History of the Pyramid Scheme
While historians say that he was not the inventor of such a fraud, Charles Ponzi made it famous. Born in Italy in 1882, Ponzi was a professional swindler. Around 1919, the Italian immigrant, who was determined to become wealthy, became inspired by international reply coupons (IRCs), which could be exchanged for postage stamps in other countries, according to Biography.com. He realized he could trade these in for more than what he paid for them, then sell them. Although doing this himself yielded a nice profit, he sought help to bring in a higher return.
His feature on Biography.com states that he would guarantee investors returns of 50 to 100 percent in 90 days or less. He kept paying them with money from other investors rather than with actual money earned. Despite the fact that this did make him extremely wealthy, he began to be investigated in 1920 and was shut down not too long following the inquiries, bringing six banks down with him, Time Magazine wrote.
He may not have ended up wealthy, but he still did end up famous. He went down in history as creating one of the more well-known Ponzi scheme examples. Speaking of which…
Ponzi Scheme Examples
Even though Ponzi schemes are illegal, many still try to make them happen even to this day. Here are a few Ponzi scheme examples from over the years:
- Bernie Madoff: Bernie Madoff was an American stockbroker who led the longest running Ponzi scheme to date. For 30 years, he used this method with stock and securities for his business, the Wall Street firm. Because of his experience in finance, it was easy for investors to believe what he was saying. In 2008, Madoff was arrested for his scam and is currently serving a 150-year sentence and required to pay back the $170 billion owed to investors.
- Lou Pearlman: Lou Pearlman used boy bands to gather his money. The American record producer most notably worked with pop groups Backstreet Boys and NSYNC and had a Ponzi scheme worth $18 billion. He convinced investors to put their life savings into charter airplanes that never actually came to fruition. Pearlman was able to get individuals to contribute to his Employee Investment Savings Accounts (EISA) program. The money from this program was able to fund his efforts with the pop music industry. He was incarcerated in 2009 and sentenced to serve 25 years in prison. However, he passed away in August 2016 before finishing his sentence, Billboard.com states.
- J David & Company: J. David Dominelli was the man behind the operations at San Diego’s J. David & Company. Another Ponzi schemer who hid his efforts behind an investment company, he promised investors returns of 40 to 50 percent and grew it to 1,500 investors by 1983, four years after starting, an October 2009 article in the San Diego Union-Tribune. Dominelli’s cover was blown by bounced checks, and he was forced to bankruptcy. Sentenced to 20 years in prison, and ordered to pay $80 million in restitution, the article adds.
- Martin Frankel: Martin Frankel (also known as James Spencer) may be known for one of the strangest Ponzi schemes of all times, CNBC states in this 2012 post. Frankel taught himself how to be a stock broker while also describing himself as a “financial genius.” His scheme cost investors $200 million. Frankel started a few financial companies, one being Winthrop Capital under the name James Spencer, which is mentioned on his Wikipedia page. He ran several financial frauds and bought and looted insurance companies until he was caught in 1999 and sentenced to 200 months in prison in 2004.
Hopefully, you’ll be able to learn from these Ponzi scheme examples of what to be aware of when signing up as an investor of some type for a new (or existing) company. If you worry that you are currently involved in one, you should immediately cease any further investing and report the company to the appropriate authorities.
What would you add to the list? Have you ever been a victim of a Ponzi scheme?
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