The Ponzi Scheme

What is it?

The Ponzi scheme is an investment fraud and one of the most infamous white-collar crimes in history. It is named after Charles Ponzi, the historical scamster who was best known for his financial crimes in the early 1900’s. He was from Italy, but it was after he moved to America that he started his fraudulent activities. The scheme he developed involved conning investors into giving him millions of dollars, and then paying them returns with other investor’s money. Investors were promised that in consideration of their investment, they would receive large returns of up to 50% in 45 days, or up to 100% in 90 days. Instead of paying these investors out of the actual profit of his business, Ponzi paid these investors by further borrowing from new investors. The investors were inclined to accept these deals as it was investment with seemingly high returns and little to no risk. In this way, Ponzi created a chain of borrowing and repaying from various investors, in the process pocketing some of the money from each transaction for himself.

The Ponzi scheme seems to be the prefect con, with the scammer earning large amounts of money, and the unsuspecting investors also satisfied with their exponential returns. This 100-year-old scheme is so well planned that is made use of even by today’s white-collar criminals. The prime example is Bernie Madoff, who in 2008 was caught operating the largest Ponzi scheme in history. Not all the Ponzi scheme cases are big enough to make the headlines, as some white-collar offenders run this scheme to a small extent. However, it can be said without a doubt that this scheme is one of the most standard, but also effective white-collar crimes a criminal can commit. However, investors are now becoming increasingly aware of these schemes, and there are also several anti-fraud agencies monitoring investment activities. Some of the basic parameter’s investors must identify to avoid falling into a Ponzi scheme are;

  • High returns with little or no risk
  • Overly consistent returns
  • Unregistered investments
  • Unlicensed sellers
  • Issues with paperwork
  • Secretive, complex strategies

The presences of all these features means that there is almost certainly a Ponzi scheme being run. It is evident from these features that it is investors dream to have such characteristics in a business, which is the primary reason why it is so tempting for many investors to fall prey to this scheme. However, over the years, corporate investors have come to realise that if it seems too good to be true, it often is.

Bernie Madoff Case

Many people are of the view that white-collar crimes are more serious than normal crimes committed on a day-to-day basis. Normal crimes are high-risk, low-reward situations such as shoplifting or robberies, wherein the perpetrator is taking a large risk in order to secure a relatively small reward. White collar crimes, on the other hand, are low-risk, high-reward situations. Such perpetrators commit crimes which generally go unnoticed for long periods of time, until some thorough investigation takes place or some questions are raised. In this time, they can earn exponential amounts of money as a result of their offences. We can take the example of Bernie Madoff here, one of the best-known white-collar offenders of all time. He committed the largest financial fraud in the history of the US, which involved around $65 Billion. Madoff had been committing corporate fraud and it was going unnoticed, with his career continuing on for about 20 years even after he committed such serious offences. This is evidence to the nature of white-collar crimes as being low-risk, high-reward crimes. It was only in 2008 that he was apprehended by federal authorities, and pleaded guilty to 11 federal crimes. He also admitted to operating the largest private Ponzi scheme in history. Hence, he was sentences to 150 years in prison in 2009 (the maximum for a person his age), for spending 20 years of his career defrauding clients and committing other federal felonies (including securities fraud, wire fraud, mail fraud, money laundering, theft from employee benefit plan, and many more). In February of 2020, Madoff’s lawyer pleaded for compassionate release of Madoff from prison, citing health and wellness issues (kidney failure and deteriorating health). However, this bid for release failed and Madoff continues to serve his prison time.

Madoff did not sound remorseful when interviewed in the years after his crimes, but he does show some self-awareness. “It wasn’t like I was being blackmailed into doing something, or that I was afraid of getting caught doing it,” he continues. “I, sort of, you know, rationalized that what I was doing was OK, that it wasn’t going to hurt anybody.” This is a prime example of neutralization of crimes by a perpetrator.