Ponzi schemes were once thought to be difficult to detect. In the wake of the market crisis and huge frauds such as Madoff, however, these cases seem to have become a staple of SEC enforcement. Last year, the Commission brought over one hundred of these cases. Frequently, there were parallel criminal cases or, charges were brought shortly after the SEC initiated its action. In some instances, a parallel case was brought by the CFTC. Many of these cases moved forward quickly, with consents to freeze orders and the appointment of receivers charged with marshalling the assets.

Last week, the Commission obtained a preliminary injunction in a Ponzi scheme case that began with a complaint filed on January 7, 2010, as discussed here. SEC v. Elkinson, Case No. 10-CA-10015 (D. Mass.). The complaint alleged that, while working from home, Richard Elkinson was able to raise about $28 million over a period of several years from 130 investors in twelve states. Mr. Elkinson apparently lured investors to purchase promissory notes in a business that was supposed to be brokering contracts on behalf of a Japanese firm. That firm, investors were told, manufactured uniforms for police, prison guards and others. The products were sold to large purchasers such as local governments.

Investors were given promissory notes signed by Mr. Elkinson which typically required payment within about one year. The interest rate ranged from 9% to 13%.

The SEC, however, claimed that Mr. Elkinson had no relationship with a Japanese uniform manufacturer and that there were no contracts. While some investors did in fact receive the promised payments, the Commission claimed that they were made with funds obtained from other investors. The scheme continued as long as a sufficient number of investors rolled over their investment since much of the money was in fact diverted to the personal use of the defendant.

The Commission’s complaint charged violations of the Securities Act registration provisions in Section 5 and of the antifraud provisions of that Act as well as the Exchange Act. In granting the SEC’s request for a preliminary injunction prohibiting violations of those sections, the court also order a freeze of Mr. Elkinson’s assets and all proceeds from others, prohibited the acceptance of additional investor funds and directed that relevant documents not be altered or destroyed. See also Litig. Rel. 21410 (Feb. 5, 2010). Parallel criminal charges have also been filed.