Ponzi Schemes, the Vintage Fraud That's Seeing a Resurgence
What’s Old is New
Skorts are back, and so are old fraud schemes! Just like fashion trends, some things never truly go out of style. Ponzi schemes, the vintage fraud that has duped investors for over a century, are making a comeback. Let's dive into the world of Ponzi schemes, from the infamous Bernie Madoff to the original scammer, Charles Ponzi, and see why these schemes are still fooling people today. Bernie Madoff, the mastermind behind the largest Ponzi scheme in history.
The Infamous Bernie Madoff
Bernard Lawrence "Bernie" Madoff, a pioneer in electronic trading and former chairman of the Nasdaq stock exchange, executed the largest Ponzi scheme in history, defrauding thousands of investors out of an estimated $65 billion over at least 17 years. 1
Madoff's scheme, which ran for decades, lured investors with a front of respectability, offering high but not outlandish returns and claiming to use a legitimate strategy. 1
In 2009, Madoff was sentenced to 150 years in prison for money laundering, securities fraud, and several other felonies. 2
Madoff's journey began in Brooklyn, New York, where he founded Bernard L. Madoff Investment Securities LLC in 1960 with his high-school sweetheart, Ruth. 3 Despite humble beginnings, Madoff's success soared as he built electronic trading capabilities and became a prominent figure in the New York Stock Exchange, making around $100 million a year by the late 1980s. 1
His Ponzi scheme involved depositing client funds into a single bank account to pay existing clients, while attracting new investors and their capital to fund redemptions, maintaining the appearance of outsized gains. 1
The fraud unraveled when the market turned sharply lower in late 2008, leading to Madoff's confession to his sons, who subsequently turned him over to the authorities. 1
Madoff's scheme left thousands of investors devastated, with only about $4 billion returned to some 40,000 victims via the U.S. Department of Justice's Madoff Victim Fund4.
Charles Ponzi, the original scammer who gave his name to the Ponzi scheme.
The Original Ponzi Scheme
The reason we call certain types of investment scams “Ponzi schemes” is because of Charles Ponzi. He scammed people out of millions of dollars in the 1920s 5. Ponzi schemes involve a scammer taking money, saying that they will invest it, but just pocketing it. Like sometimes how tree squirrels take my peanuts for themselves 6.Charles Ponzi's original scheme focused on the U.S. Postal Service and international mail, exploiting differences in currency exchange rates. 7 He promised investors high returns with little risk, a hallmark of Ponzi schemes 8. The scam collapses when the flow of new money slows, making it impossible to keep up the payments of alleged profits 9.
Other Notorious Ponzi Schemes
Ponzi schemes have been around for a long time, and many have followed in Charles Ponzi's footsteps. Here are a few of the most notorious:
Lou Pearlman – $300 million
Gerald Payne and Greater Ministries International – $448 million
Reed Slatkin – $593 million
Scott Rothstein – $1.2 billion
Tom Petters – $3.7 billion
R. Allen Stanford – $7 billion
Why Are Ponzi Schemes Still Fooling People?
Despite the high-profile cases and the lessons learned, Ponzi schemes continue to thrive. Here are a few reasons why:
Promise of High Returns: Ponzi schemes promise a high rate of return with little risk to the investor, which is always tempting. The increased cost of living that wages have not kept up with coupled with an increased workload in a digital age. 8
Word-of-Mouth: These schemes rely on word-of-mouth to attract new investors, making them seem more trustworthy. Again, the digital age has exponentially magnified this same characteristic of the scheme. Social media, podcasts, the ease of buying a domain and creating your own ‘storefront’ increases the ability to manufacture and self-promote in a way that can then be pushed by the algorithm with a few interactions and confirmations of success to bolster fraudsters in a way that could only be accomplished with accomplices or additional trickery of media outlets previously. 8
Lack of Due Diligence: Many investors get just enough information from youtube or their mentor dishing out advice from their perspective of a multi-millionnaire with writeoffs, a big cushion, and an excellent in house counsel to cover their deals. Meanwhile newbies are taking that advice from a place of significantly less resources while also failing to perform their own rigorous due diligence, making them easy targets. 16
Conclusion: Don’t Be Ponzied
Ponzi schemes haven’t gone away, but they’re resurfacing in a new medium. The allure of high returns with little risk continues to attract new victims. By understanding the history and mechanics of these schemes, we can better protect ourselves from falling prey to these vintage frauds. Stay informed, perform due diligence, and always be skeptical of guaranteed returns. I have free training available for replay that goes into the exact framework I use to vet the deal, vet the person, and verify the information. You can find it linked here, Due Dilgence Mastery, if you want to learn more.
