David de Ferrars : Any more Ponzi's out there?


As sentencing is handed down to Ponzi mastermind Kautilya Nandan Pruthi, lawyer David de Ferrars shares his thoughts

Two more Ponzi scheme convictions hit the headlines this week. International playboy Allen Stanford was found guilty in the US of running a $7 billion investment fraud and Kautilya Nandan Pruthi was sentenced in London to fourteen and a half years in jail for duping celebrities, sports stars and hundreds of other victims out of £115m in what may well be Britain’s largest and longest running Ponzi investment scam to date. 

Stanford is to be sentenced in June and will in all likelihood face a lifetime in prison.  Both men, who spent years “robbing from Peter to pay Paul”, managed to lure hundreds of investors in, causing them to lose their homes, pensions and life savings. 

Ponzi schemes, so named after 1920’s fraudster Charles Ponzi, involve the taking from one investor to pay another. It is like a house of cards that will one day fall down and as an investor you need to hope that you have been paid back your money before it collapses (although even then you may have to pay it back). 

This is what Bernard Madoff was convicted of doing in the US to the tune of a staggering $65bn and he is currently serving a 150 year sentence for it.

Investors are naturally drawn to investments that appear to offer high rates of return.  Due to the increasingly complex nature of financial investments available, it is inevitable that people are attracted to investments without necessarily understanding the mechanics of the investment and the associated risks and pitfalls.

In other situations the investor may be deliberately blind to the pitfalls and focused only on the returns. This is particularly true when the institutions are run by managers who already have a track record in the market and are highly respected and successful. 

In such circumstances, in a strong economic market there will typically be more money being invested by new investors than is withdrawn by existing investors.

Ponzi schemes therefore generally survive and thrive during a boom time. But they are typically exposed in down turns when investors are forced to liquidate their investments. This causes a cash run on the Ponzi scheme when the cash is no longer there. 

So why did Madoff get life in jail in the US, Stanford can expect likewise but Pruthi (in the UK) got just 14 and a half years? This comes down to two reasons:

– in the US the sentencing guidelines for fraud are much harsher than in the UK where “white collar” fraud is historically seen as a victimless crime (although try telling Pruthi’s victims that).

– in the US they tend to accumulate offences so that many counts or incidents of fraud stack up to produce a very long sentence. The UK does not do this to the same extent.

Pruthi pleaded guilty to four specimen counts of obtaining money transfers by deception, one count of participating in a fraudulent business, one count of unauthorised regulated activity and one count of converting and removing criminal property. The accumulation of these counts by reference to the sentencing guidelines produced just 14 and a half years. He can count himself lucky he was not tried in the US.

David de Ferrars, London based partner in Taylor Wessing’s Commercial Disputes Group