May 30, 2013 Articles

Using Forensic Accounting in Trust Disputes

In an era of Ponzi schemes and other financial scandals, this new breed of accountant plays a key role in fraud investigations

by Michael N. Kahaian and Thomas M. Schehr

Most people have heard the story of Bernard L. Madoff, the orchestrator of the single largest Ponzi scheme in history, which defrauded thousands of investors of billions of dollars. One of the hallmarks of Madoff's success in perpetuating the Ponzi scheme rested on his ability to promptly return withdrawal requests to his clients when demanded. The credit crisis induced a large number of Madoff's clients to become uneasy and, as a result, more of them requested withdrawals than his over-inflated holdings could cover. This led to the confession of the scheme to his sons and his ultimate arrest on December 11, 2008. Madoff has since been sentenced to 150 years in prison while maintaining he acted alone.

Likewise, R. Allen Stanford, the Texas financier, has been accused of a $7 billion Ponzi scheme. The charges against Stanford allege he swindled investors through the sale of bogus certificates of deposit by his Antigua-based Stanford International Bank Ltd. The instruments paid unusually high returns, but Stanford has denied the allegations and claims "he had put the depositors' money into 'real assets backed up by real investments.'" Clifford Krauss, "Stanford Points Fingers in Fraud Case" N.Y. Times (Apr. 21, 2009). Regardless of the outcome, the collapse of Stanford's financial empire occurred virtually overnight after the fraud charges were levied against him.

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