Gone, Baby, Gone: The Money, That Is. A Primer on Ponzi Schemes.

Most Villages residents are of an age to remember a movie starring Paul Newman and Robert Redford, The Sting, involving a very complicated confidence job on a gangster.  If  you’ve seen it, you remember it; if you haven’t seen it, it is definitely worth seeing; get it on DVD or catch it on cable or satellite. It’s hugely entertaining. One of the things that makes it entertaining is seeing a bad guy get taken by con men.
However, when a con man takes you, it’s not very funny.  And there are all sorts of confidence men and confidence jobs out there.  One type of con job is called a “Ponzi Scheme”.
Essentially, how a Ponzi Scheme works is the trickster approaches a victim and pitches a sale for an investment; convinces the person to invest money, and after they’ve invested the money, they get paid back a high rate of return.  They actually get some of their money back.  What makes this a con job is that the money they are being paid back supposedly as interest or dividends is not actually interest or dividends; they are being paid back their own money.  There is no investment; the con man is simply returning a portion of money to the person who gave it to them.
The problem with this is threefold; first, obviously, at some point the money is going to run out; if it’s not invested but just being returned, sooner or later there isn’t going to be any money left. Second, the con man is not doing this just to take money and pay it back; he’s spending the rest of the money on himself; buying fancy cars, boats, houses, jewelry, or whatever. And, third, the con man uses his existing victims to get other, newer, victims to invest in the fraud.  The existing victims are the best salesmen; they invested money, they’re getting money back, and they will usually brag about it. They’ll tell their golf buddy, their neighbor, their business partner, or whoever about this great investment they got; and most people are going to be interested in getting in on a good deal.  The problem is, sooner or later there is no money left; sometimes the whole scheme collapses, sometimes the con man figures it’s time to get out and liquidates everything and flees overseas somewhere that the United States has no extradition with.  Either way, at this point the money is gone and all of the victims are left with little or nothing.  But it can get worse; under the law, some early investors, the people who got in on the ground floor and got the most money out of the scheme, can be sued under a “clawback” provision of the bankruptcy code; in other words they have to turn over money that they got from the payments from the Ponzi scheme.  This can get really complicated and I’m not going to go into the details, but it is perfectly possible for someone to lose twice; first, they lose their original investment, and then they wind up being sued for the money that they wound up getting from the fraudulent scheme.  If you are being threatened with a ‘clawback’ lawsuit you definitely need to talk to a lawyer, specifically a lawyer who handles this sort of case, which I don’t handle.
Here’s a link to someone who discusses this in more detail:


What I do want to discuss is some warning signs of Ponzi schemes. I’m not trying to scare anyone, but a certain degree of paranoia and suspicion can go a long way to protecting you.  Ponzi schemers are confidence men; they gain your trust; they tend to be smooth talkers, they  are believable, and they are very affable.  The whole point behind them is that they gain the trust of people; usually by acting like and coming across like the person they are targeting; they aren’t going to be obvious about it; they aren’t going to have a gold tooth, unless the type of people they are targeting have gold teeth.
The most recent big Ponzi scheme that was in the news involved Bernie Madoff; a New York City businessman and investor.  Madoff was a very well known, well liked guy; he donated money to all sorts of charities, he hobnobbed with his victims, he was active in his religion. And these were exactly the sort of people he targeted; he targeted members of his congregation, Jewish charities.  People trusted him; he was good guy and he offered really significant returns on investments; typically running 12 to 15 percent per year, year in and  year out. Nothing succeeds like success; people turned their money over to him, he gave them a good rate of return, those people recommended him to other people and organizations, who in turn invested with him.  And then the whole house of cards fell, and a bunch of people lost nearly everything they had invested with him.
The Madoff scheme has gotten a lot of press; and the scale was gargantuan; but the problem with Ponzi schemes is that they are relatively easy to run; they don’t require much beyond a smile and a sharp business suit, and maybe a nice office; there is no actual investment behind them.  And as a result, there are a lot of Ponzi schemes out there; the bigger ones tend to make the headlines but a lot of the smaller ones don’t make the news very much. Nonetheless, even if it’s a small scheme involving a few dozen people, if you lose money on it, you’re still out of luck and may be subject to a clawback lawsuit.
And people in The Villages may be particularly vulnerable to this sort of thing; residents of The Villages have a reputation as being rich, they tend to be very sociable and vulnerable to a slick salesman, tend to trusting of other Village residents, and everybody likes a high rate of return on their money, particularly in this economy.
So, here’s some warning signs that something may be Ponzi scheme; it is possible to be a Ponzi scheme without all or even some of these signs but if  you see any of these signs, you really do need to stop and think and fully investigate; remember, no one goes around with a sign hung on their neck saying “Ponzi Schemer, Look Out”.
First, don’t get greedy; Ponzi schemes typically involve either a higher rate of return or a more regular rate of return than standard investments; or a combination of both. What’s a unreasonably high rate of return? It’s going to depend; but if it’s more than what  you could get in an standard investment, this may be a Ponzi scheme; in the Madoff case he was consistently delivering 12 to 15 percent; which for what amounts to a passive investment is quite high.
Second, the scheme will frequently involve something slightly exotic; it may be something that is in the news; but it is almost certainly going to involve something that most people aren’t going to understand the details of and it is going to be difficult to actually verify what is going on.  Frequently, it may involve something “overseas”, some sort of foreign investment; and it may be something just a tiny bit shady; there may be some sort of “partner” who’s involved.  As an example, it’s not going to be anything too exotic; it’s not likely to involve, say Peruvian Llama Wool Futures, which most people are going to raise an eyebrow over; but it could very well involve some sort of foreign extractive industry, such as Oil, Gas, or Gold; it may involve Mexican Oil Wells, or some sort of Silver Mine in South America.  Also, the shady part typically will explain the secrecy, why this is not being sold to the public; the explanation may be that “this country doesn’t allow outside investors, but I’ve got a partner there who is using the money to invest in this thing”.  Of course, there is no “partner” and there is no investment; but it’s a plausible sounding explanation.  And every body likes to bend the rules, don’t they, and get away with something.   And it may involve something that is in the news; “Green” energy, maybe Fracking, something that people will recognize as an up and coming industry, but that most people don’t know much about beyond the headlines.
Third, face to face or word of mouth sales; the con man approaches you at your church,  your country club, or whatever, and says he’s got a great investment but he’s only offering it to a select or special group of people.  Or someone you know contacts you and says basically the same thing: “Oh, I got my money with this guy, he’s great, he’s paying me back my money at this rate of return, every month, every quarter, but the deal is on the hush-hush because whatever”.  Understand, the person does not know it’s a Ponzi scheme; they trust the guy; and as far as they’re concerned, he’s legitimate; they’re getting paid what they were promised, if it was a rip-off the guy wouldn’t be paying them this money, right?  And they’ll swear up and down that this is legitimate. But it isn’t legitimate. The con man is depending on trust; they are a member of your social set; they’re a member of your church, your synagogue, they belong to your country club, the guy plays in your foursome. Of course he’s legitimate;  you know the guy, he’s a good guy, or the guy you play golf with knows the guy.  That’s why they’re called confidence men; they gain your trust,  your confidence.
Look, if you’re approached on this sort of deal, pay attention to your instincts, your gut feelings, your nose. If it smells too good to be true, it probably is; if it’s being offered to only a few ‘special’ people, you need to ask why this is not a public offering; why isn’t this a registered security or being offered over the counter to the general public. Everybody likes to feel “special” but this is precisely how people get taken in; by being told they’re part of a select group.  You need to do your due diligence on this. If you’ve got questions, ask those questions. Talk to a legitimate investment counselor about this; a stockbroker, a bank officer, or even a lawyer.  Which is not to say that smart people can’t be taken in, but if someone starts asking too many questions and demanding too many details, the con man may  drop or withdraw the offer; he doesn’t want someone sniffing around.  If the deal is withdrawn, it’s entirely possible that this was a con job from the start.

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