You Can't Cheat an Honest Man - James Walsh [4]
As far as most cops and prosecutors are concerned, though, Ponzi schemes and pyramid schemes are victimless. People who lose money in the things have usually participated willingly.
Ponzis Versus Pyramids
The terms Ponzi scheme and pyramid scheme are used interchangeably by most consumer advocates and many law enforcement people. And the schemes are quite similar. Technically, the main difference is that in a Ponzi scheme money is handed over to be invested; in a pyramid scheme, money is handed over in exchange for a right to do something (most often to open a franchise or to solicit new members). Ponzi schemes are always illegal; pyramid schemes are sometimes, depending upon how they are structured
The result, in both cases, is usually the same. As a Utah court wrote in the 1987 bankruptcy decision Merrill v. Abbott:
A Ponzi scheme cannot work forever. The investor pool is a limited resource and will eventually run dry. The perpetrator must know that the scheme will eventually collapse as a result of the inability to attract new investors. The perpetrator nevertheless makes payments to present investors, which, by definition, are meant to attract new investors. He must know all along, from the very nature of his activities, that investors at the end of the line will lose their money.
This book will treat Ponzi schemes and pyramid schemes like nearly identical twins. In the contexts and circumstances in which the two are not the same, the differences will be highlighted and explained. As is often the case, these subtle differences shed important light on the mechanics and uses of the schemes.
Ponzi schemes thrive in cycles. They were big in the 1920s, late 1940s,
1970s and—most recently—have started to flourish again in the mid
1990s. Starting in 1995, the Securities and Exchange Commission began a campaign warning investors about a rise in Ponzi schemes and investment pyramids—especially ones using religious organizations for exposure and ones targeting the elderly.
In 1995, the SEC investigated 24 Ponzi schemes involving losses of more than a million dollars—a record for a single year. “We’re finding Ponzis these days with a depressing regularity,” Tom Newkirk, the SEC’s associate director of enforcement, told one newspaper in late 1996.
Andrew Kandel, who handles securities fraud cases for the New York State Attorney General, sees one major reason for this: In the age of personalized pension plans (401k’s, Keough’s, IRA’s, etc.) more people have direct control of substantial amounts of money. “They can easily recall 10 percent CDs. So, a smart Ponzi scam doesn’t offer a 25 percent promissory note—which might excite suspicion—but a quite plausible 12 percent piece of worthless paper.”
The SEC’s Newkirk goes one step further to offer a theory about why this is so: “Ponzis often seem to be an appeal to the populist streak in Americans.”
The subtext of many of the schemes is that acheiving wealth is a matter of knowing the right techniques and the right people—secrets that the rich are in on and that the Ponzi perp is willing to share with the little guy.
The Schemes Often Spin Out of Control
A Ponzi scheme is structurally simple, hard to control beyond its first few levels and ultimately doomed to fail. For these reasons, the schemes often grow in directions—and take turns—that even the crooks creating them don’t anticipate.
One of the common side-effects: Publicity. Because people tend to associate financial success with wisdom, courage and other virtues, Ponzi perps are often heralded as geniuses or heroes. A scheme will build the illusion of a highly successful business that’s paying big money to people “smart” enough to have bought in. Of course, these impressions are all as bogus as the underlying fraud.
The truth is usually that the Ponzi perps aren’t either wise or brave.