Today, the media are abuzz about Milowe Brost and the estimated $400 million losses from thousands of investors in Canada and the United States. The RCMP arrested Mr. Brost this week. They are now looking for his partner, Gary Sorenson, also from Alberta, who is believed to be somewhere in Honduras, presumably hiding from Canadian authorities. Both men were charged with fraud over $5,000 and theft over $5,000, following a three and a half-year investigation.
Unfortunately, all of the characteristics of a Ponzi scheme are in this one. Here are the five characteristics of a Ponzi scheme:
- Charming, manipulative leaders/promoters skilled at extracting money from investors. Investors noted that Mr. Brost was “very smart and could rattle off information on a wide variety of financial subjects.” He was successful in keeping his investors away from the regulators and the police by continuing to promise his investors that this was a legitimate project.
- High Returns. In the case of Alberta, the offer was for 35 – 40% returns – way higher than what markets and banks can provide.
- Pyramid/Affinity characteristics. In order for a Ponzi scheme to be successful, it must continue to bring in new investors. Sometimes there are financial incentives to encourage investors to bring in people and often that means friends and family. The result can be devastating because friends and family also lose their money, and can ultimately blame the person who recommended it to them.
- Promises of tax-free or tax advantages. Clearly this is attractive to many people because it implies you can avoid paying taxes. As we all know, you can defer paying taxes, but you cannot avoid paying taxes altogether!
- Confidentiality. As was the case of the Manna Ponzi scheme, investors are encouraged, sometimes even made, to sign non-disclosure agreements.
Share this blog with your friends. If anyone knows of a suspicious investment scheme, the first thing to do is report it. Sadly, we find out about these schemes when it is too late and all of the money is gone. Reporting early can result in disruption or stopping the scheme altogether.
We have talked about the importance of small and medium sized businesses to Canada and in particular to western Canada. We have pointed out that certain types of small businesses, nicknamed “gazelles,” are net job creators that require capital to focus on growth and R&D. We have pointed out that traditional sources of capital from […]