Great frauds in history: Jerry Dominelli’s Ponzi scheme

Businessman running with briefcase full of cash illustration

(Image credit: Malte Mueller)

published 13 November 2019

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.

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.

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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.

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Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri