The £32m Levene Ponzi scheme!

As a chap named Levene is convicted of running a multi-million Ponzi scheme, Tony looks at the history of Ponzi schemes and how to spot one.

Earlier this week Nicholas Levene was sent down at Southwark for 13 years for cheating investors out of £32 million. And before you ask, despite the same surname, we are not related.

But I have met him.

Because of the coincidence of name, he noticed my byline in a newspaper and phoned me, almost certainly out of curiosity as his then-job did not involve media contact. I had lunch with him a couple of times around a dozen or so years ago. He was then working for an eminent firm of money brokers.

He paid for these meals – but the bill for the food did not come out of his victims' pockets, as the occasions pre-dated his fraudulent practices. They were strange occasions. While it was an era where lunchtime alcohol flowed more freely than now, his habit of drinking from a large bottle of scotch, diluted with bottled water, throughout the meal was probably unique.

And although it was clear from his suit and the solid gold Rolex that he had expensive tastes, he came over as the eminent professional.

As did Bernie Madoff, the New York based financier whose scheme defrauded American and other investors (including a UK hedge fund or two) of anything – depending on how you count the numbers – between $15 billion and $65 billion. Madoff, now in his early 70s, is now serving a 150-year stretch in a US prison.

What links the fraudsters?

What Madoff and Levene – nickname Mr Beano due to his love of the comic - both operated was a Ponzi scheme. A Ponzi is a simple form of fraud. You promise a very high – perhaps guaranteed – rate of return which investors cannot find elsewhere.

You also promise instant or very easy withdrawals so if anyone wants their money back, you simply send them a cheque from new cash coming in. But when the flow of fresh investors stops, for any reason, the scheme quickly unravels.

Ponzi schemes are centuries old. But they took their name from Charles Ponzi, from Boston in the US, whose scheme operated just after the First World War. He guaranteed huge returns from international postal coupons, which Americans sent to poor relatives in war-torn Europe so they could write letters back to the New World. He told investors that buying them in one country and cashing them in a second could produce 50% or more gains within a month or so. 

He never bought coupons – there would never have been enough anyway to fund the millions he attracted – and merely repaid early withdrawals with the cash coming in.

Madoff was more subtle. Instead of high and fast returns, he promised lower but steady money. His scheme lasted for decades while the Ponzi postage plan was over in months.

Levene claimed he had a unique method of spread betting. Like Madoff, he convinced friends who brought in more friends, working on circles of acquaintances. Whatever optimism existed at the start, as losses racked up, the pair became increasingly desperate. Levene was, in fact, a bad spread better who went bankrupt in 2009 after staking £58.5 million and owing £101 million.  Madoff, who claimed to play the bond markets, went down for billions.

Ponzi aimed his scheme at small savers. Levene and Madoff went for the rich, sometimes self-made people who, arguably, should have known better. These victims had the cash to sustain the illusion – and wanted to believe they were among the select elite. In both the Levene and Madoff cases, courts were told of a succession of very wealthy people lining up to offer their money, sometimes even begging the scheme operator to count them in.

How to spot a Ponzi scheme

So faced with almost daily assaults from dodgy investment firms, what are the lessons to be learned from the Levene case? 

1. No one can produce extraordinary results to order – or even more than occasionally.

2. If the investment mechanism is not 100% obvious, steer well clear.

3. Pay no attention to the past. It's easy to produce an apparently great track record from previous winners – anyone can claim to be a great racing tipster by looking at yesterday's results.

4. There are no secret money making methods. Beware of “confidentiality clauses” preventing you from discussing schemes with others.

5. The involvement of rich or famous people is meaningless. An investment will not become successful just because footballers or film stars have bought into it.  Their skills are on the pitch or in the studio – not in money.

6. If something looks too good to be true, then it is.

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