The World of Ponzi Schemes

I first wrote the following Ponzi article back in January 2007 and it was then published on my blog Mike's Money Making Mission.

Having been a publisher of business opportunity magazines I had previously delved into, and had experience with, various Ponzi style programs and schemes.

I like to normally dwell on positive things with money making but it is important that we take care when considering various, so called, investment opportunities and hyped up money making claims.

Many frauds and cons are based on, or are a variation of, Ponzi Schemes. They are named after the originator, Charles Ponzi, who founded the classic pre-war fraud in the USA. The concern is that these type of programmes can still flourish, especially on the Internet. Members of such schemes are often convinced of the legitimacy of the plan and defend them with great conviction. It is also a characteristic of Ponzi Schemes that the promoters continue to claim their innocence, even if found guilty in a law court or are closed down by an official government body.

So what is a Ponzi Scheme and how do they operate?
On the outside they can look to be very respectable and are usually well administered, at least initially. The schemes look out for investors or members who are willing to hand over a sum of money with the promise of an exceptionally high return. The minimum can be as little as £50/$100 but can also be several thousands of pounds or dollars. The promoters state, or sometimes just infer, that the money will be put into some sort of high rate investment. It could be a secret bank, currency dealings, gilts or many other variations.

The whole point of a Ponzi scheme is that it must look to be a very attractive proposition. To work it has to be popular and growing. Why? Simply because the investments aren't true. The first investors receive their returns from money paid into the scheme by later investors. In other words they are money circulation plans.

Some of the larger frauds may actually invest part of the money, as a smoke-screen, but mostly there is no secret bank, currency dealings or whatever.

Ponzi schemes are sometimes difficult to detect in the early stages because they appear legitimate. Early investors are full of praise as they are paid out on time. The word soon circulates as to how various people have made big returns. So the scheme snowballs and attracts more and more money. Everything is run efficiently. Regular newsletters may go out, payments are made on time etc. Even the doubters may start to think that their first opinions were perhaps wrong, as all they hear are good reports from other members. The promoters often have impressive addresses in many countries and look to be a massive concern. In reality they are often run from a small office or even a private address.

The investment returns are mostly only paid out after a year. Investors are encouraged to then leave their money with the organisation to let it compound for even, supposed, larger returns.

Eventually the money dries up. There isn't sufficient coming in for the promoter to pay out. This has to ultimately happen. The scheme crashes, or a government department may step in as they start to receive complaints from dissatisfied investors.

Prior to the crash the promoters often try for a final hit. They may alter the program slightly, offer yet higher returns if people are willing to invest more money. All along, of course, the promoters have been milking the money that has gone into the scheme. The money gets salted and hidden away in offshore accounts and the like.

When the programmes do finally crash or are closed down, as said earlier, the promoters continue to protest their innocence. They promise they will back members given time or they will fight any legal action. They try to blame the demise on others. They ask for members' patience, a lot of waffle is circulated. The strange thing is that even in the aftermath some investors continue to believe the promoters version of what might have been.

The lesson behind the Ponzi schemes is: If something looks to be too good to be true it probably is.

Ponzi style plans have different lifespans, dependent on how good the smoke screen is. If such a scheme is run solely in one country, the size of the UK, they can be around for up to eighteen months, but longer if they are worldwide. Some of the early investors do make handsome returns - this is purely for show and for publicity.

A typical scheme can be started quite easily. Amazing International is set up wanting short term loans whereby they promise to say double your money in one year. Fred runs Amazing International from his bedroom in Wisteria Crescent, even though his letter heading indicates his main office is in Los Angeles with another at an offshore location. He tells people he can also get them high returns in financial instruments at Swiss/Austrian Banks with his inside knowledge and the fact that he is such a large concern. Few people bother to check out his claims properly so money rolls in. Some is salted away and some used for an extravagant lifestyle. When the first loans or interest become due he pays out a few, who insist on their money, but persuades the majority to keep their money in the scheme (for massive gains). When the scheme finally collapses Fred has disappeared.

Be careful of any over hyped claims. A few suggestions:

• Secret or red ribbon deals, financial instruments or bank accounts offering unusually high returns or growth for doing nothing are usually best avoided - unless you have proper professional advice.


• Do not believe that because individuals or companies are making confident claims they must be telling the truth and that they wouldn't be silly enough to lie.


• Check out the company or organisation before parting with any money. In the UK Limited Companies can be checked out at Companies House. Also in the UK the addresses of the people or person behind a P.O. Box Number can be obtained from the Post Office. No phone and a Box Number - forget it!


• If an investment is offered, again in the UK, check out with the Financial Services Authority that the individual/company is authorised.


• Always contact the company themselves. Ask lots of questions. Where is that branch in Los Angeles? How is the money made? If they won't say - forget it! Don't be fobbed off.

I previously published business opportunity magazines and you would be surprised how many fall for Ponzi style money making schemes. Be careful.

The scary thing about Ponzi schemes is that they fool all sorts of people. Even the rich and famous are taken in when they hear about the high returns supposedly being made.

It has now been reported, for example, that Kevin Bacon and his wife Kyra Sedgwick got stung by the Bernard Madoff Ponzi style fraud in the USA.

The couple have admitted that they were taken in but their spokesperson wouldn't say as to how much money they had 'invested'. No doubt it was a sizeable amount.

Other names who were caught up in the Madoff swindle are said to be Steven Spielberg, Eric Roth and Jeffrey Katzenberg.

And, of course they are not alone. Incredibly some UK banks pumped money into Madoff's fund to the tune of millions of pounds.

The wise banks left it well alone. As one banker told me, "We couldn't understand how Madoff was supposedly getting such regular high returns. It just didn't feel right."

But greed is a strange thing. Sometimes it overlooks and ignores the obvious - and this is why Ponzi Schemes will always flourish.

The US Bankruptcy Court in Manhatten has now released a list of Bernard Madoff's clients who have filed claims.

If you are interested in such things you can see the full list of 163 pages on the Madoff Victim List.

In addition to the well known names previously released Sandy Koufax, the ex-Major League Baseball player, is now also included along with several dozen accounts involving the Mets.

Ponzi schemes touch on all walks of life.

Charles Ponzi, 1882-1949, was born in Italy and headed for America in 1903 where, he believed, the streets were paved with gold. He tried all sorts of get-quick schemes but none seemed to work, until 1920 that is. This is when he thought up the very first Ponzi scheme.

He was a charming, gregarious man and for a brief period even some newspapers and people in the financial sector were taken in and virtually endorsed his so called investment.

You can read the full story of this extraordinary man in a book by Mitchell Zuckoff called Ponzi's Scheme: The True Story of a Financial Legend

This book takes an investigative look at the reasons why Ponzi schemes and pyramid frauds are thriving everywhere. It closely examines why over 100,000 Americans are suckered into the schemes every year.

Tips are offered to detect schemes and respond when they occur. The purpose of the book is to educated consumers and make them aware of how scams work.

The book, with the very long title, is available from Amazon and at a discount of course:

Link:You Can't Cheat an Honest Man: How Ponzi Schemes and Pyramid Frauds Work...And Why They're More Common Than Ever

The Lord himself, Andrew Lloyd Webber, has had a rant today about the UK Budget and the fact that income tax has been raised for those earning over $150,000 per year.

He's annoyed because high tax payers also have to pay high National Insurance contributions. He wrote in the Daily Mail, "In Healy days, there was no open-ended National Insurance tax. Then National Insurance was supposed to be just that, not the gigantic Ponzi scheme financed through direct taxation that it has become."

If you think about it that is exactly what a lot of pension schemes, and the like actually are - glorified Ponzi schemes. Current contributions pay for the payments to recipients.

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