The Metro Dream Homes Ponzi Scheme
May 26, 2009
Metro Dream Homes (MDH) orchestrated a Ponzi scheme that promised to pay off investor's mortgages in 7 years. The founder and management team at MDH used fancy seminars at expensive hotels and initial investor testimonials to convince other investors to participate in their "Dream Homes Program". The Dream Homes Program offered to payoff the investors current mortgages in 5 to 7 years for an initial investment of at least $50,000. The Dream Homes Program ran for 2 years during which over 1,000 individuals invested a total of $70M in the program. The money from investors was supposed to provide the initial capital investment for ATMs, telephone card kiosks and other business ventures. The revenue generated from these investments was going to be used to pay off the mortgages of the investors. Although, some mortgage payments of the early investors were made the rest of the investor's money was used to pay the exorbitant salaries of MDH's management team and their extravagant lifestyles.
The Ponzi scheme put together by MDH is one of the many cases of fraud going on today. The economical background opened the opportunity for such cases of fraud to occur. During the time of the MDH Ponzi scheme, there was a boom in the economy and housing markets. This was driven, in part, by the deregulation and lack of oversight by the government in the housing and securities markets. Without a thorough amount of government oversight many people took it as a great opportunity to make money at the expense of others. During the economic boom, a lot of money was being made and everyone wanted to be a part of it. Many individuals, who knew little or nothing about investing, were taken by scams like this while trying to get their piece of the pie.
There are a few ethical issues involved in the MDH's Dream Home Program. The deontological approach would identify what the management team at MDH should have done once they knew that the investor's money would not be used to start the revenue generating ventures that they had promised the investors. At this time, the MDH team should have clearly understood that there was no way that they would be able to fulfill their part of the agreement with investors, which was to pay off the investor's mortgages in 5 to 7 years. The MDH team had a duty to act morally and disclose to their investors that things were not going to work out as planned. The virtue ethics approach would look at the motivations and intentions of the MDH management team. Using this approach, it is clear to see that the motivations and intentions of the MDH team were to make money at any cost. The MDH team had no intentions of actually pursuing the revenue generating ventures that they sold investors on. Instead of using the money they got from investors to purchase equipment to generate revenue, they used the money to make payments on the mortgages of the initial investors, pay their salaries (some of which were over $200k per year) and to book private jets to go to championship sporting events all over the US. The MDH team had no intentions of paying the money back to the investors, they just wanted to make money and live the good life on someone else's dime. The utilitarian approach would identify the choices that would benefit the most people and hurt the least. The actions taken by the MDH team on the surface looked to benefit the majority of the parties involved. If things had gone according to plan, the business ventures that the MDH team would have benefits both the MDH team and the investors. The business ventures could have provided enough revenue to cover the mortgage obligations to the investors as well as profits to the MDH team. The problem is that the MDH team didn't pursue any revenue generating ventures with the investor's money. This course of action now only serves to benefit the MDH, not any of the other parties involved.
Before going further with the analysis, it is important to identify all the stakeholders affected by the decisions from the MDH team. This will be key in determining alternative courses of actions for the MDH team. The obvious stakeholders would be the MDH team and the investors. Both stand to gain or lose from the investment opportunity. Other stakeholders include, the families of the investors, the mortgage companies who own the loan on the investor's homes and the neighbors of the investors. In some of the different articles I read regarding the MDH Dream Homes Program describe homeowners that had to struggle to come up with the money to invest with MDH. Some of the homeowners had to take out second loans on their homes in order to be able to participate in the investment opportunity. This indicates the investors didn't have a lot of money and would suffer financial hardship if investment didn't work out. This would mean that they would eventually default on their loans, leaving the mortgage company with a bad loan and undervalued home on their books. The foreclosure of the home would not only affect the investors themselves, but their families too. The family would find themselves without money or a place to live. This would also affect their neighbors as well. When the home goes into foreclosure, then the bank will do whatever it can to get the home off their books. Typically, this means the mortgage company would enter a short sale on the home. This would end up driving down the home prices for the investor's neighbors. Also, depending on the situation, this drop in price could also drive the neighbors into foreclosure if they had special covenants in their loans regarding home value or if they needed to refinance out of an adjustable rate loan. Another group that might be affected by the MDH Ponzi scheme is other investment groups who get a bad name just because they are trying to participate in other investment opportunities. In this case, I am considering investment groups who are trying to put together legitimate investments for individuals. People who have been burned before, or who know someone who was burned before wouldn't want to take the risk and invest with the group for fear the same thing might happen again.
I have already touched a little bit on the some of the consequences of the MDH Ponzi scheme. The short-term consequences could be that the investors might go out and spend more of their money with disregard thinking that they won't have to worry about their mortgages anymore. They might go and run up credit card debt, buy new cars or even go on vacations. These short-term consequences would develop into long-term consequences when the investors realize that they will be responsible for the mortgages on their homes. The short-term consequence for the MDH management team is that they need to keep carrying on the charade. The Ponzi scheme worked because the investors were able to see earlier MDH investors that confirmed that their mortgages were being paid. The MDH team knows that this is a critical part of establishing legitimacy. If they weren't able to depend on the earlier investors corroborating their story, the whole house of cards would come crashing down immediately. The long-term consequences for the homeowners would be foreclosure and credit problems. The long-term consequences for the MDH team would be jail. Once the investors realize that MDH isn't making payments on their mortgages, it won't take long for the government and regulatory agencies to become aware of what happened. Taking into consideration the lengths the MDH group went to in order to pull off the scam; it won't be long until they're under indictment for the Ponzi scheme they put together. Once the management team is under indictment, the reputation of their employees will also be tarnished. It is possible that the employees were unaware of what the management team was doing with the investor's money, but mostly that won't matter to potential employers.
The MDH management team had an obligation to tell their investors the truth about what they were really going to do with the money they received and to do what they promised they said they would do. The investors had no problem giving their money to the MDH management team because they believed the MDH team would do what they said they would do. This would most certainly have changed if the MDH team had been honest about their intentions. If the investors knew that the MDH team was not going to purchase the equipment for the ATMs and telephone card kiosks, the investors would have questioned how MDH would be able to come up with the money they needed to pay off the investor's mortgages. Had the MDH team done this, the investors would have been able to make an educated assessment of the situation and decided whether or not to invest with MDH.
The course of action take by the MDH management team was clearly not the ethical choice to make. The MDH team could have made taken alternative courses of action that would have been ethical. Next I will discuss three different alternative courses of action and make a recommendation as to what the MDH should do if an opportunity like this arises again. One course of action would be to just be honest with the investors. This would mean that the MDH team would tell their investors that they had no intentions of investing their money wisely and had no opportunity to repay the investors. Obviously, this choice would stop the investors in their tracks. I can't imagine that any investors would give any money to the MDH team if they choose this option. This option would save the investors and their family, neighbors and mortgage companies from the negative consequences of investing with MDH. This option hurts the MDH team as far as its ability to generate revenue, which in turn would mean layoffs for the company. At least with this choice, the MDH team is open and honest with their potential investors. This way, later down the road, there would be no surprises with the outcome of any investments.
Another course of action is for the MDH team to actually follow through with their plans to invest in other revenue generating ventures so they could have an opportunity to fulfill their part of the deal and pay off the investor's mortgages. The MDH team needs to be open and honest about their plans and how they plan to payback the investors. This is an ethical choice. With this choice, the MDH has the potential to attract individuals to invest with them. This choice also puts the investors in the right frame of mind to weigh their options. The investors can do some research to see how good their chances are for their mortgages to get paid off. At first glance, this seems like a good choice for the MDH team. However, I believe that the MDH team isn't really interested in putting in the hard work and effort to make this option work. I am not convinced that the MDH has the business sense to identify a good investment opportunity and to see it through to fruition. Ultimately, this option would not be good for any of the stakeholders in the long-term. The MDH team wouldn't be able to generate revenue from the investments and not be able to pay off the investor's mortgages or pay the salaries of their employees. The company would have to layoff employees or even close down entirely. The investor's would be left with no return on their investments and have to pay off their mortgages on their own. This opens up the possibility for foreclosure and puts their families, neighbors and mortgage companies at risk as well.
The last course of action that I recommend for the MDH team is to not pursue this type of investment opportunity at all. As I stated before, I don't believe that the MDH team has ability to identify and execute an investment opportunity. It is best for the MDH team to find other opportunities for employment. This option is the best option because it provides the greatest good for all stakeholders concerned. The investors don't get enticed with the idea of financial freedom and the MDH team doesn't get the liability of having to payoff the mortgages for their investors. This option does leave the MDH to search for some other opportunity to pay for its operations but leaves the investors to deal with and be held accountable for their own finances. Here the risk to the investor's families, neighbors and mortgage company do not increase from their current levels.