Ponzi Schemes: Four awards to the best
In the wake of the discovery of the US$50billion Madoff fraud the “Ponzi scheme” has become extremely talked about. Forensic accountants and financial crime examiners worldwide have since uncovered numerous schemes similar to Maddoff’s .
But what is a Ponzi scheme?
A Ponzi scheme operates on one basic premise; the funds of new investors pay older investors in order to induce yet newer investors. In the end, there money is spirited away and there is nothing left but for the scheme’s promoter(s).
Essentially, the scheme generates little to no profits from business activities. Any new money invested goes towards paying returns to other investors and therefore a constant stream of new investments is necessary for the survival of the scheme.
These schemes often [but not always] pray on inexperienced investors who have little knowledge of financial markets. In fact, it is not unusual for such fraudsters to recruit investors by attending local churches and community groups.
Often, initial investors actually do make good returns on their investments. This occurs because, in order for the plan to work, investors need to think that it is a worthwhile investment.
Thus, a typical Ponzi scheme will develop in the following way:
- A scheme is advertised which promises generous returns (often far above the general market) in a set amount of time. These returns are claimed to be possible because the trader has special knowledge or a new business strategy. The offer is often couched in meaningless but impressive terms such as “hedge futures trading” and “global currency arbitrage”.[1]
- At the end of the set term, the initial investors receive the promised return. Happy that they have made such a profit in a small amount of time; and believing that it is a good investment option, they often reinvest more of their own money as well as informing others about the ‘opportunity’.
- As the word spreads more people want to invest because they are witnessing people getting good returns. Numerous investors hand over large amounts, with total investments in the scheme often reaching into millions of dollars.
- At this point a few things can happen; the scheme promoter takes off with the money, leaving investors out of pocket; investment slows making it harder to pay returns, investors get worried, pull their money out and the whole scheme collapses, or; the scheme is discovered.
The scheme itself is named after Charles Ponzi, and Italian national who immigrated to the US in 1903. Although the scheme was already around in those days, the amount of money swindled by Ponzi and his method made him notorious throughout the States. He is reported to have promised a 50% return on investment over a 45 day period. Around 1920, it is believed that he made $15million in six months.
Ponzi is not
A Ponzi scheme is a type of pyramid schemes, but it is different to the standard multilevel pyramid scheme in that the latter requires each investor to recruit new investors themselves in order to make a profit. While the Ponzi scheme sees all the investment moneys going to one person (or group if there are more involved), multi level pyramid schemes spread the money across many investor levels.
The King of Spin
The ‘crown’ of course, goes to Bernard Madoff for [apparently] single-handedly ripping of investors to a tune of US$50billion. If this figure turns out to be accurate he gets the gong for the biggest fraud in history. It has been suggested that Madoff succeeded for as long as he did because his rate of return promised weren’t too unrealistic [10% per annum].[2]
The award for ‘heinously immoral’ goes to Gerald Payne of Greater Ministries International in Florida, for telling his congregation that God would double their money. He went so far as to liken the profits to be made from the investments to a modern day version of the ‘loaves and fishes’ miracle. Twenty thousand investors and $500 million later Payne was sentenced to nearly thirty years in gaol.
Scientology minister Reed Slatkin gets the ‘shoot for the stars’ award for creating fake statements and fake companies to acquire $593million from investors, many of whom were Hollywood celebrities. In 2000, the scheme fell apart when it was discovered that he was not a licensed investment advisor. That of course was not before he churned millions of dollars into the Church of Scientology.
The ‘unbelievable but true’ prize goes to the man dubbed “520 percent” because of the amazing rate of return that he offered. William Miller swindled around $1million back in 1899 by asserting that he had inside knowledge about the way that profitable companies operated. He was sentenced to ten years prison after an investigation conducted by a newspaper uncovered the scheme.
[1]http://en.wikipedia.org/wiki/Ponzi_scheme
[2] http://www.marginalrevolution.com/marginalrevolution/2008/12/how-to-run-a-po.html
7 Goods Reasons Why the World’s Largest Fraud Occurred : : Intellisec Articles says:
[...] could not possibly cover the $7Billion in redemptions, funds that had already been lost in the “Affinity-Ponzi” scheme he’d been operating for decades. He had just before this, announced to his staff “its all [...]
February 18th, 2009 at 2:43 am
Bernie Madoff’s Yacht Seized, Wins Top Honors for Best Ponzi Scheme & Inspires Another Crime Show | Jewssip says:
[...] Intellisec.com has come up with the top awards for the Best Ponzi Schemes of All Time! Click to see if Bernie sweeps all categories - ‘the crown‘, ‘heinously immoral’, ‘shoot for the stars‘ and ‘unbelievable but true’. The ‘crown’ of course, goes to Bernard Madoff for [apparently] single-handedly ripping of investors to a tune of US$50billion. If this figure turns out to be accurate he gets the gong for the biggest fraud in history. It has been suggested that Madoff succeeded for as long as he did because his rate of return promised weren’t too unrealistic [10% per annum]. [...]
April 2nd, 2009 at 8:39 am
Laser Haas says:
http://www.usnews.com/articles/news/2009/04/01/amid-recession-fbi-makes-new-push-on-financial-crimes.html?msg=1
Madoff type fraud duplicated by another case where the SEC was asked to Back OFF and it results in a $2 billion fraud of Tom Petters not being investigated in 2005 and Marc Dreier believing he partnered with a DOJ get out of jail free card!
April 3rd, 2009 at 7:29 am
online stock trading advice says:
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I’m Out!
January 10th, 2010 at 6:57 pm