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Stringer Ponzi scheme, Rod Cameron Stringer, protecting against Ponzi schemes
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Bernard Madoff arrives at Federal Court for a scheduled hearing in New York. (AP)

As More Ponzi Scheme Scandals Break, How Can You Protect Your Investment?

January 22, 2009 01:59 PM
by Anne Szustek
Weeks after the Madoff fiasco, the SEC is accusing a Texas man of operating a Ponzi scheme. What are the signs that a hedge fund could be a scam?

West Texas’ RCS Hedge Fund Apparent Ponzi Scheme

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On Tuesday, the Securities and Exchange Commission sued Rod Cameron Stringer, a former used-car salesman from Lamesa, Texas, for allegedly heading a $45 million Ponzi scheme under the guise of a hedge fund.

According to the SEC’s complaint, Stringer has been operating the scheme since 2001, taking money from 31 investors, many of whom were of advanced age. He apparently claimed his returns were as high as 61 percent, and had paid out at least $2.4 million. Stringer had not registered with the SEC, nor does he have a securities license.

Stringer, whom the SEC says was also moonlighting as a tow-truck driver, bail bondsman and crop-duster pilot, apparently spent 80 percent of the money on a swimming pool for his office, mortgages for at least two homes and a horse-racing partnership.

“Stringer’s claims regarding the hedge fund and the high rates of return are completely bogus,” the SEC said in its lawsuit, as quoted by Bloomberg.

The SEC is also suing Florida hedge fund adviser Arthur Nadel for allegedly overreporting his investments by $300 million. Bloomberg reported that less than $1 million in hedge fund assets remain. Nadel disappeared last week.

“Hard economic times may be bad for most investors and fund managers,” writes HedgFund.net, "but they are good for one thing: exposing frauds,” such as the Madoff scandal, which saw reputable investment firms and philanthropies lose millions.

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Background: Madoff scandal

Madoff is facing a securities fraud charge for an alleged $50 billion Ponzi scheme at his investment firm, Bernard L. Madoff Investment Securities. According to the criminal complaint signed by FBI Agent Theodore Cacioppi, Bernard Madoff told at least three high-level employees at his apartment on New York’s Upper East Side in December that the business was “basically, a giant Ponzi scheme.”

On the surface, Madoff seemed to be flourishing. According to statistics provided by Barron’s and cited by the Associated Press, in 2001, Madoff Investment Securities was “one of the top three market makers in Nasdaq stocks and the third-largest firm matching buyers and sellers of securities on the New York Stock Exchange.



It turned out, however, that the very funds put up by investors were the source of payment for returns on investment. Clients’ recent requests for some $7 billion in return payments were bleeding Madoff dry, leading the company founder to admit to one employee that he was flailing.

One brokerage firm, Chile’s Celfin SA, is paying back $10 million to clients who lost money in Bernard Madoff funds. “We are committed to returning 100 percent of the capital invested,” Celfin partners Juan Andres Camus and Jorge Errazuriz said, according to Bloomberg and quoted by findingDulcinea.
 

The case of Celfin is one example of a firm holding itself accountable for the lapses in due diligence that accompanied the Madoff affair. Sol Waksman, president of BarclayHedge, which tracks the performance of hedge fund managers, summed up the climate of the industry: “It’s gone from being an old boy’s network to a real business. If you knew the right people, or if the right people could vouch for you, you were in,” he said, according to CNNMoney and cited by findingDulcinea. “That’s what due diligence was—checking the references.”

Opinion & Analysis: Doing due diligence on hedge funds

The relative opacity of hedge funds can make getting background information a bit of an obstacle. But often a simple public record search can help a potential investor gain insight into hedge funds’ management.

For example, the Montvale, N.J.-based hedge fund HMC International Fund is facing SEC charges for allegedly misspending $12.4 million in funds. A search of public databases revealed that one of its managers, Bret Grebow, has a lengthy history of criminal charges and financial liens.

"It was staggeringly easy to get this information," Michael Allison, CEO of International Business Research, a background checking firm, told BusinessWeek.

“With hedge fund blowups becoming common, do some sleuthing before you write a check,” writes the business magazine.

Reference: What is a Ponzi scheme; investing guide

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