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L EGAL REPORT: FORENSICS & CRIMINAL LAW Big frauds are complex and require good action plans from lawyers attempting to get victims' money back. BY DARY L- LYNN CARLSON The perils of Ponzis D uring the 1920s, Charles Ponzi had no way of knowing the scope of his infamy when he orchestrat- ed the first major fraud of the type that now bears his name. His scam involved international mail reply coupons that were mandated at the time; he'd buy them overseas and sell them for more in the United States, attracting investors who sought to share in his profits for which he promised would be upwards of 50 per cent. He provided marginal profit payments to earlier investors from money he received from new investors, which kept everyone happy and hope- ful, while Ponzi himself was making millions and spending lavishly. It all came crashing down when the authori- ties caught wind that something was amiss; he pleaded guilty to one count of fraud and was sentenced to five years in prison. But it is his legacy that lives on to this day. Ponzi's scheme has been duplicated by dozens of copycats and it's expected there will be an increase in such fraudu- lent investment schemes over the next decade. For lawyers, a Ponzi-type fraud is one of the most complex to unravel, requiring significant expertise to facili- tate any recovery of monies on behalf of the victim investors. James Grout of Thornton Grout Finnigan LLP represented the receiver of Portus Alternative Asset Management Inc., which had been run by Michael Mendelson and Boaz Manor. After Portus collapsed, more than 26,000 investors were owed more than $790 million. Mendelson and Manor were charged with numerous counts of fraud and other offences; Mendelson plead- ed guilty to one count of fraud while Manor is awaiting trial. Technically, says Grout, "I would not call Portus a Ponzi scheme because Ponzi schemes usually do not involve the acquisition of assets for the investors." Portus used approximately $529 mil- lion it raised from the investors to buy promissory notes. The receiver was able to cash in the notes and, together with other recoveries, generated in excess of 95 cents on the dollar for the investors. Grout explains that Portus sold the investors on an elaborate investment structure that was never implement- ed. He acknowledges "we had to jump through hoops to obtain orders from the court to enable the receiver to cash in the notes. It was absolutely fascinat- ing legal work." Grout says he would not be surprised www. C ANADIAN Law ye rmag.com NO VEMBER / DECEMBER 2010 51 JEFF SZUK