Federal authorities announced, on Monday, September 26, that $55 million would be returned to victims of an online Ponzi scam.
Under a federal remission program, the US Justice Department and the Secret Service will return these funds to the 8,400 investors of a Ponzi or Pyramid scheme ran by AdSurf Daily Inc. and its affiliates (ASD Cash Generator, La Fuente Dinero, and Golden Panda), know collectively as ASD.
This particular Ponzi, which promised a 125-150% return on investments, was operated by Thomas A. “Andy” Bowdoin, Jr. of Quincy, Florida and others out of a local flower shop. Bowdoin age 76 was federally indited in December 2010 on five counts of wire fraud, one count of securities fraud, and one count of unlawful sale of unregistered securities. His criminal case is ongoing. If convicted, he faces a maximum sentence of 125 years in prison and fines of up to six million dollars.
Unlike most Ponzi or Ponzi-type schemes, the ASD scheme was clever in disguising its true nefarious purpose. Unsuspecting internet users signed up as members for its auto-surf services. They paid a membership fee and were required to view different advertised websites. Advertisers paid to have their websites included in the rotation of sites that members saw, and members were paid cash or credit to view the advertised sites.
ASD members were promised high returns on their membership fees for visiting the advertised sites for a few minutes a day as well as for referring others to ASD. In reality, membership returns were paid from the fees of later joining members and not from actual revenue. Because no business was being conducted to generate the promised returns, ASD would eventually collapse like a hollow pyramid — hence its name.
Luckily, federal authorities learned that ASD was a Ponzi in time, before ASD assets were dissipated. Under federal forfeiture statutes, authorities timely instituted suit declaring that, since ASD assets were obtained through criminal activities, the assets belonged to the government. They seized cash from various bank accounts, real estate, luxury vehicles, watercraft, and computer equipment. Based on the amount seized, all ASD members should be fully compensated for their losses.
Pyramid or Ponzi-type schemes have been perpetrated on innocent investors since at least the 1850’s and probably much before. Such a scheme involving life insurance policies was described in Dicken’s The Life and Adventures of Martin Chuzzlewit. Of course, Charles Pietro Ponzi lent his name to the notorious scheme of the 1920’s involving discounted postal reply coupons. His scheme brought down six New England banks and wiped out investors. They received less than 30 cents on the dollar. The victims of Bernie Madoff, the admitted operator of the largest Ponzi in history, fared little better. The reported, estimated losses to them totalled over $50 billion. His 150-year prison term was, perhaps, cold-comfort to individual traders who modestly invested a few thousand dollars to the top-ten investors who suffered potential losses of $28 billion.
To date, the trusteee for the Madoff Ponzi has not issued compensation for investors’ losses. And, it must be questioned whether full compensation is possible given the magnitude of the scam. However, individual Madoff investors may have another recourse to recover losses beyond the trustee payout. IRS rulings permit taxpayers who experience losses from certain investment arrangements discovered to be criminally fraudulent (i.e., Ponzi-type schemes) to deduct such losses as theft of income-producing property. The losses are taken on Section B of Form 4684 and are carried over to Schedule A. For more information, see IRS Publication 17 at page 167, Revenue Ruling 2009-9 (04/06/2009), and Revenue Ruling 2009-20 (04/06/2009), all of which are available as free downloads at the IRS website (www.irs.gov).
