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Recession Causes Rise in Fraud and Rise in Convictions

David P. Meyer

In mid-2009, Time Magazine published an article that declared the United States was in a "boom time for scams." Two years later, that's still true.

In a recession, economic uncertainty causes many investors to look for big returns with little risk - a combination that rarely exists outside the promises of a con artist. And, with more investors desperate to believe in guaranteed, high-yield investments, schemes proliferate to an alarming degree. New ones start almost daily, while old ones (started prior to the recession) fall apart and make weekly headlines.

The rise in investment schemes that fall apart, however, gives us a good way to measure fraudulent activity during a recession: we can watch for trends in the amount of restitution ordered by the state.

In Montana, for example, only $2 million was ordered in 2008, but just two years later the state ordered restitution was a whopping $116 million ("Fraudulent securities dealings spiked in recession," Associated Press, Aug. 20, 2011).

Montana Commissioner of Securities and Insurance Monica Lindeen said this trend could be explained by understanding that a lot of big-money rackets (such as Bernie Madoff's infamous Ponzi scheme) fall apart when new investments dry up.

Montana officials say this is what happened to convicted Ponzi schemer Arthur Heffelfinger of East Helena. In 2001, Heffelfinger began running a scam that bilked investors out of $2 million. When the money ran out, and no new investments could be brought in, the scheme collapsed in 2009. Heffelfinger was sentenced to 10 years in prison, and ordered to pay $1 million in restitution.

Other fraudsters who found themselves convicted and ordered to pay restitution for investment fraud and/or theft after their schemes unraveled during the recession, include: William Arthur Sassman II, Antoinette Hodgson, Matthew and Lance La Madrid, and Dan Wise. (For more information about these schemes, click here.)

To learn how to protect yourself from investment fraud and securities scams, browse our investor library.