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By Jason Szep
BOSTON (Reuters)—Nearly four months before this week's arrest of the boss of a New York investment firm on charges of defrauding at least 1,500 investors of more than $370 million, Howard Stevens suspected the company was a sham.
Stevens went online and warned other investors. Using the nickname "hBomb," he wrote on an Internet message board that Agape World Inc, the firm run by Nicholas Cosmo who was arrested this week, "is a 100 percent fraud."
"Please DO NOT invest your money with these scam artists. Nick Cosmo should change his name to Nick Ponzi," he wrote.
The Internet is offering early warning signs, and in some cases filling a regulatory void, as the year-long recession exposes growing numbers of multimillion-dollar Ponzi schemes that pay older investors with money from new clients.
Stevens posted his warning on www.scamvictimsunited.com a week after meeting with Cosmo at Agape's office on New York's Long Island. In an interview with Reuters, he said Agape's office looked shoddy and unprofessional, and Cosmo dodged his questions.
"He gave us a hard time. When we tried to see some of the contracts, they refused to show us anything," he said. "Nick Cosmo wore a suit but we bumped into a few brokers that looked very out of place for a business handling so much money. They wore jeans, or had hats turned back or were wearing earrings."
Stevens invested $20,000 and lost $10,000. "I tried to take out all of the money but he said that I had to wait until January 27 before I could get back the other $10,000," he said.
Operating in the largely unregulated world of high-interest, high-risk commercial loans, Cosmo falsely promised big returns through short-term "bridge" loans to businesses provided by his company, according to federal prosecutors, the FBI and the U.S. Postal Inspection Service.
They accuse Cosmo, 37, of using investor money for personal expenses such as jewelry, limousine rides and hotel stays, and to pay more than $212,000 in court-ordered restitution to investors following a prior fraud conviction.
While the money is a fraction of the suspected $50 billion scheme masterminded by former Wall Street legend Bernard Madoff, federal regulators say the number of such Ponzi scams—or "mini-Madoffs"—in recent weeks is adding up.
"We're expecting a 25 percent increase this year in the number of cases that we actually file," said Stephen Obie, the head of enforcement at the U.S. Commodity Futures Trading Commission. He said leads to possible Ponzi schemes had doubled in the past year. In January alone, the CFTC has filed three cases.
"The challenge in investigating these cases is that most of these miscreants are unregistered, operate below the radar and create an illusion of profitability through deceit," he said in a telephone interview.
Next: Filling a Regulatory Gap