“People are, I think, particularly vulnerable because people have lost so much in their retirement plans and stock portfolios.” — Republican Rep. Tom Grady [Photo: Florida House of Representatives]

Freshman Republican Rep. Tom Grady, a securities lawyer who represents coastal Collier County, knows well the uphill battle that victims of Ponzi schemes typically face. Nine years ago, Grady represented more than two dozen people in the Naples area conned by David Mobley, a local hedge fund manager who bilked his investors out of at least $59 million over seven years in the 1990s.

As is often the case in a Ponzi scheme, there was little money to be recovered from the crook. Mobley had squandered his ill-gotten gains on a lavish lifestyle, several failed business ventures and some charities. So Grady went after Morgan Stanley Dean Witter, the brokerage where Mobley had maintained his investors’ funds and trading accounts. Grady argued that the firm should have detected Mobley’s fraudulent scheme — that brokers there should have been able to see that his Maricopa fund’s 50%-plus annual returns didn’t mesh with his underlying stock trades.

While that lawsuit ultimately was unsuccessful, Grady says he plans to employ a similar strategy on behalf of several victims of Bernard Madoff, the infamous Wall Street financier at the center of an alleged $50-billion Ponzi scheme. Grady, who says he’s received calls from people owed more than $1.5 billion, isn’t planning to sue Madoff. Rather, he’ll try to pursue claims against others who may be liable — investment advisers or hedge funds that may have recommended or hired Madoff without conducting due diligence.

More than 2,000 Floridians are estimated to be among Madoff’s casualties, including state Rep. Franklin Sands and his wife, Leslie, who live in Weston. The Democratic leader, who is 68 and made his living in the jewelry business, first began investing with Bernard Madoff Investment Securities more than a decade ago, based on the advice of “professional advisers.” He told the South Florida Sun-Sentinel that he and his wife lost nearly their entire savings to Madoff. Another public official, Venice Mayor Edwin Martin Jr., lost about 60% of his net worth to Madoff.

A rash of other recent Ponzi schemes in Florida has come to light as the economic downturn has dried up the inflows of cash on which the schemes depend and more investors attempt to withdraw their money.

» In December, the Securities and Exchange Commission filed an emergency action to halt an alleged $23-million Ponzi scheme operated by George Theodule, a self-proclaimed minister from Haiti, who solicited other Haitian-Americans through a network of purported investment clubs in south Florida. Theodule’s company, Creative Capital, guaranteed a 100% return on investments within 90 days and promised that some of his companies’ proceeds would be used to benefit the Haitian community in the U.S. and Haiti and others in Sierra Leone, the SEC said.

» In January, Arthur Nadel, a prominent Sarasota philanthropist and money manager, was charged with securities fraud and wire fraud. Through his company, Scoop Management, Nadel managed six private investment funds that he claimed were worth $342 million but in reality were valued only at about $500,000. He was arrested in late January after two weeks on the run.

» R. Allen Stanford, the Texas financier who is at the center of an alleged $8-billion investment scam, operated an office in Miami and also had offices in Boca Raton, Vero Beach and Longboat Key.

Sen. Garrett Richter introduced companion “investor protection” legislation in the Senate. [Photo: Florida House of Representatives]

Grady believes Ponzi schemes hurt faith in the financial system. “It’s just another reason not to trust anyone. It’s a reason to doubt your financial statements. It’s a reason to doubt everything. That doubt and uncertainty is what I believe is strangling America.”
Grady and Sen. Garrett Richter (R- Naples) have introduced “investor protection” legislation meant to help authorities crack down on securities fraud by broadening the state’s ability to investigate and pursue financial crimes and by strengthening registration requirements for investment advisers, dealers and others.

Currently, such crimes are pursued by the Office of Financial Regulation, which works with state attorneys. But Grady says the state attorneys are often “territorial” and not as experienced in handling such cases “because it’s not what they do.” His bill would allow the Attorney General to engage in civil investigations of securities fraud with the approval of the Office of Financial Regulation.

The bill, which has 20 co-sponsors, would also enhance the Office of Financial Regulation’s enforcement powers, allowing it to authorize emergency suspension of people and firms who fail to provide financial books and records to the state. Regulators could suspend or revoke the licenses of those who violate the rules and deny registration to those who have been convicted of certain crimes.

Alex Hager, interim commissioner of the Office of Financial Regulation, Florida Attorney General Bill McCollum, and Jack McRay, advocacy manager for the AARP’s Florida state office, have all expressed support for the legislation. Hager says the bill would provide his office with the “means to take swift action against these violators.”

Attorneys who work on Ponzi cases say they doubt the bill will do much to stop the schemes. “Ponzi schemes probably existed before Charles Ponzi, and they’ll continue to exist,” says Akerman Senterfitt attorney Michael Goldberg. “Until people are a little less greedy and do the due diligence and ask the questions that need to be asked, they’re going to exist. Even if you had thousands of regulators looking in all the right places ... it’s up to the investors to be more diligent.”

But Grady hopes that his “investor protection” bill will make people think twice before handing their money over to a potential con man. “People are, I think, particularly vulnerable because people have lost so much in their retirement plans and stock portfolios that they’re going to be too eager to make those (losses) up — and to wager to try to or want to believe that some con artist would want to help them. That’s why I think the timing of the bill is good — at least causes people to think about these things.”