1. Charles Ponzi’s Scheme
The scheme of 1919 used the U.S. Postal Service. Ponzi took advantage of the international reply coupons which enabled pre-purchase by senders. The recipient would then exchange the coupon for airmail postage stamps at their local post office. The arbitrage (the exchange) is itself legal but Ponzi turned it into a criminal undertaking because of his greed. He indicated below his company name, Securities Exchange Company, that purchasers would realize 50% profits in 45 days, an amount equivalent to 100% for 90 days (Darby, 1998). He started this company in January 1920 to boost the spread of his scheme. 18 investors deposited $1,800 in the initial month and Ponzi managed to repay them using money from new investors.
The amount rose to $25,000 from February to March 1920. Ponzi’s success in the scheme brought him investors almost immediately. He still employed agents to find him, new investors. The invested amounts continued to grow to $420,000 then $2.5 million in June and million dollars each week by July. Ponzi redistributed the investing money he received, telling the investors that they made profits, but never invested any of it. The postage stamp scheme thrived up to August 1920, when The Boston Post began investigating Ponzi’s company. The investigation led to his arrest in the same month.
2. Robert Allen Stanford
Investigations against him commenced in early 2009 after the U.S. Embassy revealed that Stanford International Bank participated in money laundering, bribery, and political propaganda. The bodies that investigated the company in February 2009 were the SEC, FBI, the Office of Financial Regulation (Florida), and the Financial Industry Regulatory Authority. SEC officials discovered that Stanford showed customers hypothetical investment telling them that it was the historical data on the sales pitched to customers.
Stanford dismissed these claims saying that his deposit certificates were safe. However, the U.S. Securities and Exchange Commission (SEC) charged him with fraud and several violations of the securities laws of the U.S. and Stanford willingly surrendered himself on 18th June 2009 (Cohn, 2019). Stanford, however, pleaded not guilty to obstruction, fraud, and conspiracy charges when he appeared before a court in Houston. He was admitted to Conroe Regional Medical Center on 27th August 2009 after he complained of a racing heart issue.
He got another hospital admission in September 2009 due to the serious injuries sustained after an inmate beat him. SEC Inspector General raised major concerns in March 2010 over the inability of SEC to unveil Stanford’s Ponzi scheme. Stanford’s trial officially commenced in January 2011, when the district judge thought he was not fit for trial as his anxiety drug interfered with his reasoning. Prosecutors also reduced his charges to 14 after Stanford denied the $7.2 billion damages claims on SEC and FBI. Again, Stanford had to go to the Federal Medical Center after his attorney said he had amnesia. Trials, thus, resumed on 22 December 2011, so in March 2012 the judge found him guilty of masterminding a Ponzi scheme (Cohn, 2019). He was sentenced to 110 years in prison on 14th June 2014 and his appeal was also rejected in October 2015.
3. Tom Petters
Tom Petters owned the Petters Group Worldwide, and his company is known for the theft of more than $2 billion through its Ponzi scheme. Petters was found guilty of a number of federal crimes which were all linked to his operations of the Ponzi scheme worth $3.65 billion. Petters’ Ponzi schemes existed around 1998-2008. He conducted a variety of Ponzi schemes that saw him raise about $4 billion. He named the schemes Arrowhead, Stewardship, Palm Beach, and Lancelot (Carlson, Hansen, & Dosch, 2009). These aided him to establish the third most diverse fraud ever recorded in the history of the United States.
In 2002, Petters collaborated with Ted Deikel to purchase the brand name Fingerhut as well as its customer list and its Minnetonka, Tennessee, and Minnesota buildings. Following the acquisition, Petters switched his major schemes to Fingerhut’s Minnetonka branch, commencing online sales in November 2002. The Petters Group then bought uBid in April 2003, a time when Fingerhut got a credit line of $100 million for financing receivables and inventory. Petters’ investments in Nazca Solutions also happened in 2003. Petters’ Group Worldwide then used $426 million to buy Polaroid in 2005 and acquired Sun Country Airlines in 2006. By 2007, Petters Group Worldwide’s revenue amounted to $2.3 billion (Carlson et al., 2009).
The FBI began investigations on Petters in 2008 on the basis of a fraudulent scheme that involved revenue exceeding $100 million. Petters accepted that he falsified tax returns and that he operated a fraudulent scheme. He resigned from the position he held in his company on 29th September 2008 and on 3rd October, he was arrested. He was found guilty at the U.S. District Court in December 2009 and received a sentence of 50 years in April 2010.
Laws that Protect People from Ponzi Schemes
Pyramid and Ponzi schemes are still in existence and pose a great challenge on the law enforcers. According to International Monetary Fund (1999), the forms in which the schemes come continue to change. This also makes them difficult to detect. To restore public confidence which had been lost in the U.S. stock market in 1929, Congress signed the 1933 Securities Act and Securities Exchange Act in 1934 (U.S. Securities and Exchange Commission, n.d.). The latter Act established Securities and Exchange Commission (SEC). The main mission of SEC is to promote capital formation, ensure investors’ safety, and establish fair and organized markets. SEC requires firms that sell securities to provide accurate information about the business, the securities for sale, and potential risks associated with their securities. SEC also requires honesty on the part of persons that trade securities. Moreover, SEC has its Whistle-blower Programme in which knowledgeable attorneys guide the activities of whistle-blowers to ensure they stay anonymous as they share crucial information to SEC (U.S. Securities and Exchange Commission, n.d.). The procedure ensures that unauthorised parties remain unaware of the reporters’ identity. SEC also compensates the whistle-blowers.
In the U.S., several bodies have the power to sue a business that shows fraud tendencies. The Federal Trade Commission (FTC) is one of them. SEC also watches businesses closely to detect financial distribution networks and securities that are yet to be registered (International Monetary Fund, 1999). The U.S. Postal Inspection Services and the FBI also watch out for money laundering, securities fraud, etc. All these bodies. The FTC agents file uncovered pyramid schemes based on the FTC Act. This Act forbids deceptive activities and practices that interfere with fairness in commercial enterprises. After filing a suit, the Commission is allowed by the Act to seek reinstitution for clients and receivership over the business of the defendant, among others. Pyramid and Ponzi schemes are still in existence and pose a great challenge on the law enforcers. According to International Monetary Fund (1999), the forms in which the schemes come continue to change. This also makes them difficult to detect.
How do you identify a Ponzi scheme?
SEC and FTC emphasize the need for the public (a business manager or investor) to possess tips for spotting Ponzi schemes so they can stay away from the same (International Monetary Fund, 1999). They caution people against the business or investment programmes that offer exaggerated returns claims, particularly when the owners of such companies do not show real sales of a product or the actual profits from the investment. In other words, the lack of such substantial proofs indicates the possibility that the company will use funds from latter recruits to compensate those that came earlier. SEC and FTC would like people to stay away from the Ponzi-type schemes because their collapse causes substantial financial losses to the participants.
Secondly, there is a need to beware of plans in which new distributors earn some commission. It could be a Ponzi scheme if the members are expected to give up-front payments. If you see these first two indicators, do not be fooled by the existence of some purported service or product. FTC indicated that it has in the past uncovered several schemes that hid behind charities, jewellery sales, cosmetics, etc. (International Monetary Fund, 1999). Therefore, if the plan presented to you claims product/service sales, check for indicators such as inflated prices, the need for new members to purchase very expensive inventory, and if the majority of the sales take place among members as opposed to the public.
Thirdly, watch out for programmes that speak of possessing a secret plan, some overseas links, and privileged relationships that are not clarified. The International Monetary Fund (1999) warns people that Charles Ponzi used a scheme of this nature, telling investors that he had a hidden trading approach. Lastly, individuals must beware of plans whose operators encourage clients to keep investing even when the commitments are not yet accomplished. It is commonly understood that the schemes never raise enough money to meet their obligations to a majority of investors.
