities Administrators Association. Rated the number 10 scam for 2004 is Variable Annuities. Because of what appears to be a widespread practice of selling Variable Annuities to Massachusetts elders, let’s take a closer look at what these are and what you should do if you or someone you know has purchased a Variable Annuity.
WHAT IS A VARIABLE ANNUITY?
A Variable Annuity is an annuity whose returns vary, with the stock market. They are tax deferred, so that your earnings grow tax-free. Some have death benefits and they avoid probate. This sounds pretty good, doesn’t it? Now comes the bad news. Because they are variable, you might not receive the returns that you expected. If you need to get your money back and liquidate the annuity, be prepared to pay large surrender charges. The broker who sells you the annuity will earn a commission of about 7% of the amount of the annuity. Variable annuities make sense only for consumers willing to invest for 10 years or longer, but they are not suitable for many retirees who cannot afford to lock up their money for a long time.
STATE REGULATORS EXPAND ANNITY PROBE
Sales of Variable Annuities have increased over the last ten years. High sales commissions is the driving force for the increase. State regulators have received complaints that several elderly clients had no idea of what they were investing in other than that they would receive a higher interest rate. Secretary of State William Galvin said, “The response suggests very strongly that this is a big problem in Massachusetts.”
It’s hard to believe, but this is happening everywhere. You go down to your bank to renew your CD. The teller says, hey, instead of renewing your CD at 3%, you could go to our investment advisor and get 5%. Citizens Bank would hold “Blitz Days” or “Cold Calling Nights” where tellers would assist financial consultants, from their investment branch, to identify likely clients for investments. Tellers would be rewarded with points toward bonuses if they had made “qualified referrals” to the investment office. Sunny vacation trips and expensive dinners were awarded to top performers. Citizens Bank is claimed to have sold a variable annuity to an 80-year-old client, who shortly after purchasing the Variable Annuity, needed to move to an assisted living facility. He had to pay a 7% surrender charge to get his money back. On February 10, 2005 Secretary of State Galvin filed a complaint against Citizens Bank for Dishonest and Unethical Practices and Failure to Supervise.
This is not limited to Citizens Bank. Secretary of State William Galvin is also investigating many other banks and brokerage firms as part of his investigation. In January he issued a subpoena to Morgan Stanley to investigate whether brokerage houses failed to disclose payments received from insurers to sell variable annuities.
WHAT SHOULD YOU DO IF YOU PURCHASED AN ANNUITY – If you are over age 75 and have purchased a variable annuity you should contact the Secretary of State’s office at (617) 727-3548,Toll Free: (800) 269-5428 (Massachusetts only), Fax: (617) 248-0177
Email: securities@sec.state.ma.us
If you were over age 65 and purchased a variable annuity and were not aware that these Variable Annuities carried a market risk, paid commissions to brokers and are not guaranteed, you should also call.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Ma. He also holds a masters in accounting and a masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys.