This “mini-series” of ScamAlerts started when one ABC2 viewer sent in an email because, after asking many friends, she and her social network realized they really didn’t understand a Ponzi scheme. The concept gets further complicated and confused because people often interchange the terms pyramid scheme and multi-level marketing (which of the three is the only one that’s legal) with Ponzi scheme. So here’s our attempt to explain (wish me luck!).
I found the simplest definition of a Ponzi scheme online, www.newsroom-magazine.com
A Ponzi scheme is a personality driven pyramid scam in which a charismatic individual persuades people to invest money in some bogus financial enterprise. The allure of every Ponzi scheme stems from a contagious belief that all one must do is put in their money and wait for a return. The scammer pays out a substantial amount of new monies to early investors — producing the illusion of reality.
The excitement of quick returns spreads as people share their sure-fire, easy money stories. It is the victims who perpetuate Ponzi scams through enthusiastic stories of quick money — exactly what the perpetrator needs to attract new investors to the scheme. Anyone who believes there are potentially endless streams of free money easily becomes a believer in financial perpetual motion.
Unfortunately, reality eventually gets in the way. Then, moments before the scheme collapses, the perpetrator absconds with the booty leaving believers penniless and dismayed. Those who know the game best, such as Wall Street’s accused swindler Bernard Madoff, can keep a stable Ponzi scam going for years, or decades.
Ponzi schemes are named in honor of Charles Ponzi – a man who swindled thousands of New Englanders who bought into what was a small postage stamp speculation in 1921. Again, using my online source, we see how it works: Ponzi assured his investors that he alone knew how to profit from the investment (expertise and charisma), he promised incredible (and obviously false) returns of 40% return on their investment in the first three months, playing on the American dream of “get rich quick”, and a result of this greed, it is claimed Ponzi took in one million dollars during one three hour period!
The bottom line for a Ponzi scheme is all new money is paid to the guy at the top (Mr. Ponzi) and Mr. Ponzi distributes some investment income to those early investors to fuel their greed, so they will invest more, and tell all! There is always a promise of an abnormally high return for a bogus product/service (remember that great vacation home that turned out to be swamp land in the Everglades of Florida?). Again, the scheme can actually last for years until the “Ponzi” vanishes with the loot, legal authorities catch “wind” before the “Ponzi” blows, or the scheme simply collapses under it’s own weight (investment slows or the “Ponzi” can no longer pay out returns).
While Ponzi schemes have made headlines lately, it is more likely that the typical Joe and Jane Citizen will come face to face with a pyramid scheme (next week’s topic) over their lifetime. In the mean time, here are a couple of real examples of prosecuted Ponzi schemes that could easily have duped any of us:
· Pennsylvania based Foundation for New Era Philanthropy raised over $500 million from 1,100 donors – INCLUDING the Red Cross
· Church leaders from Greater Ministries International in Tampa Florida promised church members they would “double their money” and using Bible scripture, bilked members out of 500 million dollars – nearly all the money was lost or hidden away. The ring leaders behind the scam received prison sentences ranging from 13-27 years.
This is sadly the stuff America is made of and the reason why cliché’s become cliché! If it looks too good to be true – it probably is. Need I say more? Talk soon - Angie
