Will Allen's $31 Million Ponzi Scheme Explains How Athletes Get Ripped Off

Former NFL cornerback Will Allen has gone from intercepting passes to intercepting millions of dollars from unsuspecting investors. The former New York Giant and Miami Dolphin has been charged by the Securities and Exchange Commission with running a $31 million Ponzi scheme based on advance loans to athletes who were short on cash. According to the complaint, Allen's company, Capital Financial Partners (CFP), provided sham loans, fraudulently obtained investor funds, and used just $13.4 million in loan repayments to pay $20 million out to investors, among other charges detailed in an SEC complaint this week.

CFP offered high-interest loans to athletes who desired advances on future contracts. These were typically players in their respective sport's off-season, between paychecks or recent draftees who were yet to sign their first professional contract. The loans were often short-term and had interest rates between 9 and 18 percent. Annualized, some of these loans had interest rates well over 100 percent. Investors were fraudulently led to believe CFP's loans were backed by the player contracts, indicating Allen's company could recoup money from the athletes' teams should they fall behind on payments.

Allen was an honor student in economics at Syracuse, but this kind of finance isn't taught on campus. Allen's experience with this kind of loan came on the job. After the Giants selected him in the first round of the 2001 NFL Draft, but before he signed his first professional contract, Allen was robbed of tens of thousands of dollars worth of jewelry and the keys to a new Mercedes. Allen had recently signed with talent agency IMG (International Management Group). Although Allen refused to discuss where the money came from, the general assumption is that it came in the form of a loan from IMG. One anonymous player talked to the Hartford Courant about the practice:

"Let's put it this way. The players and agents understand that the money is available. In many instances, the players are just as aggressive as the agents when it comes [to money]. I'm not saying that's what was going on with [Allen], but when you hear about something like that, it does make you wonder. You'd have to assume that those were the circumstances [in which he got the money]."

Following Allen's robbery, the New York Times' Mike Freeman reported agents and financial planners regularly extended lines of credit up to $500,000 to first round picks. An agent told the Courant that interest rates were typically 10 percent—on the low end of what Allen's company charged. With financial planners, these loans were typically made under the condition the player will retain the planner's services in the future. For draftees—many of whom come from middle class or working class backgrounds, may have family to support, and have been working without pay from the NCAA for the past three or four years—it's easy to see why such an arrangement would be enticing even with the high interest rates.

It's also easy to see how Allen, between his economics education and his experience on the other end of the bargain, might figure there's a gap in the market here. Loads of athletes—whether draftees, veterans between jobs, or players simply waiting for the offseason to end—are looking for advances on money they assume will be coming to them down the line. The athletes figure the high interest rates won't be a problem once the season starts and paychecks start coming in, and the investors funding the loans get a great short-term return.

But between 2012 and 2015, CFP had a $7 million shortfall between loan repayments and investor payouts. One NHL player who was loaned $3.4 million by CFP filed for bankruptcy in 2014, and it's unlikely he was the only one unable to repay his debts. Faced with the shortfall, CFP paid its investors with money raised from new investors—the definition of a Ponzi scheme. The investors' assumption that the loans were backed by the players' contract and that the team would repay the loans if the player defaulted turned out to be a complete lie.

Predatory lenders and other seedy characters looking to latch onto rich (or soon to be rich) young athletes will be around as long as athletes are highly paid. Some things could certainly be fixed, however. The NCAA's tight rules on advisors could be loosened to allow players to begin the financial planning process in an earlier and more controlled environment. College athletic programs could make a point of putting athletes on a professional track into classes that can teach them how to manage their money. And most importantly, the NCAA could actually pay the players and leave fewer with empty bank accounts in that time between their last college game and their first professional paycheck.

But as things stand, there aren't any barriers between financial sharks looking to make a quick buck and young athletes eager or even desperate to get their first taste of professional money. Will Allen knew those athletes would be there for CFP to exploit because he had been on the other side. He learned it from watching agents and financial planners exploiting himself and his teammates like that for years.

Allen's mistake, ironically enough, was running out of money to pay his rich investors. Even he couldn't get away without paying the piper.