SEC Charges 1inMM Capital, LLC with Operating a $690M Ponzi Scheme | Hacker News Reader

SEC Charges 1inMM Capital, LLC with Operating a $690M Ponzi Scheme

sec.gov

134 pointslxm89 comments

> Horwitz misappropriated investor funds for his personal use, including the purchase of his multi-million dollar home, trips to Las Vegas, and to pay a celebrity interior designer.

I don't understand this behavior. Did he not know he was committing fraud? Did he think he would never get caught?

Presumably he thought he'd get away with it, yeah. Or just enjoyed his money while he had it and lived with the dissonance.

Once it gets too big the chance to get away with it gets really slim. If you steal some millions you can dissapear and If you aren't too stupid no one will find you and after a while everyone will forget you. But with hundreds of millions you won't bei forgotten and the agencies will put enough manpower in finding you.

Yeah, it seems the key is in exploiting the lack of law enforcement resources. I read an article yesterday about Canadian doctors trafficking fentanyl patches. The,now retired, agent who busted a small ring said he could have gotten 1000 doctors if he had the resources. He also mentioned the courts would not back him up on a large bust either. If he brought them 100 doctors he said they would tell him to pick the worst seven.

Bernie Madoff did the same, i think you just have to ignore that you're gonna get caught.

He knew he was committing fraud. He thought he could get away with it.

I'll venture in to the rando guy's theory on psychology here and say that I've seen a few good articles that indicate that folks who steal / commit fraud often GREATLY over estimate how many other people do it too.

Does / did Horwitz, I don't know, but if so it is probably pretty easy to convince yourself to do things if you think everyone else is and you're just getting yours...

Even if you know you are going to get caught you might as well enjoy the money while you have it. It could take many years before people catch on. Also, there's a certain sense of entitlement that leads people to not even consider the consequences because they've never faced any real consequences in their life.

>I don't understand this behavior. Did he not know he was committing fraud? Did he think he would never get caught?

Sociopaths don't think very far ahead (otherwise it'd be obvious to them their behaviour would fail in repeated games). When everything is going well, nobody asks questions.

Same deal with Archegos; how does rehypothecating collateral and leveraging up 10 to 1 in individual stock holdings make any sense in the long run? You're literally asking to blow up.

The really worrying thing is: if clowns like this are out there, imagine what the more clever people are getting away with.

It's a shame that the word Ponzi scheme is so abused that when I see something labled a Ponzi scheme my expectation is that it is not actually a Ponzi scheme.

Where as this is a real Ponzi scheme. The business was totally made up, and it was a front to get investor money to cycle to other investors:

>in fact, neither Horwitz nor 1inMM had ever sold any movie rights to, or done any business with, HBO or Netflix.

Crazy that people think they can get away with this stuff. Ponzi schemes seem guaranteed to blow up over a long enough time horizon.

1inMM also used contributions from new investors to pay out to older investors in this scheme as well, which is one of the hallmarks of a true Ponzi scheme.

That is what he said already. "it was a front to get investor money to cycle to other investors"

Not a response to you specifically, more of a comment on the reliability of sources: causal media (such as Twitter, blogs, HN comments) might misuse the term “Ponzi scheme,” but sec.gov sure doesn’t.

For every Ponzi scheme that blows up and is all over the news, there are dozens more that are able to fly under the radar long enough for the perpetrators to disappear. There is a lot of get-rich-quick style fraud out there and very few government resources to tackle all of it. The trick to running a successful Ponzi scheme is really to make sure to not get big enough for the real authorities (like SEC) to care. Grandma complaining to the police that a local swindler cheated her out of a couple hundred bucks is going to be met with a shrug.

Makes sense

[takes notes]

The other method is to make your scheme complex enough to overwhelm the limited budgets of these authorities. Selling nonexistent film rights is amateur stuff. If instead he had sold NFTs to nonexistent film rights, he'd be shopping for a bunch of new Lambos right now.

It is crazy, but I've always wondered how many Ponzi schemes are currently going on. Given that this one was just caught despite being founded in 2012, it stands to reason that there are still some out there currently working that haven't been caught.

They usually think they can get out before it blows since they're holding the cards.

> Crazy that people think they can get away with this stuff. Ponzi schemes seem guaranteed to blow up over a long enough time horizon.

I just finished a podcast on Madoff, and I found myself wondering if he just assumed he would eventually get caught. The man lived like a literal king for like 40 years, and only got caught in his 70’s. It’s not a tradeoff that I would take, but I wonder if for some people, prison is the assumed endgame, and the goal is to keep the plates spinning for as long as possible.

Several Ponzi schemes have started out with legitimate though niche investments that provided a good rate of return. It just became untenable when too many people poured into the market and the perpetrator didn't have the courage to say no and decided instead to start lying to investors to keep the gravy train flowing.

Ponzi schemes can operate in the open for a pretty long time.

As of late 2007 it was pretty clear that Agape World Inc. was a classic Ponzi scheme (see FatWallet forum thread full of promoters and onlookers patiently explaining the scam at https://web.archive.org/web/20080503040727/http://www.fatwal... ). They claimed to offer "commercial bridge loans", which to a limited extent they actually did, though they were mostly paying investors other investors' money.

They operated apparently with impunity throughout 2008 and the arrest wasn't until Jan 2009, with years of further criminal charges helping unravel the scam ( e.g. https://archives.fbi.gov/archives/newyork/press-releases/201... , https://www.justice.gov/usao-edny/pr/largest-grossing-broker... ).

It was just fascinating to spend all of 2008 reading that forum thread being vividly suspicious that folks were being scammed in broad daylight for a year.

Wow, thanks for that glimpse into the past. Really fascinating how it always sounds the same "if it's a scam how come I've been making money" and "they've been doing this for 9 years so if it was a scam it would've collapsed by now". Until the wheels come off, nobody can talk the shills out of it. Or even tell whether they believe what they're saying or just trying to lure others in.

A couple years isn't a very impressive track record IMO.

It amazes me that in the year 2021 there are still Ponzi schemes being pulled off like this.

Expect to continue being amazed in 2041 when they still work and in exactly the same way.

There's a sucker born every minute.

Not all of these people are suckers. Some are in neurological decline due to age (not necessarily dementia). Point is, don't always criticize the victim. Sure, there are some victims who should have known better. But not all.

Whether a person should have known better or not doesn't change the fact that these bad people shouldn't be doing these bad things.

I don't know why or how it got fashionable to dismiss someone having something terrible done to them by saying "they should have known better" but every single time it's bullshit.

I have a feeling it's a thought terminating cliche to help out of the state where you know something terrible happened to this person, and there is nothing you can do about it.

How does that relate at all to my comment? I think you replied to the wrong thread?

There will always be Ponzis because it works on the greed of the mark. Wanting unrealistic returns and impossible profits makes people ok with the "rest of your story," even if it's all BS. The mark just has to believe he'll profit at those crazy levels.

Madoff’s scheme wasn’t based entirely of the greed of his clients (though that was certainly a major factor): a lot of it was the Myth of Financial Genius that surrounded Madoff and an excessively credulous financial media which didn’t investigate a hedge fund that in retrospect was clearly cooking the books. The pension funds who lost money weren’t trying to juice their pensions, they thought their money was safe with someone of Madoff’s pedigree.

Understandable ignorance explains many victims of financial crimes. In this case and in Madoff’s it seems to be basically okay people who had no idea they were dealing with a scheming sociopath. No need to judge their character.

A good point.

It would amaze me if there wasn't; grifts and scams are part of human nature - ponzi schemes are an obvious one wherever you have investment.

Why does this amaze you ? More than half of Startups are Ponzi schemes played over a longer time horizon and more artfully. They start with a product or service that barely generate profit in the real world, polish it up with Pitch Decks, sell the idea to investors who then sell the idea to other investors and on and on the scheme goes until they IPO it if it goes that far. The banks get ahead of it and eventually the retail investor and 401k are usually left holding the bag.

That's not a Ponzi scheme, and you diminish the fraud of real Ponzi schemes by equating them with a frothy venture capital market. Very few startups deliberately commit fraud by paying out old investors with new investors. Just because seed and Series A round investors can liquidate earlier doesn't mean it's a fraudulent operation.

Former fraudster here. It's a stealth ponzi scheme. An advanced ponzi scheme should not look like what it was centuries ago. A ponzi scheme can be polymorphic and stealth.

It's like saying you are not a human because you're not white. Ponzi can have same structure and look legit perhaps play longer.

Edit: Wow my texts are flagged. Strange!!

I don't really care if you're a former fraudster or not. I am still outright rejecting the claim that the venture capital industry is engaged in, or equivalent to, a systematic Ponzi scheme. If you want to critique it, fine, but don't commit an abuse of terminology.

At this point I've worked for, worked with or invested in over 50 different VC-backed startups. I have been brought in to see their code and the internals of their products. Yeah sure some opportunistic sociopaths like to raise stupid seed rounds on a fugazzi pitch deck. And the industry is frothy with fundraising. But you can't categorically classify the industry as fraudulent.

There exist many varieties of high risk investments with a long time horizon which are not fraudulent. Everyone knows what they're getting into. Cases like Theranos are not the norm, which is why they received outsized attention when they're uncovered.

The only legal difference between an MLM and a Ponzi scheme is that the MLM has a product. It might be closer to the truth to say startups bear a large resemblance to MLMs.

There are a lot of anti-MLM people who think they should just be called Ponzi schemes. I'm on the fence about the terminology, but I think both should be illegal at any rate.

If schemes were regulated out of existence, then eventually there would be a huge population of gullible suckers who won’t recognize a Ponzi scheme.

Much like how most American don’t barter anymore for little things so they’re easy pickings at a car dealership. Or if everybody quits drinking alcohol, you’ll know less people who’ve had liver failure, causing next generation to not know the risks, etc

That's a really interesting concept, but I think somewhat flawed. The purpose of regulating schemes out of existence is so that there's a smaller chance of them existing. Even if that decreases one's ability to discover these schemes, it should (theoretically) more than even out with the decreased chance of investing in a Ponzi scheme.

I liken it to online shopping. Online shopping today is much more trustworthy than 15 years ago. Improvements in technology and more name brand companies using the internet has led to an increase in trust levels for shopping today versus in the early 2000's. This does make us more likely to be scammed, but the fact that it is now harder to scam someone online has (I would assume) decreased the percentage of people making fraudulent purchases.

> I liken it to online shopping. Online shopping today is much more trustworthy than 15 years ago.

I'm not sure this is the case. I find it harder to avoid scams these days because some of the sites I used to trust went out of business because they couldn't compete with Amazon. But now Amazon is full of nearly impossible to spot fakes and sellers who flat out lie, and their system makes it hard to track who is who.

More and more, I go to the manufacturer's website and buy directly from them. If I'm buying a printed book, I use abebooks.com. Trying to do my part to support the Amazon competition. I still buy from Amazon, but not as much as a year ago.

AbeBooks does have independent sellers, but for anyone who was unaware, it was acquired by Amazon in 2008.

> it was acquired by Amazon in 2008

I did not know that. Thank you for sharing. What are other (non-Amazon) options?

The fact that they happen seems rooted in human nature.

I'm not sure of anything that will stop that.

optimistist get their comeuppance

I am amazed at the scale.

On HN you read about a hustle some startup had to undergo to raise a $1 million seed, and here a second-rate actor https://www.imdb.com/name/nm4878976/ has access to $690 million?

In 2020-1 we've seen people making 100%+ returns on ridiculous investments everywhere, so i can see how certain people are falling for to-good-to-be-true schemes.

In related news, Gina Champion-Cain was sentenced to 15 years for a ponzi scheme involving $350mil.

https://www.justice.gov/usao-sdca/pr/san-diego-business-lead...

A lot of these "crypto" schemes (OneCoin etc.) operate all over the world, but cater heavily to people in third-world countries. They go on "roadshows" with their cronies, and hold glitzy conferences for people out in the boonies.

The other side. https://www.youtube.com/watch?v=NsViVc2-3Jo

I wonder how many people unwittingly confused him with Ben Horowitz.

None. This guy played off his Hollywood contacts, friends, and lifestyle, and his pitch had nothing to do with VC, The Valley, or anything related to Ben Horowitz.

> The complaint alleges that Horwitz and 1inMM promised investors returns in excess of 35%

If someone offers you a 35% return and they aren't the Renaissance Medallion Fund, you should probably do your due diligence.

https://en.wikipedia.org/wiki/Renaissance_Technologies#Medal...

Wow thats fascinating. So there's no way in I imagine... are their trades public?

>The Medallion fund is considered to be one of the most successful hedge funds ever. It has averaged a 71.8% annual return, before fees, from 1994 through mid-2014.[33] The fund has been closed to outside investors since 1993[34] and is available only to current and past employees and their families.

This number has been cited often. This is not to be skeptical rather to crunch the claim:

Suppose Rentech started with $50M AUM in 1994 (reasonable assumption for a small hedge fund); 50M * (1.718)^20 = 2.51 Trillion in 2014. What am I missing here?

If you had a 10% return one year and a 90% return the next, for an average of 50%, your total principal would increase by 1.1 * 1.9 = 2.09. If you calculate by the average instead (1.5 * 1.5 = 2.25) the rate of return is higher, and that error may have compounded in your calculation.

The Medallion Fund does not compound... the return is not re-invested into the principal but disseminated to investors annually. The strategy they play only works up to a certain level of capital.

They have a maximum capacity of a few billion dollars in the fund. Every year they return the money they made so the fund stays the same size. Strategies don't scale indefinitely

This probably comes as a shock to people outside the quant finance industry, but RenTech isn't the only game in town when it comes to regularly beating the market by one or two standard deviations, year after year. They're just the most famous and have a certain je nais se quois.

The red flag to look out for is extraordinarily low variance of returns, not extraordinarily high mean of returns. Madoff never promised more than about 12%, but he promised to be within 1% of that all the time. If you look at RenTech's Medallion returns since 1988, they're consistently between 30% and 120%. They're not slamming down the same percentile every year.

It's one thing to beat the market - it's still an incredibly difficult feat to do it consistently, but there's an element of chance involved. You won't beat by the same margin every year, even if you do beat every year. If you're hitting similar returns year after year, that implies your work is completely decoupled from the inherent randomness of market dynamics.

IIRC the folks who tried to raise the red flag on Madoff early on was because of what you describe. The numbers just didn't follow any kind of market change often enough / have enough fluctuation to make sense at all.

If you don't mind me asking, who are the other games in town?

Basically any established HFT, though they're market making instead of market taking. TGS. Baupost. Soros had an excellent run for like 30 years. Simons' family office, Euclidean, does well. A lot of under the radar family offices which don't have stringent reporting requirements. Various groups in Citadel, Point72 and Millenium. Appaloosa. A bunch of prop trading groups in the Chicago area. And outside of quant, the top long/short equity funds regularly do well. Like Coatue.

I looked at a few of these; none seems to take investment from average joes. Even if i show up with $1M in cash, doesn't look like any doors are open. Is that accurate?

To most of these firms, a new client with $1mln is not worth the hassle at all. On the off chance some capacity is freed up, its given as priority to clients who have 100s of millions invested already. To a degree it's a privilege to invest in this league.

Yeah. A well-performing fund will never open its books for a seven figure check. They could likely find a senior employee (not even a partner) willing to invest that.

Another investor is another person you have to have a relationship with.

With Renaissance (and a few others) a significant number of employees have an above average net worth, and choose to invest their spare capital with the fund, slowly crowding out any outsiders.

Bona fide lack of access for outside investors is probably a strongly positive signal in this industry.

Actually, it doesn't sound impressive to me at all. If a fund gets 30% ROI per year then I assume that the fund is severely underfunded. After all, if they were truly that good at allocating capital then just give them 100 billion dollars and let them single handedly run the entirety of the US economy.

There's a good amount of funds who actively keep their AUM low. If they have too much money in their strategy, it will discovered and that kills the golden goose. Or, there's just not enough liquidity in the instruments traded and the money would just be idle. Lots of high alpha funds have forced redemption just for these reasons alone.

Scale is a large factor in how well these funds can perform. Even Buffet famously talks about how difficult it is to allocate order-of-magnitude larger amounts of money, because the opportunities are harder to find and you affect the market more as you increase your buying.

can a regular joe invest in that RenTech fund?

No, not even the biggest investors can. It’s for RenTech’s employees only.

If one vendor is offering a solution that vastly exceeds the expectation of all other vendors, current and former, you should ask a lot of questions.

Either they're full of shit, or you're about to learn about some new breakthrough that everyone will be using in the future (unfortunately some of the former will claim to be the latter).

I see a lot of people here wondering how anyone could be taken in by Ponzi schema. However, a lot of the same people are "investing" in BitCoin - where the most recent rise in price may be due to a foreign company that mints new money out of thin air.

To be clear: I am NOT BitCoin is a ponzi schema. Some other alt coins definately smell like it - especially if they are created without doing ANY kind of work.

Dude I've seen people who absolutely understand that it's a ponzi, and jump in it to screw the greater fools by being themselves the greater fool of others.

Most people join ponzis knowingly trying to make an impossible buck on the back of the next guy.

I can understand poor communities exploited by MLM companies, maybe (but who thinks money comes from selling idiotic products to your friends, really?), but ponzi victims losing all their saving when it falls should consider:

- why put so much in non mainstream vehicles (cash, real estate, your company's stock)

- if non insured by the government, it's always a possibility to lose it all, it can't be such a surprise. Even a nice house can lose all its value due to a construction nearby

It's only a bad idea to be in the last traunch of joiners. See also GME.

Bitcoin and all of crypto, in its entirety, is a Ponzi.

It is backed by the same USD that Bitcoin fans claim is worthless, yet they price it in USD and extract USD from it to buy things.

Eventually one day the USD supplies will get dangerously low and there will be a systemic bank run and it will collapse. It came dangerously close in 2018. The tide will eventually go out again.

Two economic laws of gravity: wildcat banking systems always fail, and it is never different this time.

If nothing else, the absurd mining costs constantly pulls fiat out of the cryptocurrency markets. Tether has been able to keep things afloat (4 billion USDT printed in April so far), but it’s only a matter of time before everything collapses under its own weight.

There are a lot of absolutes here, which is generally not a great basis for discussing emerging technology. I recommend you reconsider your view of crypto "in its entirety" which seems based on the rabid views of a few.

Many seem to make the same mistake and focus too much on the "my coin will keep going up" crowd. There're a lot of real technical challenges being solved in the crypto space, and I feel it'll still be interesting to follow from an academic standpoint even after the next inevitable bubble burst.

Nope. The word "ponzi" has a specific meaning. Just because an asset is sold from one investor to another without producing anything, doesn't make it a ponzi scheme. Otherwise you could say gold is a ponzi, or oil is a ponzi, etc.

There's a finite amount of money going into it, there are finite drains coming out of it. Once it hits a point where the pot of money drains to zero it'll pop just like a Ponzi.

The people who extracted money early will wind up net positive, the people who did not will wind up seeing it all lost.

That's a Ponzi. Arguing about it is splitting hairs and missing the forest for the trees.

So you're saying gold is a ponzi? Congratulations, you just redefined an established word in the weirdest possible way.

If you have gold you can use it in a number of industrial and commercial manners, regardless if the price went to zero or not. If the price of Bitcoin goes to zero, what are you going to do with a wallet?

> If you have gold you can use it in a number of industrial and commercial manners, regardless if the price went to zero or not.

So, we're discussing a hypothetical where the price of gold goes to zero. And you're suggesting that in this hypothetical scenario there would still be industrial and commercial uses for gold? If that was the case, then the price of gold would not be zero, would it?

Also: when you're referring to "commercial" use of gold, you're mainly referring to gold jewelry, e.g. people who like to admire gold for its beauty. If the prize of gold went to zero (e.g. no more industrial or commercial uses for gold), then people could still admire their gold coins. In the exact same manner, people could still admire their Bitcoin wallets if the price of Bitcoin went to zero. So I'm not sure what you were trying to prove with that argument.

Anyway, neither Bitcoin nor gold is ever going to go to exactly zero, so this hypothetical scenario is not exactly realistic. Nor is it relevant to the question at hand: is gold/bitcoin a ponzi scheme? And the answer of course is "no", because ponzi scheme has a specific definition, and if you look at that definition, it's very obvious that neither of these assets fit that definition.

If someone won't tell you where the money comes from, it's a scam.

If someone is happy to talk for hours about their low latency machine learning AI block chain black swan delta hedged arbitrage manifold engine people throw money at them.

Also, during the last Bitcoin crash Wall Street figured out how to short Bitcoin and other crypto.

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