Investments are part of a comprehensive personal financial strategy, which goes beyond day to day needs. To make the most of earnings, savings and other surplus funds are committed to various financial instruments. Regardless of the size or scope of an investment, it is made with hopes of growing wealth, over time. Depending upon where money is invested and how particular markets perform, returns can represent steady, conservative growth or explosive, off-the-charts gains. While major windfalls do occasionally deliver overnight prosperity; consistent, incremental returns are more realistic for long-term success. In fact, the lure of extraordinary profits can lead investors astray.
The promise of rich proceeds is powerful enticement for those with money to invest. It speaks directly to human need, offering security and prosperity. And since many investments are passive, there is little effort expected to cash-in on perceived windfalls. People simply want to believe their money can grow quickly, based on sound management and genuine economic principles. For as long as there have been investors with high hopes, however, opportunists have been prepared to exploit the human desire for good fortune.
Ponzi schemes are an example of financial misrepresentation used to swindle cash from investors. Like pyramid scams and other illegitimate enterprises, Ponzi rackets bilk money from good-faith investors, who expect it will grow, rather than disappear. Despite similarities to other forms of fraud, true Ponzi schemes are marked by common characteristics, setting them apart from other financial scams.
The hallmark feature of a Ponzi plot is the manner in which investor returns are funded. Rather than legitimate growth or income, profits paid-out to investors come from money subsequent participants invest in the scheme. Of course those coming on board believe everything to be on the up and up. And early investors do receive investment proceeds, so they have no reason to doubt its legitimacy. In fact, many people simply leave their money vested, continuing to watch their account values grow. This actually feeds the scam, as organizers aren't pressured to come up with cash gains. Instead, they just print statements showing investors how well their holdings are doing.
Financial rackets of this nature typically begin to unravel when participants seek to withdraw their money. To a point, the illusion of liquidity is kept afloat by steady streams of new recruits contributing new money to the scam. But ultimately, the balance of available capital is not sufficient to cover requests for payouts. Additional features of ill-conceived financial scams include:
Better than Average Returns - Investment options are widespread, so illegitimate operators try to stand out by pledging high returns. To entice recruits with money to contribute, Ponzi organizers promise substantial short-term gains, as well as opportunities for consistent long-term benefits. Good-faith investors are blinded by the potential for windfalls, and after initial payouts are made, many victims stay invested, without concern.
Vague Description of Investments - Though some shady deals include details designed to add legitimacy, other swindles use ambiguity to deflect understanding. The secretive, exclusive approach keeps curious investors from digging deeply and exposing inconsistencies.
May Start as a Legitimate Opportunity - Some financial misdeeds are born of legitimate business ventures. When they run into trouble or underperform promises made by organizers, failed efforts are propped-up inappropriately, using an influx of new investor capital. For many con artists behind the scams, lines between fraud and legitimate intentions are blurred - giving them false confidence to continue.
Preys on Less-Savvy Investors - Cheats rely on trusting participants, so large-scale fraud operations are built through word of mouth and positive referrals. Once established with ground-level investors, subsequent recruits are less likely to investigate individuals and practices tied to the recommended investments.
Various Financial Vehicles are Used - This classification of monetary malfeasance is not limited to any one approach. Various legitimate instruments are used to cloak cons, so staying safe from scammers requires diligence on multiple fronts. Anything from Certificates of Deposit (CD) to false business entities are used to dupe victims, especially new practices and products unfamiliar to mainstream money managers.
Though his was not the first such crime, Charles Ponzi nonetheless lends his name to the misdeed. The Italian-American immigrant launched his version of the scam in 1919, when he formed a securities exchange company in Boston. The illegitimate entrepreneur put forth a plot by which he'd buy international reply coupons, which were used to buy postage across the world. Buying them in bulk and selling them in the U.S., where they were more valuable than other countries, his plan held promise for speculators with money to invest. In fact, he is said to have offered 50% returns on money held less than two months.
Unfortunately for Ponzi and his prey, the grift was unable to support itself and new investor money was diverted to pay-off early participants. Ponzi himself skimmed millions before the scam collapsed. The size of the racket is what drew attention to it, rather than originality. In the end, thousands of investors lost millions and even banks went insolvent as a result of the failed venture. Like many who followed in his footsteps, Ponzi was ultimately held accountable for his crime, which landed him in prison.
Perhaps the most notorious scam of all time was carried off by Bernie Madoff, who defrauded investors for more than twenty years. The sheer size of the scheme, history's richest, sustained it longer than most swindles, accounting for billions in losses. Madoff's Wall Street reputation supported the racket, which continued to attract high-dollar investors, without generating legitimate profits. He was a respected figure in the securities business, having launched his own funds and helped form the NASDAQ stock market. Madoff also sat on the board of important industry organizations, which reinforced his authority and deflected scrutiny.
Madoff's crime reached to Hollywood, stinging several notable celebrity clients. But it also had institutional impacts, as charities, retirement plans, endowments and banks were ultimately devastated by the scope of the fraud. More than $65 billion was misappropriated, $20 billion of which Madoff is believed to have personally stolen. The crime fell apart in December, 2008 when investors called-in $7 billion, when Madoff had less than $300 million available to pay them.
His sons and other associates were involved, many facing charges in fallout that still isn't entirely settled. Bernie Madoff was charged with fraud, money laundering, perjury and theft, netting him a 150-year prison sentence.
Not every sting rivals Madoff's, in terms of dollars bilked, but other high-profile con-artists bring their own brand of star-power to financial wrongdoing. Lou Pearlman is best known for his successful run as an entertainment promoter and talent developer in the 1990's. Household names conceived and managed by Pearlman include ‘N Synch, Backstreet Boys and O-Town. Mr. Pearlman also holds a conspicuous place in the pantheon of most notorious all-time swindlers, for a rip-off used to fund his lavish lifestyle.
In addition to entertainment business ventures, Pearlman maintained a longtime presence running companies in the airline industry. His illegitimate operations stemmed from work with planes and blimps, ultimately ballooning into a staggering Ponzi scheme. Using bogus companies tied to airline services, Pearlman is said to have squeezed nearly half a billion dollars from investors who thought they were buying charter planes and related assets. In addition to fighting civil suits from most entertainers he represented, Pearlman is currently serving a 25-year prison sentence in Texarkana.
Norman Hsu ran a multi-million dollar Ponzi scheme, which ultimately touched on Washington politics. In 2007, Hsu raised money for political candidate Hillary Clinton - then considered a shoe-in for the presidential nomination. Instead of legitimate funding, Clinton ended-up with a scandal on her hands, forced to return nearly one-million dollars Hsu contributed. Hsu was also linked as a donor to Obama, and though convicted of campaign finance violations; his downfall was defrauding $60 million to fund his own spending. In 2009, Hsu received a 27-year prison sentence.
David and Company operated in California's high finance community during the 1980's. Named for its owner and principal, J. David “Jerry” Dominelli, the firm pursued opportunities in currency and commodities trading. With the help of high profile contacts like Nancy Hoover, Del Mar's Mayor, Dominelli orchestrated a $200 million scheme that returned only $120 million to investors. The $80 million left in the balance lined Dominelli's pockets, before San Diego's richest crime began to unravel.
In addition to Hoover and other wealthy associates, Dominelli's influence stretched to San Diego Mayor Roger Hedgecock, who was ultimately accused of wrongdoing. Along with Dominelli and others, Hedgecock was associated with allegedly concealing campaign payments worth $350,000, which were also said to have benefitted the mayor's personal finances. For his crimes, J. David served ten years of a twenty-year jail sentence.
Grand-scale cons rely on access to large sums of money. In many cases, the legitimacy required to rub elbows with high-dollar investors comes from past financial success, or respect within financial industries. Typically, people trust their money to those most experienced guiding profits, which is why scammers like Bernie Madoff stay afloat for years. In the case of Greater Ministries, a Ponzi organizer responsible for a half-billion dollar fraud, credibility came from above.
Led by Gerald Payne, high-level church leaders swindled pastors and parishioners across the country, promising to double their contributions in only seventeen months. Instead, elders diverted funds to a secret account worth more than $20 million. Thousands of victims lost money to the grift, in which Payne's wife, Betty, knowingly participated. Several people were sentenced as a result of the scripture-based financial fraud.
More than 7000 investors, mostly elderly retirees, invested with Michael E. Kelly in a hotel swindle worth $500 million. Kelly was a hotel operator, who used a notion known as “universal leases” to attract speculators. Participants could use these universal room nights themselves, in a time-share type arrangement, allowing them to stay free for a week each year. Alternatively, shareholders could give-up their time to be leased-out by another company, which was also owned by Kelly. The promise of high returns prompted most to choose the leasing options, which did not pay profits projected by Mr. Kelly. Having concealed from investors the fact that gains depended upon a steady influx of new recruits, he was charged with mail, wire and securities fraud.
A Minnesota businessman now serving a 50 year sentence at Leavenworth Penitentiary was responsible for a Ponzi involving more than $3 billion. Tom Petters operated a brokerage and investment firm, at times carrying brands like Fingerhut, Polaroid and Sun Country Airlines. He was guilty of diverting funds to prop-up various ventures, ultimately defrauding trusted associates and hedge fund investors. Many participants were lured under false pretenses, based on illegitimate reported sales and imagined fiscal health.
Secrecy is essential for keeping grifts afloat, so Scott Rothstein used it to his advantage. Promoting himself as someone who moved in the shadows, while profiting on others' financial settlements, Rothstein's cloak and dagger routine was built-in to his con. Participants were unaware of the lengths to which Mr. Rothstein went to carry-off his illegitimate enterprise, including bribery, forgery, and other forms of corruption.
Like profits reaped from other scammers, Mr. Rothstein's illicit gains were applied to a lavish lifestyle of opulence and excess. His Wife, Kim, was also embroiled in the scandal, as she attempted to hide wealth related to the racket. To dupe recruits, Rothstein promised huge returns, topping 20%, in as short as three months' time. Payouts were to come from fictitious clients' structured financial settlements already on deposit with Rothstein's company. For his role in the crime, he pled guilty to federal charges in 2010, but not before more than a billion dollars moved through his illegitimate venture. Kim Rothstein was relegated to 18 months in jail and was released to a halfway house in 2015, after serving a partial sentence.
Using his position as a financier and prominent sports sponsor, Allen Stanford orchestrated one of the largest Ponzi schemes in history. His Investment company, Stanford Financial Group and a series of international banks were ultimately exposed as fraudulent, yielding prison time for Stanford.
In 2009, the SEC investigated and leveled both civil and criminal charges against Allen Stanford, accusing him of widespread wrongdoing. At issue were CDs his company promoted, in order to conceal a massive fraudulent operation. The value of Stanford's scam is believed to approach $7 billion. To keep his international racket flowing, Stanford fabricated records and used hypothetical investment returns to harness participants. Unfortunately, he portrayed profitable endeavors as historical fact, rather than speculation, mounting a near-Madoff
Under scrutiny in other countries prior to being uncovered in the U.S., Stanford was convicted in 2010 and sentenced to 110 years behind bars. He is currently appealing his conviction as unfair prosecution and a violation of Constitutional protection.
Fraudsters use any number of techniques to bilk money from unsuspecting investors. Often using their own reputation and business standing to gain trust, skilled con artists take down thousands of recruits with each scam, accounting for billions in losses. Through market savvy and shrewd manipulation of finances, some Ponzi artists stay afloat for years, renewing their illegitimate activities with each new participant. It isn't until holdings are called due that most rackets fall apart.
The stakes continue to rise for scammers, who have pushed their shams to epic proportions in recent years. And despite decades-long prison sentences for offenders, there appears to be no shortage of men and women waiting to follow in Charles Ponzi's footsteps.