Ponzi scam victims fight back online

By Jason Szep

BOSTON (Reuters) - Nearly four months before this week's arrest of the boss of a New York investment firm on charges of defrauding at least 1,500 investors of more than $370 million, Howard Stevens suspected the company was a sham.

Stevens went online and warned other investors. Using the nickname "hBomb," he wrote on an Internet message board that Agape World Inc, the firm run by Nicholas Cosmo who was arrested this week, "is a 100 percent fraud."

"Please DO NOT invest your money with these scam artists. Nick Cosmo should change his name to Nick Ponzi," he wrote.

The Internet is offering early warning signs, and in some cases filling a regulatory void, as the year-long recession exposes growing numbers of multimillion-dollar Ponzi schemes that pay older investors with money from new clients.

Stevens posted his warning on www.scamvictimsunited.com a week after meeting with Cosmo at Agape's office on New York's Long Island. In an interview with Reuters, he said Agape's office looked shoddy and unprofessional, and Cosmo dodged his questions.

"He gave us a hard time. When we tried to see some of the contracts, they refused to show us anything," he said. "Nick Cosmo wore a suit but we bumped into a few brokers that looked very out of place for a business handling so much money. They wore jeans, or had hats turned back or were wearing earrings."

Stevens invested $20,000 and lost $10,000. "I tried to take out all of the money but he said that I had to wait until January 27 before I could get back the other $10,000," he said.

Operating in the largely unregulated world of high-interest, high-risk commercial loans, Cosmo falsely promised big returns through short-term "bridge" loans to businesses provided by his company, according to federal prosecutors, the FBI and the U.S. Postal Inspection Service.

They accuse Cosmo, 37, of using investor money for personal expenses such as jewelry, limousine rides and hotel stays, and to pay more than $212,000 in court-ordered restitution to investors following a prior fraud conviction.

While the money is a fraction of the suspected $50 billion scheme masterminded by former Wall Street legend Bernard Madoff, federal regulators say the number of such Ponzi scams -- or "mini-Madoffs" -- in recent weeks is adding up.

"We're expecting a 25 percent increase this year in the number of cases that we actually file," said Stephen Obie, the head of enforcement at the U.S. Commodity Futures Trading Commission. He said leads to possible Ponzi schemes had doubled in the past year. In January alone, the CFTC has filed three cases.

"The challenge in investigating these cases is that most of these miscreants are unregistered, operate below the radar and create an illusion of profitability through deceit," he said in a telephone interview.

REGULATORY GAP

That's keeping Jeff and Shawn Mosch busy. The Minneapolis couple run www.scamvictimsunited.com and saw a huge spike in page views since Cosmo's arrest on Monday.

"The first day the news broke my husband was checking the hits on the site before he went to lunch. He came back and was like 'Oh my God, we have had 2,000 hits while I was away from my desk for half an hour,'" she said.

The site has grown steadily since they launched it in 2002 after losing thousands of dollars in a counterfeit check scam when they tried to sell a 1961 Buick online.

The site is the Moschs' attempt to fill a regulatory gap by protecting consumers from institutions, including some private banks or lenders, that do not need licenses and do not fall under jurisdiction of a specific regulatory agency.

Shawn Mosch once recorded all the money that visitors to her site reported saving by heeding its warnings. The tally reached $2 million in the first two years. After that, she gave up counting. "It got too overwhelming to track," she said.

Other nonprofit anti-fraud sites report a steady surge in traffic in recent months, along with an apparent increase in financial scams. One site, www.fraudaid.com, says more people are getting entangled in a vast array of online scams.

"There is massive ignorance out there. People who are coming to us are already starting to feel the pressure from the economy when they get involved with one of these scams," said Annie McGuire, who founded the site in 1999.

"We don't see the people who think it can't happen to me."

Another nonprofit site, www.scamwarners, is seeing a jump in reports of a fast-growing and sophisticated international version of a classic check-fraud scam, along with loan scams and false offerings of employment.

"People are definitely targeting the desperate," said Jillian Gerard, who runs the site.

But Obie at the Commodity Futures Trading Commission said swindlers also exploit the Web, citing a case in which a phony investment company told clients that it was registered with a regulatory agency that didn't exist. But it created a separate web site for the fake regulatory agency.

"The entity claimed they were regulated by the American Futures and Options Trading Commission. They copied portions of our website to create a website" for this fake agency. "The Internet can be a great sword for popping the balloon of a fraud. But it can also be a weapon swindlers use," he said.

The rise in suspected Madoff-style investment scams -- and the work of websites in policing them -- underline the need for greater regulation of brokers, said Tamar Frankel, a Boston University law professor and expert on financial regulation.

"We have a very different situation now. This is not the 1930s anymore," she said.

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