Great frauds in history: Jerry Dominelli’s Ponzi scheme
J. David “Jerry” Dominelli's classic Ponzi fraud cheated investors out of $80m in the 1980s.
J. David "Jerry" Dominelli was born in Chicago in 1941, graduated from the University of San Diego, and went on to became a stockbroker. In 1979 he set up J. David & Company, an investment company that claimed it could make returns of around 40%-50% a year on the interbank and foreign-currency markets. While many people were sceptical, its apparent initial success led to a flood of investors and Dominelli broadened the fund's activities into other ventures, such as real estate. By 1983 the fund had received more than $200m ($504m in today's money) from 1,500 investors.
What was the scam?
Despite the illusion of investment success, the returns were almost completely made up as J. David & Company engaged in only $11m ($27.7m) worth of trading. Instead, it operated as a classic Ponzi scheme, with the money from new investors going to pay returns to those who had previously bought into the scheme. Meanwhile, Dominelli would use the 20% of the fictitious returns that he charged as his fee, as well as large sums from the fund, to maintain a lavish lifestyle. He bought multiple homes, several private jets and spent millions of dollars on classic cars.
What happened next?
By December 1983 the scheme began to unravel as the company began to run short of money. When some investors tried to withdraw their money, they found that the cheques that they received bounced because of a lack of funds, leading to a massive panic as other investors tried to get their investments back. Despite attempts to reassure investors by falsely claiming that the company was solvent, J. David & Company was forced to declare bankruptcy, and Dominelli was arrested, eventually spending more than a decade in prison after confessing to defrauding investors.
Lessons for investors
Only $120m ($303m) out of the $200m invested was returned to investors, with the balance spent on expenses or blown by Dominelli and his partner. Many investors ended up losing even more because they borrowed money or made spending decisions based on the false account statements provided by Dominelli. Given that stocks can go down as well as up, and funds can lose money, it's never a good idea to get carried away by investment success that might only prove temporary.