Lack of due diligence in Massachusetts Ponzi scheme

The numerous Ponzi schemes unearthed in 2009 highlight the point that some very sophisticated investors skipped basic steps in conducting due diligence. Lawyer Jay L. Fialkow and his partner, Jeffrey P. Ross, a Boston businessman, are facing civil charged filed by Massachusetts Secretary of State for failing to register as dealers-dealers or investment advisors while referring clients to Richard L. Elkinson, who the SEC has charged with running a Ponzi scheme. The SEC complaint alleges that Elkinson, of Framingham, Massachusetts, lured 130 investors to invest $28 million with him through his d/b/a Northeast Sales. Ross and Fialkow allegedly referred clients to Elkinson (they dispute that charge, and claim they merely introduced clients to Elkinson). Ross and Fialkow earned $319,000 in commissions from Elkinson, according to Mass SOS filings.

The Boston Globe highlights red flags: "In 1992 Elkinson declared bankruptcy, and court filings reflected a man with virtually no assets, and just $600 in a bank account. When Fialkow and Ross visited Elkinson at his office, they found a sloppy desk in a bedroom of his Framingham home, with a computer and a few papers that looked like contracts. Elkinson would call Ross and Fialkow’s office daily, asking if they had raised new money for him. The pair never received tax forms from Elkinson reporting their investment gains, as required by law, according to regulators. And a cursory check of public filings would have revealed that Elkinson never submitted incorporation papers for his company, Northeast Sales."

A Jan. 2006 letter to a CPA firm from the RossFialkow firm noted that Elkinson had earned 9-13% per contract, which ran 6 to 10 months--a tidy rate of return that sounds too good to be true.