Hollywood actor’s Ponzi scheme, explained: Why investors keep falling for scams
![<i>Gary Coronado/Los Angeles Times/Shutterstock</i><br/>Horror-film actor Zachary Horwitz](https://abc17news.b-cdn.net/abc17news.com/2022/02/hypatia-h_fda574644738f1d98ebd66d759d7d18a-h_be4b3b78596d470cc98e90985564bb96-300.jpg)
Horror-film actor Zachary Horwitz
By Allison Morrow, CNN Business
The tale of Zachary Horwitz made headlines this week after he was sentenced to 20 years for bilking investors out of $650 million by peddling bogus licensing deals with HBO and Netflix.
Ironically, it is just the kind of juicy swindler story you might binge watch on those platforms: Horwitz, a 35-year-old actor who had bit roles in a handful of low-budget films over the past decade, pleaded guilty last fall to committing federal securities fraud and running an illegal operation known as a Ponzi scheme. For years, prosecutors say, Horwitz used his investors’ money to fund a lavish Hollywood lifestyle — until his scam unraveled.
Ponzi schemes, explained
In short, a Ponzi scheme is a type of financial fraud that uses money from new investors to pay off earlier ones.
The term comes from the 1920 swindler Charles Ponzi, but in recent years has become synonymous with the crimes of Bernie Madoff, the mastermind behind the largest financial fraud in history, who died in prison last year.
Although Ponzi schemes have a long history, they are far from a bygone threat, experts say. In fact, they remain a major risk to investors in an era of soaring stock markets and wild surges in newfangled assets like NFTs and cryptocurrency.
“Fraudsters really feed on times of uncertainty, financial distress, upheaval, times of change, and those are really the times that we’ve been living in the past few years,” says Kathy Bazoian Phelps, a lawyer who runs a blog about Ponzi schemes. “And of course there’s a lot of money out there people are looking to invest.
Horwitz’s case appears to check the major boxes for a Ponzi scheme: They’re typically perpetrated by (a) men who (b) promise steadily high returns with minimal risk and (c) often prey on friends and family to get the scam off the ground.
Early investors in a Ponzi scheme get rewarded with mindbogglingly large dividends — Horwitz allegedly promised returns between 25% and 45% — that propel them to tell others about the golden opportunity, which keeps new money flowing into the scam. Once the pool of new investment dries up, of course, the fraud falls apart.
A fraud is born
Prosecutors say Horwitz, who goes by the stage name Zach Avery, promised his investors — many of whom were friends — that their money would be used to buy film distribution rights that he would then license to streaming platforms for a profit.
“But, as his victims came to learn, [Horwitz] was not a successful businessman or Hollywood insider,” prosecutors said. “He just played one in real life.”
(Savage burn, prosecutors.)
Horwitz’s company “neither acquired film rights nor entered into any distribution agreements with HBO or Netflix” and he provided fake documents to his investors. HBO, like CNN, is part of WarnerMedia.
Horwitz instead routed the funds to his own accounts, shelling out $5.7 million on a house and splurging on trips to Vegas on private jets, according to a complaint filed by the Securities and Exchange Commission.
It’s not hard to imagine how an investor might be sucked into such a scam in the era of meme stock rallies and overnight cryptocurrency millionaires. The fear of missing out is a powerful tool for grifters.
Phelps, who wrote “The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes,” says people often rely too much on word of mouth without due diligence to determine whether an investment is legitimate. That can be especially true when it comes to schemes involving cryptocurrencies or artificial intelligence.
“All it takes is for somebody to represent that they have the proprietary algorithm that guarantees returns and that sounds pretty technical and fancy and like a sure thing,” she said. “That feels comfortable to people because somebody knows technically what they’re talking about, supposedly, and the outcome is a guaranteed return that’s much higher than something they’re going to find somewhere else.”
In fact, the SEC is particularly worried that the rise of cryptos “may entice fraudsters to lure investors into Ponzi and other schemes” in part by promising investors an opportunity to “get in on the ground floor of a growing internet phenomenon.”
The agency cited a 2013 case in which an alleged Ponzi scheme advertised a bitcoin “investment opportunity” in an online forum. Investors were promised up to 7% interest per week, and that their funds would be used for bitcoin arbitrage. Instead, the crypto funds were used to pay existing investors and exchanged into US dollars to pay the organizer’s personal expenses.
Even professional investors can fall victim to fraud, Phelps notes, but there are several ways to avoid getting taken for a ride. Step one is simply being mindful of the potential for fraud. “I’m not even sure if that crosses people’s minds at all,” she said. Beyond that, investors need to ask due diligence questions, beware of promises of guaranteed return with no risk and watch out for returns that are higher than what you’re likely to find in the marketplace.
“If you can’t really understand what the investment is after a five-minute explanation,” Phelps says, “you probably shouldn’t be investing in it.”
The-CNN-Wire
™ & © 2022 Cable News Network, Inc., a WarnerMedia Company. All rights reserved.