Investors must always keep their eyes open for fraudulent schemes.

• Author: Wood, Walt
• Position: LAW JOURNAL 2009

The revelation of Bernard Madoff's colossal $60 billion Ponzi scheme in December shocked a country that already was reeling from the effects of unchecked greed and speculation on its economy. While the Madoff scandal was still unfolding, the nation learned in February that the U. S. Securities and Exchange Commission had charged billionaire R. Allen Stanford with running a separate Ponzi scheme that could total as much as $8 billion. Ponzi schemes, named for an infamous 1920 swindle conducted by Charles Ponzi, attract investments on the promise of high-interest returns, but actually use money from later investors to pay off earlier investors. Sensational stories of fraud and unscrupulous business practices seem to be commonplace lately in the national headlines, occurring on a variety of scales.

One recently unfolded in North Carolina. On Dec. 5, after a weeklong trial, a Wilson County jury found that two elderly women in their community had been defrauded in a national Ponzi scheme that was responsible for the loss of about $70 million. The jury returned the women's investments and imposed punitive damages of $1.25 million against the defendant, an investment broker, for taking advantage of the women and knowingly misleading them about their investments.

As the investments were marketed from 2002 through 2004, investors would purchase large advertising billboards in units of $20,000 from Mobile Billboards of America. The "mobile billboards" would be placed as advertisements on the sides of large trucks that would travel through major U.S. cities. Because the investors were technically the owners of those mobile billboards, their investment returns were comprised of lease payments from an advertising-placement company related to MBA.

The monthly lease payments--at a rate of 13.49% annual interest--supposedly came from the advertising revenues. These arrangements are typically referred to as "sale and leaseback" programs. At the end of a seven-year period, MBA would repurchase each billboard unit for the original price paid, so that the investment appeared to be a method of preserving principal while making seven years of competitive interest. Hundreds of North Carolina investors, mostly senior citizens, bought into the mobile billboards scheme, believing that their money was safe.

In reality, the sale and leaseback program was a Ponzi scheme, where the lease payments came from investors' own money. The company evaded securities regulations...