Ponzimonium

“AND NOW, this 16th day of March, 2010, it is ORDERED that Counsel for the Receiver and the Securities Exchange Commission shall FORTHWITH provide the Court with a list of the currentlyknown “red flags” that arguably should have alerted investors to the fraudulent activities of Joseph Forte, L.P.

AND IT IS SO ORDERED.”

Paul S. Diamond, Judge1

Joseph S. Forte was particularly good at making things disappear. However, he was not a magician, but a money manager who used smoke and mirrors to trick investors into thinking that he could earn them from 20 percent to more than 36 percent annually on their investments.2 Forte promised to take relatively small sums of money, strategically place them in the commodities futures markets, and turn them into substantial wealth. Over the course of nearly thirteen years, Forte successfully performed this act, soliciting more than $78.5 million from over one hundred Philadelphia-area clients.3 When Forte surrendered to federal authorities in December of 2008, all of the investors’ money had disappeared. Although some of the money surfaced as “interest payments” and redemptions, millions of dollars had been transformed into the accoutrements of Forte’s lavish lifestyle and into generous donations to nonprofits. When the show was over, the funds were gone and it was clear that Forte was just a charismatic illusionist.

It all began back in 1995 when Forte and three others pooled about $200,000 to form a limited partnership with the purpose of investing in security futures.4 Forte became the general managing partner of the limited partnership, Joseph Forte L.P., because of his self-certified success in trading commodity futures.5 Over the next thirteen years, Forte built on his alleged success, bilking millions from investors eager to become new limited partners in his unregistered commodity pool, a pool that Forte promised would make colossal returns from trading futures in the S&P 500, treasury bonds, foreign currency, and precious metals.6 By the time Joseph Forte L.P. filed its 2007 US Return of Partnership Income, it had over one hundred limited partners. The partners were completely unaware that Forte, the only individual who had authority to make day-to-day decisions concerning the operation of the partnership, had been operating it as a Ponzi scheme from day one.7

Where did all the money go? Other than the quarterly fraudulent account statements that Forte conjured up and passed through an accountant—who happened to be one of the original three limited partners—he had little to show for his success as an investor. In fact, from 1998 through 2008, he lost more than $3 million trading commodity futures. From October 2004 through July 2007, Forte barely traded at all, and from October 2002 through February 2007, Forte didn’t deposit any funds in the commodity pool’s trading account.8 Following the Ponzi format, Forte used investor money to pay both interest and principal to some investors, while the rest went directly to his own accounts. Forte paid himself generous management and incentive fees based on the artificial value he attributed to the commodity pool.9 Forte used these funds to build his stature, or rather his façade, in the community.10 In addition to purchasing multiple cars, jewelry, and a beach house on the Jersey Shore, Forte invested in at least sixteen small businesses and was wildly generous to area charities.11

How did this scheme grow so large and endure for so long? Well, it ballooned and sustained itself because investors were not only receiving quarterly statements from an accountant showing that the value of the commodity pool had grown to over $154 million, but they were receiving actual returns. Plus, investors were paying taxes on those returns, because Forte made sure that everyone received federal tax forms setting out their taxable profits from the commodity pool.12

Forte’s act seemed too good to be true, but by creating a complete fiction, it was hard for regulators and investors to discover the truth. Throughout the scam, Forte never registered with any regulatory body, nor were his quarterly account statements ever properly vetted by an independent accountant. Only when news of the Madoff scandal hit did some investors begin to question Forte about the health of the commodity pool and request the return of their investments. Unable to make additional payments without soliciting new investors, Forte came clean with authorities.13 Of the original $78 million, it remains unclear how much will ultimately materialize. In an attempt to recover as much as possible, the court has appointed a receiver to assist in selling the houses, cars, and jewelry. In addition, the investors who received fictitious profit payments will, in all likelihood, be forced to return them. Even the nonprofits will have to return the donations. These funds were never Forte’s to give.14

BANK FRAUD—Criminal fraud against a bank to obtain a loan or other bank services

As for Forte, he pled guilty to wire fraud, mail fraud, bank fraud, and money laundering charges in June of 2009. In November of that same year, Forte was sentenced to a term of fifteen years imprisonment with five years of supervised probation and ordered to pay close to $35 million in restitution and another $35 million in penalties.15,16 In the CFTC’s case against Forte, a permanent injunction is in place, and the receivership is in the process of collecting funds and determining the amount of restitution owed to investors.

Forte now resides in the Metropolitan Detention Center in Brooklyn, New York. Joseph S. Forte turned into federal inmate #63656-066; he’s projected to reappear in 2023.

CLIENTS	PRISON SENTENCE
>100	15 YEARS
AMOUNT COLLECTED	APPROX. RESTITUTION
>$78,500,000	$35,000,000
LOST IN TRADING	PENALTIES
>$3,000,000	$35,000,000