The Politics of Ponzi Schemes

History, Theory and Policy

Marie Springer

• Publisher: Routledge
• Year: 2020
• ISBN:
  9780429869792
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

In the space of three years, from 2009 to 2012 Bernie Madoff, Tom Petters and R. Allen Stanford were all convicted for running multi-billion dollar Ponzi schemes. These three schemes alone have had the largest financial take in U.S. history. But what role does the economy and legislation play in the occurrences of Ponzi schemes? What is the nature of Ponzi schemes and what are their tools and mechanisms? What can we know about Ponzi perpetrators?

Unraveling the answers to these questions (and many more), Marie Springer provides the first representative portrait of Ponzi schemes, their perpetrators, and their victims. Adopting a multidisciplinary approach, she begins by presenting an overview of different types of Ponzi schemes. She later explores perpetrators and victims of Ponzi schemes followed by a close examination of economic trends, regulatory changes, and the financial relationship with Ponzi schemes. Other key features include:

• A non-technical overview of both offender based and offense-based approaches of studying this form of fraud.

• Examples of Ponzi schemes and Ponzi schemers.

• A wealth of descriptive statistics on known federal cases from the 1960s until the present to quantify this specific form of fraud.

Broadening our understanding of Ponzi schemes as a form of white-collar crime, The Politics of Ponzi Schemes provides an excellent foundation for students and practitioners of public administration, banking, as well as investors, finance and accounting, law enforcement officers, legislators and regulators.

Part I

The Ponzi Schemes

Chapter 1

Ponzi Schemes and White-collar Crime

The Nature of Ponzi Schemes

The primary action that determines that a fraudulent scheme is a Ponzi is that the funds of later investors are used to pay interest or principal to earlier investors. Without this action, a fraud is not a Ponzi scheme. Not all frauds labeled as Ponzi schemes in the common media were designated as Ponzi schemes by federal agencies or law enforcement authorities. Only those cases that were determined by federal authorities to be Ponzi schemes are used in this study.

The term “Ponzi” refers to a specific type of fraud perpetrated by Charles Ponzi in 1920. Prior to that event this type of fraud fell under the general category of a swindle or confidence game. Kathy Phelps and the Honorable Steven Rhodes (2012) provide a concise list of characteristics that law enforcement and regulatory agencies use before they designate a fraud as a Ponzi scheme:

1. Deposits were made by investors.
2. The Debtor conducted little or no legitimate business operations as represented to investors.
3. The purported business operations of the debtor produced little or no profits or earnings.
4. The source of payments to earlier investors is from cash infused by new investors.

(Phelps and Rhodes § 2.03[1][b], pp. 2–8)

Some fraud cases have been falsely labeled as Ponzi schemes in the general media. These were frauds whereby the perpetrators simply stole the money of their victims, not investing it or paying other victim-investors, but instead spending the funds on what is usually an extravagant lifestyle. These were instances where there was taking of funds without Ponzi payments. These schemes are sometimes referred to as take-the-money-and-run schemes (from the Steven Miller Band song lyrics) (Huddleston, 2012, p. 57). These cases are theft by deception, not Ponzi schemes. For this reason, media designations of Ponzi schemes were not used in this study.

Fraud schemes that are designated “pyramid schemes,” also known as multi-level-marketing schemes (MLMs) in federal documents, are not part of this study, unless they were also classified as a Ponzi scheme. The business structure in MLMs is different from Ponzi schemes in that there are several levels or layers of participants, sometimes referred to as “members,” who each bring in their own members or clients. Whereas Ponzi schemes have primary perpetrators that control the entire scheme. Multi-level marketing entities can be legitimate businesses where each level sells an actual product and earns a profit; the profits trickle up to more senior participants. There are well-known legitimate, successful, well established multi-level marketing businesses. Ponzi schemes are never legitimate business entities.

In 2009, the term “Ponzi scheme” became a common term in media with the schemes of Bernie Madoff and Allen Stanford. Two of the three biggest Ponzi schemes in world history became public knowledge, and in the press daily. The three schemes were all international in nature with victims all over the world. The first of the two Ponzi schemes was carried out by Bernard L. Madoff. Bernard Madoff admitted that his investment advising service – Bernard L. Madoff Investment Services (BMIS/BLMIS) – was actually a Ponzi scheme in early December 2008. Six months later, he was sentenced to 150 years in federal prison at the age of 75. The second of the two major Ponzi schemes was that of Robert Allen Stanford (Allen Stanford) and his Stanford International Bank Ltd. Stanford was charged with securities violations by the Securities and Exchange Commission (SEC) on June 19, 2009, and criminally indicted on June 18, 2009. Stanford was convicted and sentenced to 110 years in federal prison.

The third of the three largest and most significant Ponzi schemes in world history was based in Russia: Mavrodi Mondial Moneybank (MMM). The MMM scheme was a global Ponzi scheme that functioned in at least 118 countries with an estimated investor base of approximately 250 million people worldwide (Hess and Soltes, 2018). The scheme originally began in Russia in the early 1990s following the move to a capitalist economy. The founder, Russian Sergei Mavrodi, died on March 26, 2018, putting an end to the scheme. The scheme became global when Mavrodi began using cryptocurrency approximately 2011. The total amount of money involved was not reported in the media; there were too many countries, and multiple cryptocurrencies being used at the time of Mavrodi’s death. With Mavrodi’s death there was no individual to take responsibility. Since MMM was a global scheme, and cryptocurrencies were the monetary unit, there was no law enforcement agency with jurisdiction to try to account for all of the lost funds.

A Ponzi scheme is not a specific crime, but a type of fraud. This research uses the SEC’s definition of Ponzi Schemes:

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

(SEC)

Ponzi schemes are just one type of white-collar crime. The term “white- collar” symbolizes the socioeconomic level of the perpetrators, indicating professionals and corporate executives who would be likely to wear suits and ties to work as opposed to those who are in the trades, symbolized by the term “blue-collar,” the attire that those in these professions are thought to wear to work. The term “white-collar crime” was initially coined by Edwin Sutherland in 1939, (1983), defined as “as a crime committed by a person of respectability and high social status in the course of his occupation” (Sutherland, 1983, p. 7). This study defines the term of white-collar criminals to include those who present themselves as being of a high social status and respectability, using the rewards of their frauds to fulfill the image of high status, in order to perpetrate the Ponzi schemes.

The study of offense-based research in white-collar crime is defined by “the illegal act or the series of illegal acts committed by nonphysical means and by concealment or guile, to obtain money or property, to avoid the payment or loss of money or property, or to obtain business or personal advantage” (Edelhertz, 1970, p. 3). This definition from Herbert Edelhertz came from his work in the Department of Justice. Edelhertz felt that the academic community (Clinard and Quinney, 1994; Cressey, 1953; Reiss and Biderman, 1980; Sutherland, 1947), approaches of offender- based definitions of white-collar crime were too narrow, too restrictive. As such, Part I of the book addresses the offense of Ponzi schemes and examines the nature and characteristics of Ponzi schemes referred to as the tools, manner, and means going forth.

This type of fraud includes many laws and regulations that are violated, commonly mail fraud and wire fraud, as well as such regulatory violations as failing to register as a brokerage, or investment adviser, or a commodity broker. The laws and regulations are discussed in Chapter 11. The term “Ponzi scheme,” for the purpose of inclusion in this study, is qualified herein, in terms of requiring all four parts – offense-based, offender-based, and environment-based – and adds a fourth criterion that includes the amount of money taken to be over $100,000. The offense is defined within publicly available federal agency documents, and designated to be Ponzi schemes within the wording of the text in these documents. Herein the offenders are defined as those who carried out and were charged in the frauds, were considered of high socioeconomic status or who presented themselves as such in Ponzi schemes, by the nature of their crime. The environment r...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Illustrations
• Acknowledgments
• List of Abbreviations
• Introduction: Ponzi Scheme Research and Overview
• Part I The Ponzi Schemes
• Part II The Perpetrators and Victims
• Part III Laws, Economics, and History
• Conclusion
• Glossary of Terms
• Index