2009 Could be the Year of the Exposed Ponzi Scheme

I've always been skeptical of unregulated funds. And, while I now believe that many legitimate funds are out there, the entire area of so-called unregulated funds is just that - unregulated - in so many different ways. And, in the process of investors asking for their monies back, the line between Ponzi schemes and legitimate funds can quickly become blurred as an accounting error or illiquidity of an investment can cause a fund to be converted into a Ponzi scheme.

And, it isn't just hedge funds. It can spread to other investment vehicles. Virtually anything unregulated. And, nobody goes out to create a Ponzi scheme (except maybe Madoff). Rather, they develop out of circumstances where a money manager is too eager to provide returns to early investors, then maybe there comingling funds to pay out earlier investors with the proceeds from later investors.

One of the most interesting cases that I have seen involved an aircraft finance firm in Chicago that had funds built around buying and leasing old aircraft. Early investors did very well. The SEC came in and started to unwind the funds when later investors discovered that there monies were going into the accounts to pay early investors. The company was run by a very aggressive young kid who understood the aircraft finance business well and just wanted to make his investors happy. He later told the SEC, "accounting was never our strong point."

So, a warning to all who failed to ask simple questions and relied of the "due diligence" of others. Your money may disappear.

And, a warning to all of my friends out there running these funds. There was a lot of dumb money out there. The dumbies are about to ask for it back, creating all sorts of dislocation.

When the water is deep, you can be doing anything underneath it, but when the tide rolls out everyone will see it. 2009 may become the year of the Ponzi scheme.