Alleged Local Ponzi Scheme Steals nearly $1,000,000

Lessons to be Learned

Being in the financial industry, Ponzi schemes happen more often than I like to hear, but it’s especially concerning when it hits close to home. In this case, Jeremy Lundin of Mound, allegedly stole almost $1,000,000 from local investors and never invested a penny. Jeremy, the owner of Big Island Capital (named after a popular hangout on Lake Minnetonka), promised investors “exponential returns” with very little risk.

Potential investors were sold the fund as “an investment you can be comfortable with and double your money,” and the owners would "shoot for returns of between 40 to 80%.” An excerpt of the investment strategy provided to investors is below:

“Our investment strategy is consisted of only options trading. This isn’t the buy low, sell high, keep the stock for a long time strategy that the majority of investors participate in. Options trading consists of buying or selling contracts of an underlying company’s stock instead of the stock itself. This means your money goes further and your investment grows exponentially. With this strategy, there is risk. There is a chance that the price of the stock goes the opposite way, but your investment is protected with stop losses.”

Ignoring the poor explanation of option investing compared to stock investing, the first lesson is that anyone offering sizable returns with little risk is at best ignorant of how markets work, or at worst perpetrating a fraud. In this case, it looks like the latter. Risk and return are correlated, meaning they follow the same trend, e.g., when potential return increases, so does the risk associated with that return. It’s not a perfect system, but with semi-efficient markets this holds true. Stock options, just like stocks, are traded in very large, very efficient markets.

The next lesson is not altogether obvious and many investors may not consider it unless it’s directly brought to their attention. The money invested in Big Island Capital was deposited directly into the bank account of the company. This means Big Island had custody of the assets. This also means Jeremy and Big Island could do whatever they wanted with the money. Having custody of the assets is what made it all possible. The second lesson is, your financial advisor (investment manager, wealth manager, stock broker, etc.) should never have both custody of your assets and be the one providing the advice. In this case it was easy to make fictitious account statements for each of the investors. If he did not have custody, a third-party custodian would have provided statements directly to the investors. Had a third-party custodian been involved, investors would have needed only to review their statement from the custodian and compare to what Jeremy was telling them. This Ponzi scheme, and most Ponzi schemes, are impossible to pull off if there is a third-party custodian.

There are other red flags in this case as well. Jeremy made large purchases including a Maserati, a boat, and luxury vehicles over a short time-period. While a financial advisor shouldn’t be handcuffed into living an austere lifestyle, considering the age of the company and the amount of assets Big Island was managing, it should have raised concern. Even the fact that the company was named after a known party destination should have given potential investors pause.

Key Lessons to be learned for investors: 
1.) Don't chase unrealistic returns - if it sounds too good to be true, it likely is.

2.) Avoid investment strategies you don't yourself understand - be skeptical of complex investment strategies.

3.) Always separate custody from management of the assets - when investing with anyone, the assets should always be titled in your name.

Here is the link to the article by Fox9 with an accompanying video.