Ponzi Schemes and Fraud: Does the Investor bear any Responsibility?

A decision of the Ontario Superior Court of Justice in the case of Siegel et al. v. Hibbert et al., released on May 7, 2012, contains some interesting observations on the role of investors in Ponzi schemes.

It does not lie in the mouth of one who makes a statement on which another relies to say that the other was careless in believing him.

The judge began his Reasons with the following comment:

Greed is a vice that makes normally rational people act irrationally.  It plays exceedingly well into the old maxim ‘if it looks too good to be true, it usually is’.  This case proves that both theories are alive and well.”

In this case, a series of Plaintiffs invested various sums of money with one Marlon Gary Hibbert and his companies from about late 2006 through 2008.  All of them had heard of Hibbert generally by word of mouth, and all had approached him to ask that he invest their funds.

Hibbert traded in the currency exchange market without any training, experience or formally education in investments.  He was never registered with any regulatory body or government agency. 

He would explain to each Plaintiff that he traded in that market and that he guaranteed a 5% return per month or 8.5% per month if the funds were locked in for one year.  He also personally guaranteed all principal and interest payments. 

In most cases, a Plaintiff would invest $10,000 and begin to receive a monthly interest payment or a monthly investment statement showing the monthly interest amount being added to principal. 

After receiving interest over time, Plaintiffs would then invest further funds with the same written guarantee.

Eventually, interest payments began to be missed and phone calls were not returned.  When Plaintiffs began to demand the return of their funds, Hibbert stalled and made excuses.  Eventually, it became clear that the investments were all lost.  Hibbert alleged that the losses resulted from the recession and market volatility.  At trial, however, he produced no evidence that any of these investments were ever even made.

Not surprisingly, Hibbert was found liable for all of these losses.  Simply put, the judge did not believe a single word Hibbert said. 

The judge did make a point, however, of commenting on the position of the Plaintiffs in going ahead with the so-called investments on the basis of a totally unrealistic rate of return promised to them and personally guaranteed by Hibbert.

It would appear that one of Hibbert’s defences had to do with the carelessness of the Plaintiffs in believing what he had said.  The judge dismissed that argument, saying:

The gullibility of the Plaintiffs in believing the misrepresentations of the Defendant, or lack of care on their part in failing to make an independent investigation, is no defence to an action based on fraud.  It does not lie in the mouth of one who makes a statement on which another relies to say that the other was careless in believing him.”

I am familiar with a number of instances in which people make terrible investment decisions based on what may well have been misrepresentations.  They decline to pursue the matter because of a concern that they will be criticized for failing to conduct proper due diligence.  This case stands for the proposition that even the dumbest investment decision will not disentitle someone from relief against a fraudster.  Having the details of the matter revealed in open court may be embarrassing, but if the fraud can be proven, justice will prevail nevertheless.

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