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When Charles Ponzi's name became synonymous with the pyramid scheme, it seemed like a big scam at the time. He defrauded investors of some $7 million before he was arrested in 1920. But even accounting for inflation, Ponzi's scheme was dwarfed by Bernard Madoff's alleged crimes, and it's turning out that it's dwarfed by some others. Since Madoff's arrest in December, authorities have been uncovering one suspected Ponzi scheme after another. One of the latest in Sarasota, Florida, where NPR's Greg Allen reports Arthur Nadel is charged with defrauding investors of at least $300 million.
GREG ALLEN: Imagine Tony Hagar's surprise and chagrin one recent Sunday. It was January 18th.
Professor TONY HAGAR: My wife happened to open up a local paper and saw an article and asked me if I knew of a hedge fund managed by a guy by the name of Arthur Nadel. And I said, yeah? And she said, well, he's disappeared, and so has $350 million of the funds. Then I realized that we had lost everything.
ALLEN: Hagar is not a wealthy man. He is a university professor who lives near Daytona Beach. He first heard about Arthur Nadel when he was rated the nation's top money manager by an investment newsletter. After making some inquiries, Hagar put his life savings - a few hundred thousand dollars - into Nadel's funds. Hagar is 68, but now is not sure if he'll ever be financially secure enough to retire.
Nadel operated his six funds here, in a modest storefront in downtown Sarasota. Now the office is dark and locked, and Nadel is facing securities and wire fraud charges. A receiver has been appointed and the funds and Nadel's assets have been frozen. Morgan Bentley is an attorney in Sarasota who represents more than 40 of Nadel's clients.
Mr. MORGAN BENTLEY (Attorney): I walked by that office a thousand times, and the irony of it is I get, you know, these local publications with party pictures in them that get sent out. I got mine on Friday, the day he disappeared. And he's on the third page. His wife is on the seventh page. And I thought, God, I can't get away from this guy.
ALLEN: Nadel was arrested last month, nearly two weeks after he went missing. He disappeared a day before he was due to pay $50 million to some of his investors. By then, Bentley says, many of Nadel's clients, some spooked by the Madoff scandal, had already begun to ask probing questions about their investments and the solvency of the funds.
Mr. BENTLEY: Then there were more than half a dozen, I want to say, you know, six or eight, who specifically went into his office in November and December and said, how are you going to make distributions this year? How are you doing on liquidity? And were assured repeatedly and shown statements about cash positions and everything else, all of which of course was bogus.
ALLEN: Besides being well-connected socially, Nadel was a generous philanthropist. He and many of his clients contributed to Sarasota's active cultural groups. Nadel's arrest and the collapse of his funds, Bentley says, has been devastating to the city.
Mr. BENTLEY: We've always had this good philanthropic, good arts community, solid core base community, and this hits right in the heart of it. I mean, you're talking about the YMCA, the opera, and the list goes on and on of things that have been around and a part of this community for years.
ALLEN: Stories similar to Arthur Nadel's are popping up weekly around the country. In New York, authorities recently arrested fund manager Nicholas Cosmo for running a suspected $380 million Ponzi scheme. A few weeks earlier, the SEC accused an investment fund manager in Philadelphia, Joseph Forte, with running a $50 million scam. In Atlanta, fund manager James Ossie is charged with a $25 million fraud. And the list goes on.
In Florida, Ponzi schemes are a perennial bumper crop, in large part because of the many wealthy retirees. Attorney Michael Goldberg, a court certified expert on Ponzi schemes, is currently helping unravel six of the scams. It's not that there are more Ponzi schemes now, he says. It's just that more are coming to light. The reason is cash. Few people are making deposits, and many are seeking withdrawals, a scenario Goldberg says is disastrous for modern-day Ponzis.
Mr. MICHAEL GOLDBERG (Attorney): Ponzi schemes need a constant influx of cash. And these redemptions coming out of that have dried up the cash. And that's really why, I think, they're being exposed.
ALLEN: Goldberg says there are some red flags that can signal a Ponzi scheme. When a fund manager tells the touts a secret formula for beating the market, for example, or when he guarantees a certain return on investment. As for the investors, Goldberg says, he's seen poor people taken advantage of and the wealthy.
Mr. GOLDBERG: It's just little bit of human nature and a little bit of wanting to make quick buck, and to be honest, a little bit of greed. That's the common characteristic.
ALLEN: All reasons why Charles Ponzi and the scam he gave his name to are likely to be with us for a long, long time.
Greg Allen, NPR News, Miami.
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