The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims

Hardcover | July 18, 2012

byTamar Frankel

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In a Ponzi scheme, new investments are used to pay existing investors, to cover the cost of salespersons, and to finance the Ponzi schemer's satisfying lifestyle. Although Charles Ponzi recruited investors in Boston in 1919 and died in 1949, his design and mode of operation are alive and welltoday. Indeed, losses from Ponzi schemes in the United States are equal to losses from shoplifting. Ponzi schemes catch in their net highly sophisticated individuals and institutions as well as low-income and middle-income investors, and these schemes have attracted investors all over the world, inRussia, England, India, Albania, Romania, Portugal, Costa Rica, and elsewhere.Looking into the innumerable cases of Ponzi schemes throughout the years, Tamar Frankel observes that even though patterns began to emerge in the stories of con artists and their victims' behavior, the main puzzles still remain: How do con artists dazzle and lure wealthy and educated individuals andrepresentatives of large institutions to hand over huge sums of money? How do con artists divert investors' attention from the soft spots of their stories? And while there are so many books and articles about Ponzi schemes, their warnings and constant advice on how to detect and avoid con artists gounheeded. In The Ponzi Scheme Puzzle, Frankel explores con artists' fascinating power of persuasion and deception, and analyzes their subtle signals that mimic truth and honesty. She identifies the reasons for the local and global success and longevity of such schemes and seeks to understand the nature ofthe con artists and their victims. She combines the many stories of Ponzi schemes, derived mostly from court cases and newspaper articles, to show the patterns of such frauds, the nature of the con artists, and character of their victims. These patterns tell us much about human nature, about oursociety, and about ourselves. The book first analyzes the design and pattern of the con artists' attractive offers and how they hide deceptions, then deals with the ways in which schemes are advertised and sold. Next, it focuses on the core of con artists' success, then discusses the characters ofcon artists and their victims. Finally, Frankel offers a number of observations on the lessons we can learn from these stories and analyses. She concludes that our attitude to con artists is ambivalent and uncertain perhaps because their behavior is so close to the behavior of honest people; orperhaps because they act like the social leaders with whom they are likely to mingle, or perhaps their actions are necessary to shake up a complacent society. Therefore, she writes, self-protection from charming, dangerous con artists must involve self-examination: once we recognize our owntendencies we can better protect ourselves from their toxic attraction.

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In a Ponzi scheme, new investments are used to pay existing investors, to cover the cost of salespersons, and to finance the Ponzi schemer's satisfying lifestyle. Although Charles Ponzi recruited investors in Boston in 1919 and died in 1949, his design and mode of operation are alive and welltoday. Indeed, losses from Ponzi schemes in ...

Tamar Frankel is Professor of Law at Boston University School of Law. She is the author of Trust and Honesty: America's Business Culture at a Crossroad (OUP, 2008) and Fiduciary Law (OUP, 2010).

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Format:HardcoverDimensions:224 pages, 8.25 × 5.5 × 0.98 inPublished:July 18, 2012Publisher:Oxford University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0199926611

ISBN - 13:9780199926619

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Table of Contents

PrefaceIntroduction1. Con Artists at WorkA. Three Stories of Ponzi Schemers1. Charles Ponzi2. Bernard Madoff3. Gregory BellB. The Basic Design1. Drawing attention to the offera. High Returns At No Riskb. Stories to Satisfy Investors' Curiosityc. Con Artists' Stories Are Exceptional and CreativeC. Gaining Trust and Concealing the Truth1. Words Can Be Used to Signal Trusta. Words Can Denote Trustworthinessb. Signals to raise Trustworthinessc. It Depends On How You Say False Things. Specific Promises with Vague Rolesd. The Way a Story Is Told Can Signal Truthfulnesse. Refusing to Provide the Details of a Scheme Need Not Undermine Trust2. Familiar Transaction Businesses and Forms Seem to Make Verification Superfluous3. Hiding Fraud by Actions. Prompt Payments That Spell Trustworthiness, Low Risk, and Much MoreD. Hiding the Vulnerable Part of the Story: Secrecy and Costly Verification1. Concealing the True Nature of the Ponzi Business2. The Use of Justified Secrecy3. Stories That Are Costly to Verify4. Details That Hide the Truth by Drowning Ita. Details Can Hide the Truthb. Complexity Helps Hide the Truth As WellE. Con Artists Deceptive Friendship, and Seeming Vulnerability by Age and Naivety1. Deceptive Friendship and Love2. Deceptive Weakness of Age and Seeming Naivetya. Old Age Can Deceiveb. Naivety Can Deceive2. Selling the StoriesA. Advertising1. The Importance of Advertising2. Where To Operate And How To Build a Reputation3. Show Generosity4. Entertain5. Draw Attention by Engaging in Attention Drawing ConflictsB. Recruiting Helpers1. Cooperation, Competition and Congregation Among Con Artists2. Birds of a Feather Flock TogetherC. How Do Con Artists Approach Their Victims?1. From Family and Friends to Institutions to Affinity Groupsa. Introductionb. Affinity Groups: Ethnic and Religious Groupsc. Religious Institutionsd. Hybrid Institutions And Overtones2. Technology Has a Growing Impact On The Growth Of Ponzi SchemesD. The Sales Force1. Collecting and Distributing Information2. Paid Sales Force3. A Pure Sales Structure: Pyramid Schemes3. Con Artists' Behavior Seems a "Normal Usual Behavior"A. Humans Have a Natural Ability To Pretend, Lie, And Influence Others1. Humans And Even Primates Have Innate Abilities To Lie Convincingly2. Signs Of Misleading Signals3. Legitimate Lying4. Exploiting The Weakness Of The Social System5. The Slippery Slope: From Honesty To Fraud6. Ponzi Schemes "Businesses" Mirror Respectabilitya. Legitimate Businesses: Banking and Financial institutionsb. Stock Market Trading-Following The Trendsc. Salespersons And Tradersd. Entrepreneurse. Con Artists Are Believable: They Believe in Their Activities And View Them As Businessesf. Longevity of the Businesses Breeds Respectability4. A Profile of the Con Artists and Their VictimsA. The Dark Side Of Con Artists (And Some of Their Investors)1. Con Artists Are Different From Most People2. On Very Rare Occasions A Con Artist Might Resort To Murder3. On Very Rare Occasions A Group Of Con Artists Can Be Deadly As Well4. Con Artists Lack Empathya. What Does Empathy Mean?b. Lacking Empathy Can Bring Repeat Fraudsc. Lacking Empathy Can Render Con Artists More Effectived. People's Empathy Is Socially Important5. How Do Con Artists Present Themselves?a. Protecting the Weak Ego: We Are Special!6. Con artists' mechanisms of ego protection and justificationsa. Denialb. Blaming The Governmentc. Blaming The Lawsd. Blaming The Victimse. Blaming Others, But Avoiding A Show Of Weaknessf. Our Actions Are Justified. Others Are Fraudulent, And We Must Protect Ourselves Against Them By Defrauding First; Besides, Everyone Does Itg. Our Good Works Testify To The Legitimacy of Our ActionsB. The Profile Of The Victims. What Kind of Persons Are the Sophisticated Victims? What Makes Some People More Vulnerable to Ponzi Schemes Than Others?1. The Dark Side of Some Investors: Lacking Empathy Toward Other Investors And Shared Greed2. Investors In Ponzi Schemes, Who Suspect Or Know The Nature Of The "Investment" Yet Invest3. The Element of Greed4. What Drives the Victims?a. Gullibilityb. Risk-Tolerance may cover tolerance to the risk of being caught for illegal activitiesc. An optimistic nature and outlook on life affects risk toleranced. Social Statuse. The role of education in risk tolerance is unclearf. A Reminder of the Stories in Chapter 1: The Ways Con Artists Make Their Offers5. The Dark Side of Some Investors and Their Representatives: Lack of Empathy Towards Other Investors and Shared Greeda. Investors in Ponzi schemes, who suspect or know the nature of the "investment" yet invest in it, do not demonstrate empathy with their fellow investorsb. How do sophisticated victims of Ponzi schemes view themselves?6. How Do Some Victims React To the Discovery of Con Artists by the Government?a. The victims' attitude towards the governmentb. The nature of a Ponzi scheme justifies this view of some investorsD. The Issue of Addiction. Ponzi Schemes Are Addictive For Con Artists And For Some of Their Victims. The Slippery Slope to Addiction and Illegality1. What Is Addiction?2. What Causes An Insatiable Craving For More, And A Loss Of Self-Control?3. What Are Con Artists and Perhaps Their Victims Usually Addicted To?4. Con Artists Are Repeat Offenders5. How Does the Public View the Con Artists and the Victims?A. America Is Ambivalent About Its Con Artists1. Con Artists That Defrauded Small Investors Are Viewed Somewhat Differently2. When Con Artists Mimic The Power Elite, They Are Close To, And Live Like, The Very Wealthy And Politically Powerful3. The "Barren and Destructive Creators" The Benefits of Creative Harm4. Con Artists Can Be Corrupting TeachersB. How does the Public View the Victims?1. With Few Exceptions, People View The Victims Of Con Artists Differently Than They View The Victims Of Violent Crimes2. A Related Reason For Condemning The Victims Is That They Did Not Do Their HomeworkC. Are There Available Protections For Sophisticated Potential Victims?1. Red flag: a very high return-low risk2. Red flag: The mystery source of the higher returns3. Red flag: Continuous offerings of obligations4. Red flag: Con artists' activities outside the legal protections5. Other red flag signals6. Separating Business, Emotion, And Faith7. Advice To Investors As Protection Against Affinity Scams Is Similar6. The Legal AftermathA. Collecting the Assets and Mediating Among the VictimsB. The Issues Error!C. Who Collects the Remaining Assets?D. Who, Among the "Helpers" of Con Artists, Must Pay?1. Who Helps The Con Artists?2. What About Suspecting Helpers?E. How To Divide the Remaining Assets?F. Are All Victims Equal? They Are Not1. Distinguishing between initial investment and profits2. Markets and stolen goods: Policy issues3. What about victims that "smelled a rat" and decided to withdraw their money after collecting the profits?Epilogue