You Can't Cheat an Honest Man - James Walsh [7]
Fry tried to put a positive spin on his bitter experience. His posting beseeched, “who better to advise against the pitfalls of... options trading than one who has been sucked into the abyss by utilizing them?”
Investors Also Define the Ponzi Equation
The perps are only part of the equation, though. In order to understand why these schemes are becoming so common, we need to consider the investors who enable the crooks.
In August 1996, the Nevada state attorney general’s office arrested five women and filed suit against 27 other people in what it characterized as a “classic” Ponzi scheme1 taking place in a city that wouldn’t seem to need one: Las Vegas.
Actually, the Las Vegas scheme was more like a pyramid plan than a Ponzi scheme. It was surprisingly simple. Participants would receive $16,000 from a $2,000 investment if they could recruit a large enough number of family members, friends and co-workers. Time didn’t matter that much, only the number of people a person could convince to join. The scheme’s organizers didn’t hesitate to admit that people who joined early would be paid by the people who followed.
The organizers of the pyramid scheme tapped a rich source when they got involved with the Las Vegas Metropolitan Police Department. Police sergeants, patrol officers and corrections officers were among the people actively recruiting co-workers to join the scheme.
By early 1996, the scheme collapsed and more than 200 people in the Las Vegas area lost their $2,000 entry fees.
The fact that many of the participants were cops upset many people. A local newspaper complained:
Not only have they embarrassed themselves, their badges and their department, but they also have spent their precious credibility by recruiting others into the basest sort of get-rich-quick scheme.
Like more flagrant forms of corruption, Ponzi schemes thrive on the special, intense level of trust that police officers have in one another. And, like the more flagrant forms of corruption, the schemes undermine that trust.
1 Law enforcement officials almost always refer to Ponzi schemes as “classic.” A California lawyer who has prosecuted the things says, “It’s a way that the cops can say these people should have known better than to get involved in a get-rich-quick scheme.” In other words, it’s a way for them to show the contempt they feel for everyone involved. In the Nevada case, this included some of their own.
One Las Vegas cop added some insight that seems to support the populist/class envy theory of why the schemes work. “This is a place where all kinds of bad people are making all kinds of good money. It’s very hard to toe the straight line as a law enforcement professional. A lot of [police officers] looked at the scheme like a kind of honest graft.”
A Global Phenomenon
Ponzi schemes aren’t limited to San Diego leasing companies, North Carolina decorators or Las Vegas cops. Though the schemes are distinctly American phenomena, their resurging popularity is global. During the early and mid-1990s, several eastern European countries, newly relieved of the financial burden of Marxism-Leninism, plunged into Ponzi schemes that were national in scope.
In Albania, which had suffered for 40 years under a Marxist regime too extreme for even the Soviet Union to support, private moneymaking schemes that promised huge dividends soaked up the savings of between 50 percent and 90 percent of the population. Most of these cons promised big money from the development of technology companies and international banks to people who barely understood the concept of currency. Almost $3 billion flowed into the schemes from people who could barely feed themselves. As ever, the first few successes created huge demand.
By late 1996, when the schemes started to collapse, street riots and political chaos followed. The outrage was understandable. The Albanian government, long suspected of being