There is nothing new under the sun – just new ways to get away with it.
Many people are familiar with the term “Ponzi scheme” even if they may not know the original story or the mechanics through which bad guys make off with money using those schemes. But say the word “Ponzi” and may people’s minds will conjure up visions of slick-talking charmers taking victims’ hard-earned funds by promising stellar returns — but then disappearing into the night.
As a quick refresher course, Charles Ponzi plied his dark trade a century ago, giving his initial investors the sky-high returns he promised. But it turned out he used money from more recent investors to pay the investors who came in previously.
It was all a juggling act, but Ponzi schemes never end well. The scammers either disappear with the money or too many investors try to withdraw their funds at once and the scam collapses (as happened with Charles Ponzi). The Bernie Madoff debacle is but one glaring example of how Ponzi schemes come crashing down.
And now, Ponzi schemes can be done digitally — using the shiny lure of cryptos.
In Canada, the Ontario Securities Commission this week reported that Quadriga CX, a crypto-trading platform that collapsed in that country last year, was nothing more than a glorified, high-tech Ponzi scheme.
“What happened at Quadriga was an old-fashioned fraud wrapped in modern technology,” the report noted.
Some 76,000 investors across the globe lost as much as $124 million as the company went under. And regulators have concluded that Quadriga failed because late CEO Gerald Cotten, who died in 2018, had been conducting fraudulent trades.
Authorities found that Cotten opened up accounts under various aliases and lost money trading cryptos with money from Quadriga’s legitimate and unwitting clients. Investigators concluded that Cotten carried out the fraud on his own.
And as had been widely reported, he died with the secrets of how to access the digital wallets held by those investors. But according to regulators, the money was largely gone anyway.
“Cotten sustained real losses when the price of crypto assets changed, thereby creating a shortfall in assets available to satisfy client withdrawals,” the OSC said in its report. “[He] covered this shortfall with other clients’ deposits. In effect, this meant that Quadriga operated like a Ponzi scheme.”
The OSC found that Cotten lost $115 million in trading, while he used other money stolen from clients to fund a “lavish” lifestyle. All told, $215 million was unaccounted for when Quadriga filed for protection in 2018. Only $46 million was eventually recovered.
Regulators wrote in their report that “OSC staff would likely have pursued an enforcement action against Cotten and Quadriga. However, this is not practical given that Cotten is deceased and Quadriga is bankrupt, with its assets subject to a court-supervised distribution process.”
So, there are no winners here in this modern version of an age-old tale. But at least now there are some answers.