Arcis Fraud Discovery & Exposure Centre

The Internet is a great thing, it has offered many people and businesses access to an enormous amount of information and business opportunities. However the same applies for people with less noble means and I think it is fair to say that most types of scams and frauds will have an internet version as well. "Ponzi schemes" are no exception to that and in fact are being utilised in overwhelming numbers. In short, a Ponzi scheme is one where the scammer robs Peter to pay Paul.

William Miller was a bookkeeper from Brooklyn, living in a small apartment together with his pregnant wife at the end of the 19th century, making $15 per week. With a baby underway William could certainly use extra cash. After hearing incredible stories of stock brokers making it big by playing the market, he decided to borrow $100 from a local loan shark and took it to the first investment house he could find. Alas, that first investment house he found was what was known as a so called "bucket house", where worthless stock was being sold as due to rise while actually being due to fall. This was a typical scam from the early Wall Street days.

Not long after his investment William got the bad news from the broker, the investment was gone. The following day he got a visit from the loan shark, looking for his payback. William, inspired by the words of Benjamin Franklin: "The road to wealth is a plain as the road to the market", set up W.M.F Miller Investments. Miller claimed to have picked up a secret by hanging around Wall Street and offered investors a 10% per week return on investment. This is what got him the nickname 520%.

William's strategy is what is now considered to be a classic Ponzi scheme: he paid off original investors with the investments from new investors. Initially starting with only a few investors, word spread around about this incredible opportunity and more investors wanted to join. Initial investors even started funnelling back money to make more.

William started advertising by direct mail and in the newspaper and rented an office and over the course of less than a year, William saved for himself an amount of $480,000. Of course it was only a matter of time before this bubble would break. However, before that could happen naturally two other conmen circled in on William and persuaded him in the end to share his profits in order to stay out of jail. $250,000 were eventually handed over to these conmen and on advise of one of the two, William fled to Canada. By making him believe that his son, William Junior was sick, he was lured into coming back and duly arrested and sentenced to ten years in prison.

In 1920, about 20 years after William 520% Williams launched his scheme, Charles Ponzi was a stock clerk in Boston making about $15 a week. He came across an opportunity when he learned that you could make a profit by buying International Postal Reply Coupons - the international version of prepaid postage - which could be bought in one country for one price and then redeemed in the US for a much higher price. In the New York Times of 30 July 1920, Charles Ponzi explained:

"I wrote a man in Spain regarding the proposed magazine and in reply received an international exchange coupon which I was to exchange for American postage stamps with which to send a copy of the publication. The coupon cost the equivalent of about one cent in American money, I got six cents in stamps for the coupon here. Then I investigated the rates of exchange in other countries. I tried it in a small way first. It worked. The first month $1,000 became $15,000. I began letting in my friends. First I accepted deposits on my note, payable within ninety days, for $150 for each $100 received".

Charles Ponzi got greedy and began to expand his operations by soliciting money from investors Boston, promising them a 50% return on investment in just 45 days. With a normal interest of 5% (per year) this of course sounded fantastic to investors and soon loads of money came Ponzi's way from keen investors. Ponzi worked his magic thanks to a friend in Italy and investors got what they were promised: double their money in three months. When the news started spreading, that's where the scam was born. Ponzi's scheme might have worked be it not that there were only so many IPRC's available in and to be sold in the United States.

With investors lining up for a piece of the action Ponzi came up with what he thought of as a brilliant idea: you use the money from new investors to pay previous investors. You didn't even have to buy coupons anymore. As long as investors kept on coming in the scheme could go on forever. Of course a scheme like this was bound to collapse, and it did. The Boston Post started sniffing around and the bad press made the flow of fresh blood dry up. Without this new blood the Ponzi empire imploded leaving many investors with the damages.

In the introduction to this article I described a Ponzi scheme as a scheme whereby the scammer robs Peter to pay Paul. In its essence that is exactly the nature of the scheme and ultimately the scam: initial investors are paid from the proceeds of new investors to keep the scam looking successful. In the end the bubble will burst when new investors start drying up, leaving the investors with the damages.

Often, or at least more than once, those schemes are characterised as a pyramid scheme. However, it is my opinion that notwithstanding the similarities there is also a significant difference: there is no such thing as a pyramid structure. There are in principal only two levels: the scammers level and the victim/investor level. Furthermore, Ponzi schemes do in general not make investors rely on their own ability to recruit new people.

Notwithstanding the many warnings about these types of schemes people keep falling for them. You could wonder why? One of the most attractive features about these schemes is probably the promises of higher than normally possible returns on investments. People will probably always stay eager to step into a "get rich quick plan" nowadays described as so-called "High Yield Investment Programmes".

As a result the start up of such schemes might be relatively slow, but when the word gets out they usually accelerate to unlimited speed, that is until the motor blows up! And why does the word get out? That is usually because the early participants in such schemes usually get the high returns as promised by the promoters. The sad thing is that these initial high returns are more than once reinvested in the scheme ultimately leaving even those early winners with nothing but the damages.