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California Running Ponzi Scheme with Unclaimed Property Program

started by on Apr 22 2018 – Last touched: Apr 22 2018

Apr 22 2018 11:36 am    

Bernie Madoff became an infamous individual a decade ago for running what appears to be the largest Ponzi scheme in United States (and possibly world) history. At some point his investment program stopped operating as a normal investment vehicle and just took the funds from new investors and paid returns to the old investors. It all ended when the market crashed in 2008 and no new suckers were drawn into his web of deceit. California (and most likely your home state) is running its own Ponzi scheme with their Unclaimed Property program. The question is when will their merry-go-round stop and the fraud be on full display for the world to see.

Unclaimed property programs at the state level are based on a simple concept. If a business has assets in their possession that belong to a customer and that customer has not claimed their asset for a set period of time, it has to be turned over to a state official and that state official will then notify the person of their lost asset. In the state of California, the state controller operates this program which was established in 1959. In the United States, it is estimated there is north of $58 billion in unclaimed property held by states. But are they really being held?

In a recent letter to a client of mine, the State defined what they consider unclaimed property. The letter says “Unclaimed property includes, but is not limited to, payroll checks, refunds, accounts receivable, credit balances, bank accounts, customer overpayments, money orders, traveler’s checks and insurance proceeds.”

The letter goes on to threaten the business owner with the following statement in bold type:

If a business fails to report, pay or deliver unclaimed property with the time prescribed by law, it is liable for penalty and/or interest at the rate of 12 percent per annum.

When the law was first passed in 1959, unclaimed assets were anything over 15 years old. Then in 1976 that was changed to seven years; in 1988 it was changed to five years; and, in 1990, it was changed to the current three years. It was not analyzed whether the program was best able to handle the issue. If that would have been done, the State might have made a decision that the assets were better left in the hands of the business, requiring those businesses to track down the owner themselves and return the assets.

Government officials rarely think private enterprise can do better. The question here is whether they had an ulterior motive. In 1992, this clause was inserted into the California Civil Code 1564 (c): "At the end of each month, or more often if he or she deems it advisable, the Controller shall transfer all money in the Abandoned Property Account in excess of fifty thousand dollars ($50,000) to the General Fund. Before making this transfer, the Controller shall record the name and last known address of each person appearing from the holders’ report to be entitled to the escheated property and the name and last known address of each insured person or annuitant, and with respect to each policy or contract listed in the report of a life insurance corporation, its number, and the name of the corporation. The record shall be available for public inspection at all reasonable business hours."

Since most assets are cash, that means any monies identified and turned over to the state are quickly swept into the state general fund. If there is a claim on a previously-listed asset the question is where does the money come from to pay that claim unless fresh money was coming into the fund from another unclaimed asset?

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