The Commodities Crash and Its Effect on Ponzi Schemes

Photo of Charles Ponzi, Courtesy of Wikipedia.com

The Calgary Herald published an article on December 31, 2015 about Wade Robert Closson from St. Albert, AB. He was fined $1 million by the Alberta Securities Commission (ASC) for a fraud in which he raised $10.8 million from 125 investors with a promise of 18 per cent annual returns. In addition to the fine he was permanently banned from trading securities or acting as an officer of an issuing company.

According to paragraph 10 of the decision by the ASC “…Closson diverted money to “uses not authorized by investors”, including using “approximately $5.6 million” of new investor money to pay returns to other investors, applying “approximately $3.9 million” for projects “outside the scope of the express or implied purpose of the investments”, and removing “at least approximately $800,000 for his own use“. It was in effect a fraud and a Ponzi scheme. The full decision released by the ASC is available on their website.

The decline in the prices of oil and other commodities creates an environment where investors may be more cautious about investing in exotic opportunities. Also their fears about their own employment prospects, or the future of their business may encourage them to withdraw from investments that they are already involved with.

What does that mean for Ponzi schemes? It means more draws by investors which will put a lot of pressure on the people running the schemes to come up with new investor funds to satisfy those draws from their current investors. The challenge they will face is that there are fewer new investors to invest due to the fear described above. The economic and psychological conditions are right for a large number of these schemes to collapse. That in turn will lead to more insolvencies, a greater number of law suits, and potentially more criminal and securities enforcement actions.

Alternatively, investors may search for non-traditional investments in order to secure higher returns than what they’re able to get from the stock market. To be sure there will be Ponzi schemes perpetrated, but not likely the volume that has occurred in recent years when there was more investor money available.

This isn’t just going to affect commodity investment schemes. Due to the wealth created in Alberta and other commodity based economies in the last decade investors had extra cash to invest. For example, housing prices rose drastically which created many opportunities for mortgage investment schemes, including the aforementioned Closson case.