In 1920, a little Italian in Boston named Charles Ponzi raked in $15 million in eight months by appealing to the greed that finds a home in all of us at one time or another. So successful was Ponzi that his variety of pyramid scheme still bears his name. Ponzi convinced people he was able to buy up postal reply coupons in foreign countries and convert them in the United States to postage stamps and reap a healthy profit. He never bought one, let alone the millions he led people to believe were in his portfolio. He played it smart. He acted wealthy but refused to talk about his business. He actually denied people the opportunity to invest in his idea. He kept up appearances and attitude until people were fairly drooling in anticipation of Ponzi taking their money. Finally he relented and promised to pay back those he allowed to invest with 50% interest in 90 days. He later moved that down to 45 days. At one point it is reported, people lined up four abreast for blocks in hopes of giving money to Ponzi. His scheme was to pay back early investors with money taken in from later investors. This classic scheme earned Ponzi millions of dollars and a place in history. Of course, when it fell apart — as it had to, eventually — it also earned Ponzi 3½ years in federal prison.

Raejean Bonham of Fairbanks perpetrated a classic Ponzi scheme in the 1990s in Alaska. Her idea was World Plus Travel, a business that purportedly bought up free airline frequent flier coupons from large companies which were then converted to low-fare tickets and sold to third parties at a profit. (So arrogant was Raejean that she reserved for herself the name "Ponzi’s House of Travel" and apparently planned to do business under that moniker some day.) She hustled her World Plus scam promising to pay investors as much as 50% on their investments in as little as 60 days, sometimes less. 

Of course, the only way she could accomplish that was, like Ponzi, to pay off initial investors with money taken in from later investors – the rob Peter to pay Paul ploy. It worked for a while, but as most such schemes, it eventually crumbled. By that time though, Raejean had taken in over $60 million from more than 1,100 people in 42 states! Raejean’s game was so attractive she had among her regular investors several state prosecutors and a U.S. Attorney, people who ought to have known better.

Ponzi schemes abound and, sadly, many people get taken in by the lurid profit picture that’s painted for them. Now with the Internet available to them, scam artists can pounce, take in your money, and fold up the tent in a very short time. In New York, the Bennett Funding Group took in a reported $1.5 billion before going bust. The Internet was used to take in some $5 million from investors in Fortuna Alliance, who were promised monthly returns of up to $5,000. Greed in that case got to more than 8,600 investors before the Federal Trade Commission shut them down.

The Alaska Securities Division and the feds – the FBI, FTC, and others – try to stay ahead of scamsters and warn you as quickly as can be done. We use this web site to get the word out. It’s a good effort, but the operators of scams are a hard group to pin down. While one operation is being shut down, two more take its place. Some creative devils go the true Ponzi one better – they use the proceeds from a different scheme to pay off the victims of another scheme. This way they are able to stay one step ahead of the law.

The SEC alleges that Douglas Colt created "Fast-trades.com," a stock recommendation web site, which he used to manipulate the price of four stocks during February and March 1999. The SEC alleges that Colt created a scheme in which he recommended stocks on the Fast-trades web site to drive up their short-term prices, sometimes by as much as 700 percent. By trading in advance of his stock recommendations, Colt generated more than $345,000 in total profits for himself, his mother Joanne Colt, three of his law school classmates, and two of his friends. At times, some of them garnered profits exceeding 500 percent within an hour of the recommendation.

The SEC alleges that Douglas Colt targeted low-priced, thinly-traded stocks knowing that his trades and subscriber activity would artificially increase the price of the stocks selected. Colt and the other scheme participants allegedly purchased their selected stocks and entered sell limit orders before recommending the stocks to Fast-trades subscribers, whose numbers grew to more than 9,000 by the end of the scheme. The SEC contends that within a few hours of the recommendations to Fast-Trades subscribers, the Fast-Trades participants had "dumped" their shares at a profit. The stock prices subsequently plummeted in a matter of hours.

The SEC contends that subscriber purchases were essential to the scheme. The SEC alleges that to attract new subscribers, Douglas Colt and three of his law school classmates -- Kenneth Terrell, Jason Wyckoff and Adam Altman -- promoted the website by collectively posting hundreds of false messages to various Internet message boards, including boards on the Yahoo! and Raging Bull web sites. The SEC contends that these messages disguised the authors' connection with the Fast-trades site and misrepresented the investment success they achieved from following Fast-Trades' recommendations. In addition, the SEC alleges that Colt posted a false "track record" on the Fast-Trades website touting the performance of several stocks he falsely claimed were Fast-Trades selections.

Richard H. Walker, Director of the SEC's Division of Enforcement, said, "The Internet has replaced the boiler room as the stock manipulator's tool of choice. Its low cost and ease of use has attracted a new breed of persons seeking to profit at the expense of innocent investors. People who commit fraud on the Internet will quickly learn that the Enforcement Division will aggressively attack attempts to undermine the integrity of our markets. Ridding the Internet of securities fraud is a top priority of the SEC."

According to the SEC's allegations, in late April, 1999, Colt boldly posted on an Internet message board unrelated to Fast-trades an eleven-point "blueprint" for how to commit a price manipulation scheme. His "posting" noted that someone who wanted to manipulate the price of a security could, among other things, "screen for thinly traded stocks in the $1 to $2 price range; ... look for one with a ... low... volume; pull together information from optimistic press releases; throw in some bull**** about the company being an internet wonder; buy a bunch of this garbage stock; tell your idiot subscribers... how great the stock is...; dump the shares you bought; ... laugh all the way to the bank."

The SEC alleges that Joanne Colt, in her first attempt to partake in her son's scheme, lost $24,000 by purchasing shares of one of Fast-trades' recommended stocks after she received the Fast-trades e-mail. Ms. Colt placed a market order in the fast-rising market, thereby incurring substantial losses. After this transaction, Joanne Colt began receiving the Fast-trades selection from her son before the recommendation was made public and entered sell limit orders, thereby permitting her to participate in the scheme and to make a profit. (The difference between market orders and limit orders is discussed in the SEC's "Tips for Online Investing: What You Need to Know About Trading In Fast-Moving Markets," which is available on the SEC web site at:http://www.sec.gov/investor/pubs/onlinetips.htm.)

The SEC sued Douglas Colt in the U.S. District Court for the District of Columbia, seeking a permanent injunction, as well as disgorgement of all ill-gotten gains, including prejudgment interest, and civil money penalties. The SEC also entered an administrative cease and desist order related to the conduct described in the complaint against four others involved in the scheme: Kenneth Terrell, Jason Wyckoff, Adam Altman, and Joanne Colt.

Reprinted with permission of Jeffren Publishing Company