Advice, Tips, and Observations on Business and Consumers

Ponzi Scheme explained

Ponzi Schemes are not new scams, they have existed since the 1920’s and are an offence in all countries. A ponzi scheme is a fraudulent business activity that happens when a business pays returns to its investors from new capital that is invested by new investors, rather than profits actually earned on the investment. As a matter of fact, in ponzi schemes no investment is actually being made.

Let me give you an example.
A company advertise to the public that there is an investment scheme where you can get high returns (more than what banks offer!) at a very low risk. The name of the investment is usually given fancy names.
You are told to invest Rs 10,000 and you are promised a return of Rs 17,000 after just 3 months. Indeed at maturity period you do receive your Rs 17,000, even if the company does not really deal in any product, service or investment. But this is concealed from you; you are told that the money is being invested in a foreign country or in some schemes with high turnover.

So how have they been able to pay you a return while no money has been invested? The mechanism is simple. Suppose 5 new investors came in after you invested your money and each one bring Rs 10,000, to make a total of Rs 50,000. This is where your return came from. It comes from a new pool of investors. The process is repeated on several levels, basically no money is invested, it just passed from hand to hand - it is taking from Jack to give John.

Ultimately the scheme will crash when the business fails to add new investors to the scheme, the organization can no longer pay any returns to older investors, and the debt keeps on spiralling till people start to ask about their money. Then the organisation ends up with debts of millions and even billions if it is able to operate unnoticed for years.

A company can start with all the good faith in the world without any intention to get in a ponzi scheme, but they rapidly escalate into a ponzi scheme barely noticing that they are treading on a dangerous path. When a company start having a shortage of cash flow to pay for its daily operation, often they may refuse to face reality, instead they use the money that they receive on a daily basis to pay for the expenditures of yesterday, hence a cycle is born. The only way to stop it by now would be a massive financial injection in the company or simply selling its assets to be able to repay all dues.

How to detect a ponzi scheme?
The companies’ promise high rate of returns with very low risk.
They have colourful schemes names.
They pretend to have relationships with well-known people.
Give the impression that they are compassionate.
Show off of their private life, the project the image of being very well off.
Difficulty to cash out or get returns.
The organisation seems eager for you to deposit;
They will create a form of urgency.
You will feel pressurised to do business with them.

Notorious Ponzi Schemes

10 Charles Ponzi
Charles Ponzi was the man who started it all that was in the 1920’s. Ponzi promised investors a whopping 50% return in just 45 days, or 100% in 90 days on of all things, international postal coupons, which he never actually purchased. Ponzi earned Rs 525 Million (Imagine Rs 525 Millions in 1920!) and became a millionaire in only six months. When Ponzi was caught one year later, investors received a mere Rs 175 million back, a third. He was charged with 86 counts of mail fraud and sentenced to 5 years. After Ponzi was released, he unsuccessfully (yet again) launched another scheme, where he sold real estate that was literally underwater. Not surprisingly, the namesake schemer was jailed yet again, and ultimately died penniless in Brazil, working as a translator.

9 Lou Pearlman
Lou Pearlman was one of the hottest music producers in the 90’s, having worked with 'NSYNC, LFO and The Backstreet Boys. He also produced one of the biggest and longest-running Ponzi schemes in US history, having stolen more than Rs 1.05 Billions. For over 20 years, Pearlman successfully convinced individuals and corporations to invest in two companies that only existed on paper. He also created fake financial statements to secure bank loans. In 2008, Pearlman was convicted of money laundering, conspiracy and making false statements during a bankruptcy proceeding. He was sentenced to 25 years in prison. U.S. District Judge G. Kendall Sharp gave Pearlman the chance to cut his prison time, by offering to reduce the sentence by one month for every million dollars he helped a bankruptcy trustee recover.

8 Michael Eugene Kelly
Michael Eugene Kelly ran a massive Ponzi scheme, defrauding nearly 8,000 investors, mostly retired or elderly people out of about $500 million. This was not a traditional Ponzi scheme because Ponzi schemes leave nothing left to return to its victims, whereas Kelly had millions of dollars of real estate and other assets. Kelly’s scheme consisted of creating “universal leases” which payed high commissions to brokers who sold what were basically timeshare investments. Investors could stay in the hotel rooms for one week a year or use another company, which was not surprisingly owned by Kelly, to lease the rooms at an annual return rate of 11%. Every single investor chose this option. Kelly remained in Federal Custody from 2006-2012, when he was released under house arrest pending a Rs 350 million bond signed by his family members, so he could receive treatment for colon cancer. Kelly died in 2013.

7 Pastor Gerald Payne
In the 1990’s, Pastor Gerald Payne ran Greater Ministries International. He defrauded 18,000 people out of approximately Rs 700 Million. The pastor used scriptures, he told the members of the church that if they invested with him and the church, they would double their money. Payne got away with his scheme for a while by cashing checks written for under the Rs 350,000 reporting limit, but ultimately got caught. Payne claimed the cash wasn't invested, but gifted and that their first Amendment rights as a church were violated. Payne was sentenced to 27 years in prison and his wife, Betty, was sentenced to just less than 13 years.

6 Scott Rothstein
Scott Rothstein is currently serving a 50-year prison sentence, for Rs 49 billion Ponzi scheme.The now disbarred lawyer Rothstein lived a very flashy lifestyle, owning over 200 luxury watches, Bugattis and other cars, as well as doing his business on his very own golden toilet. Rothstein convinced investors to purchase fabricated structured settlements. Investors were guaranteed a return of at least 20% in 3 months. On January 27, 2010, he pleaded guilty to 5 federal crimes. During the investigation, his wife, Kim tried to hide jewelry and other assets, but she too was found, and was forced to serve 1.5 years in prison.

5 Gary Gauthier
Gary Gauthier hosted a radio show called, It’s God’s Money. It probably wasn’t God’s intention to have him steal Rs 210 million from 38 senior citizens in the USAs. He promised his victims an 8%-40% return on investments in real estate. Gauthier lured his victims by telling listeners to call him, and he would set up a personal meeting at their homes or at his office. The scheme lasted from 2005-2010. To increase his legitimacy, investors (who presumably received a return) would call into the radio show and talk, and talk about how they got rich quick. Ultimately, Gauthier was charged with a laundry list of charges, from racketeering to security fraud.

4 Adriaan Nieuwodt
In 1984 a South African entrepreneur, Adriaan Nieuwoudt decided to market a beauty product based on an ingredient found in his grandmother’s milk-based cultures, locally known as “kubus." Nieuwoudt sold off dried-plant “activator” kits to his investors, so they could grow the milk cultures themselves in a “work at home” type scheme. They'd sell the grown cultures back to the company and in turn, would be used as an ingredient for this beauty product that didn't actually exist. While the scheme sounds sort of legitimate, the problem was that only one unit per week would be brought back, regardless of how many activator kits were purchased. Nieuwoudt was finally stopped when the operation was declared an illegal lottery by the South African government.

3 Tom Petters
Tom Petters ran a Rs 127 billion Ponzi scheme, where investors funded non-existent electronic goods, to sell to big box retailers who weren't buying them. A successful legitimate businessman, Petters owned many well-known large companies, including Fingerhut and Polaroid, which made him appear trustworthy in the eyes of investors. On December 2, 2009, Petters was charged with 20 counts of fraud, including money laundering, wire fraud and mail fraud. He is currently serving a 50-year prison sentence in a federal facility in Leavenworth, Kansas. Petters’ was the largest frauder the state of Minnesota had ever seen.

2 Reed Slatkin
Reed Slatkin was the co-founder of technology company, Earthlink and was a Scientology Minister. Beginning in 1986, Slatkin ran a Ponzi scheme for fifteen years, through an unlicensed “investment club,” where he promised a 24% return. He stole $592 million from nearly 800 people, guilty of 15 counts of fraud, conspiracy and money laundering. Many of Slatkin’s victims were also Scientologists and includes news anchor, Greta Van Susteren and Pearl Harbor producer, Armyan Bernstein. Slatkin served his sentence and was released from a halfway house, in July 2013.

1 Bernie Madoff

Bernie Madoff is presumably the most famous Ponzi schemer, operating the largest fraud in US history. Madoff stole a staggering Rs 2,275 billion from investors. Madoff received the maximum sentence of 150 years in prison, which he is currently serving in Raleigh, North Carolina. He ran a wealth management company in New York, which started as a legitimate business, but ultimately turned the entire business into one giant Ponzi scheme. His son, Mark, who worked with him, claimed not to be involved in the fraud, committed suicide in December 2010.

14 April 2015