How Graham Hoy created Australia’s worst Ponzi scheme – and got 13 years jail

The sorry tale of one of Australia’s worst ever Ponzi schemes came to an end yesterday when Victorian Supreme Court judge Justice Terry Forrest handed down Australia’s biggest ever jail sentence for white collar crime to fraudster Graeme Hoy.

Hoy was sentenced to 13 years and nine months in prison, with a non-parole period of nine years, after pleading guilty to 44 charges of obtaining property and/or a financial advantage by deception for his role in the operation of the Ponzi scheme run by financial services firm Chartwell Enterprises.

The sentencing of Hoy comes almost three years after Chartwell collapsed with $82 million in debts. Hoy’s business partner, Ian Stewart Rau, was sentenced to 20 months jail in August 2010 for his role in the scandal.

Forrest said yesterday that Hoy’s sentenced should serve as a deterrent to anyone considering establishing a Ponzi scheme.

“The bald figures that can be calculated from your offending are breathtaking. Those contemplating fraud on this scale must understand that long terms of imprisonment await them.”

The detail and cunning with which Hoy established and worked his Ponzi scheme was amazing. Here are the steps Hoy used to fleece his unsuspecting investors:

The scene is set

Chartwell Enterprises was established in May 2002 by Rau and Hoy, but it wasn’t until the start of 2007 that the scheme got into full swing. The target was the regional Victorian city of Geelong – a town with a population big enough to contain a good pool of investors and small enough that Chartwell could stand out as a sort of pillar of the community.

The scam

Chartwell’s premise was simple – investors were promised returns of between 20% and 50% per annum for investing in what was basically a pooled trading scheme. Rau was notionally in charge of trading, while Hoy was in charge of raising money.

Neither had any training in handling other people’s money, but that didn’t matter – they never intended to actually trade any money.

At its simplest, this was a basic Ponzi scheme, with investor funds used for three purposes – to pay “interest” to other investors, to fund Chartwell’s impressive business operations and to fund Hoy’s lifestyle.

The mirage

Hoy targeted small-time investors from families, many of whom would go on to recommend Chartwell to friends. While the promise of astronomical returns was the main bait, Hoy beefed up his ruse by employing 40 market analysts, who sat in a special “trading room” and spent their days doing analysis and making predictions. Prospective investors would be walked through the room – which Justice Forrest described as being “alive with apparent activity” – before being fleeced.

Only $400,000 of the $16 million Hoy took from investors was ever used for trading.

The toys

Hoy knew that to retain the confidence of investors he had to make it seem like he and Chartwell were flush with cash. To this end, he bought a $6 million luxury yacht with company money and leased a Rolls Royce Phantom. Even in the finals days of Chartwell, Forrest says Hoy was a “conspicuous consumer”.

The banks

It wasn’t just small timers that Hoy stung. His personal company Black Swan secured a $5.8 million loan from the Commonwealth Bank on guarantees from Chartwell in 2007. Even more amazingly, Hoy was able to go back and get an overdraft of $2.15 million in early 2008, just months before the business was to collapse. In both cases, Hoy used false financials to trick the bank.

The end

Hoy’s scheme only lasted 15 months and by late December 2007 it appears investors were onto him. Forrest said Hoy told investors at a dinner in December 2007 that ”the future looks great” – it wasn’t.

”At this stage the company had not traded for at least 11 months and if the management accounts are to be believed had a net asset deficiency of at least $28 million,” Forrest said.

”You assured other investors as late as April 5, 2008, only days before the inevitable collapse, that their money was still very safe.”

At a dinner with investors Hoy was forced to reassure clients that the business was trading well and their money was safe.

When the inevitable happened and Chartwell collapsed, Hoy left hundreds of lives in ruin. Forrest then cited the case of one investor who has been driven close to bankrupt, watched his wife become bankrupt and lost friends whom he had recommended Hartwell to.

“You have diminished the lives of all. You have stolen from them and humiliated them and for that you must be held to account,” Forrest said.