Ponzi Schemes – How to Recognize Them (… and the Story of Fraudster Andrew Lech) 

Convicted Ponzi Scheme Fraudsters
Upon hearing the term “Ponzi scheme,” the first names that pop into your head may be Wall Street’s Bernie Madoff, who defrauded clients of an estimated US$65 billion,1 or Montréal financial adviser Earl Jones, who swindled an estimated CA$50 million from unsuspecting investors.2

A lesser known case is that of Andrew Lech from Peterborough, Ontario. When Lech was charged by the Ontario Provincial Police in 2006, it was for the largest Ponzi scheme believed at that time to have been investigated in Canada. Lech was thought to be a “financial guru,” but instead he took more than 500 investors for over CA$66 million through an investment scam that was believed to have gone on for more than 15 years. After being charged in March 2007 with counts of fraud over $5,000, Lech pled guilty and was sentenced to 6 years in prison.

Mr. Lech – the “Guru”

Beginning in the 1980s, Andrew Lech represented to investors that he was a highly sophisticated and successful trader who had been investing his family’s wealth for years. He posed as a futures trader who provided returns on investments in the range of 15 to 40 percent after tax. Over the years, his circle of investors increased dramatically throughout Southwestern Ontario and into the US as the legend of his financial expertise spread by word of mouth and through his church affiliations.

The Reality
Mr. Lech was born and raised in Peterborough, Ontario. He did not come from a wealthy family, nor was he handling a large family investment. Lech was not registered with the Ontario Securities Commission (OSC), other than for a brief period in 1987 as a salesperson restricted to soliciting expressions of interest from prospective clients.

Lech was running a Ponzi scheme, which ultimately collapsed in mid-2003. The ensuing investigation showed that in the 20 months prior to the collapse of the scheme, Lech was operating through approximately 77 bank and investment accounts at 22 different financial institutions. Investor funds were transferred between these accounts and were, for the most part, used to make “interest” payments to investors. During the period investigated, most of the funds received by Lech were never invested.

Red Flags
In hindsight, this investment opportunity as presented by Lech should have been seen by some as characteristic of a possible Ponzi scheme. Investors understood that Lech was providing a service to acquaintances and members of his church’s congregation, yet he provided little or no accounting of where funds were invested or of the level of risk associated with their investments. Lech represented that he paid the tax on the investment income so the investors were not subject to taxes and did not need to report any information regarding the investment on their tax returns.

Red Flags – Possible Ponzi Scheme 

• Higher than normal investment returns
  
• No taxes on returns
  
• Little or no stated risk
  
• Opportunity spreads by word of mouth
• Groups targeted by affiliation, ethnic, or social groupings
• Appearance of “exclusive” opportunity – you need an “in” to invest
• Stated or implied time constraint to invest
• Mastermind is often known as a “guru”, “master,” or “genius”
•  Blind faith – investors lack understanding of investments
• Little to no paperwork documenting investments.
  

Red Flags – The Collapse

• Desperate attempts to get more investors – higher rates
• Requests to “cash out” met with excuses and delays
• Request for investment funds ignored
•  No investment documents received
• Unable to contact the “guru”
  
• Word of mouth that other investors can’t locate the “guru.”

Do Your Due Diligence
To avoid getting snagged in a possible Ponzi scheme, an investor should take precautionary steps to gain a better understanding of the legitimacy of the potential investment and adviser:

• Perform an internet search on the “guru” and their company. It is not surprising that some of those same “investment advisers” have been previously convicted or allegedly involved in other questionable or failed investment opportunities
•  Ensure the adviser is properly registered by the OSC (or other similar regulatory body) to solicit, accept, and invest funds. Generally, in Ontario, any firm or individual offering investments in Ontario must be registered with the OSC3
• Obtain documented particulars on where the funds will be invested, the level of risk associated with the investment, and a detailed explanation as to how the high returns will be achieved. Although some legitimate advisers can be reluctant to reveal their “golden goose strategy,” there is an old adage that tends to apply in most cases, which begins “if it sounds too good to be true …”
• Verify the guru’s claims and investment sources with a credible investment facility or with a lawyer or accountant to ensure the investment strategy is both legal and viable
• Contact other investors to determine if the investment offers are the same. Question any differences.

The Collapse of Lech’s Scheme
Just before the collapse of Lech’s scheme, he encouraged investors to re-mortgage homes and to invest even more funds. As an added incentive, he began to offer short-term investments with a 40 percent return. At the same time, current investors began having difficulty recouping their investments and the interest on them. In addition, it became increasingly difficult to contact Lech, with most phone calls going unreturned.

In the end, Lech was unable to bring in enough new monies to be able to pay
the monthly interest due to old investors to keep them at bay. The investors were unable to contact Lech or receive any meaningful accounting of their investments. 

Blowing the Whistle
In order to prevent or reduce losses as soon as there are concerns that investment funds are at jeopardy, the suspected scam should be reported and the following actions should be taken:

• Gather all documentation related to the investments, including promissory notes, investment statements (if any), cancelled cheques originally issued to the investment adviser or their company, and any documentation on payments received. These documents will contain information required by the authorities
• Report the complaint to the OSC4
•  Report the complaint to the local police
• Discuss the various legal options with a lawyer to recover the investments.

Civil and Criminal Litigation
In the Lech case, a class action was determined to be the most effective and efficient means to deal with the situation for the benefit of the participating investors.

A court order was issued that directed KPMG Inc., the Court appointed Receiver/Guardian, to take possession of Lech’s assets. This gave KPMG the authority to freeze all of Lech’s bank and investment accounts and take possession of any funds on behalf of the class. It also directed Lech to turn over his books and records to the Receiver/Guardian, a direction that Lech failed to comply with despite given ample opportunity to do so. As a result, the court found him in contempt on at least three occasions and incarcerated him for a cumulative period of 40 months. On November 23, 2006, The Globe and Mail article “Contempt-of-court" champ would prefer to rot in jail” reported that Lech beat the Canadian record for time served for contempt. While in jail for his second finding of contempt of court, Lech was wrongly released early and fled (allegedly out of the country). However, after being missing for 6 months, Lech was arrested in February 2005 at a hockey game in Oshawa, Ontario.

As Receiver/Guardian, KPMG was able to obtain all available records from the various financial institutions and reconstruct the source and use of the investment funds that Lech had received for the final year and a half of the scheme. KPMG reported that the total funds received and disbursed from 77 bank accounts held by Lech during that period was found to be approximately CA$96 million and US$15 million. The activity in the accounts was higher than the actual loss to the investors because Lech was also engaged in kiting cheques, whereby he transferred funds back and forth between his various accounts in order to prevent cheques from bouncing. The report concluded that during the period investigated, over 95 percent of the funds Lech accepted from investors were never invested.

After a lengthy criminal investigation, on March 2, 2007, the Ontario Provincial Police charged Lech with 88 counts of fraud over $5,000. Lech pleaded guilty and received a sentence of 6 years in federal prison. An associate of Lech in Ohio was sentenced there to more than 5 years in prison for his role in bringing US investors to Lech. In the end, the investors were provided with irrefutable evidence that their funds had not been invested but had merely been used to make payments to other earlier investors. Sadly, there was little money recovered to repay their original investments.

On May 25, 2010, an order was made by the OSC that permanently barred Lech from trading in or acquiring securities. Lech was also prohibited from becoming or acting as a director or officer of any issuer [in Ontario].

The authors investigated the activities of Mr. Lech under KPMG’s appointment as the Receiver/Guardian of Lech’s assets.

Karen Grogan is a Vice President of KPMG Forensic in Southwestern Ontario. She is a Chartered Business Valuator and a Chartered Accountant designated by the Canadian Institute of Chartered Accountants as a specialist in investigative and forensic accounting. Karen has 15 years of experience focusing on employee and corporate fraud investigations and litigation support.

Contact: Karen Grogan, Vice President, KPMG Forensic.  kgrogan@kpmg.ca  519-747-8223

Ray Porter is a Vice President of KPMG Forensic in Southwestern Ontario performing forensic investigations for public sector and corporate clients. Prior to joining KPMG in 2001, Ray had been a member of the Royal Canadian Mounted Police specializing in commercial crime investigations.
Contact: Ray Porter, Vice President, KPMG Forensic.  rayporter@kpmg.ca  519-660-2158