9 Most Brazen Ponzi Schemes in History

I'm sure you've all heard of Bernard Madoff's $50 billion Ponzi scheme that fooled even the most financially savvy investors. But what do you know about Ponzi or pyramid schemes? Here's a quick (and fun) crash course at the 9 Most Brazen Ponzi Schemes in History:

1. Charles Ponzi and the Original Ponzi Scheme

Ponzi schemes are named after Charles Ponzi, an Italian immigrant who perpetrated a legendary scam. Actually, he wasn't the inventor of this type of scams - it was called "Robbing Peter to pay Paul" schemes - but his was so large that his name became synonymous with it.

Ponzi started a business buying and selling a type of postal coupon and promised investors a 50% return on their money within 45 days (compare this to an annual 5% interest for bank savings account at the time).

Ponzi's early investors did get their money doubled and even tripled in a short amount of time. This, and glowing newspaper reports at the time about his company, the Securities Exchange Company (yes, the "SEC" - ironic, huh?), got him a lot of money from investors. At one point, Ponzi took in $1 million in a three-hour period from investors. All in all, about 40,000 investors invested about $15 million in Ponzi's scheme in nine months between 1919 and 1920 (about $174 million in 2007 value).

When it was discovered that Ponzi was paying old investors with money from new ones, his scheme collapsed and he was sent to jail ... for 5 years! After serving his federal sentence, Ponzi was sentenced by the State of Massachusetts for an additional 9 years, but he skipped town. Ponzi ended up in Brazil, where he spent his last years in poverty and sickness.

Before he died, Ponzi gave one last interview where he confessed to his crime "My business is simple. It was the old game of robbing Peter to pay Paul. You would give me one hundred dollars and I would give you a note to pay you one-hundred-and-fifty dollars in three months. Usually I would redeem my note in 45 days. My notes became more valuable than American money ... Then came trouble. The whole thing was broken." (Zuckoff, Mitchell, Ponzi's Scheme: The True Story of a Financial Legend, p. 313)

(For more detailed info, check out mental_floss' excellent post on Charles Ponzi)

2. Dona Branca, the People's Banker

Maria Branca dos Santos, or more commonly called "Dona" Branca, was a poor Portuguese woman when she decided that she would open her own "bank" in 1970. To make it attractive, she promised an interest rate of 10% per month, and got thousands of clients (including the working poor of Portugal) to give her their money.

The scheme lasted more than 14 years, and during this time she's known as "The people's banker." Dona Branca was arrested and sentenced to 10 years in prison. She died poor, blind, and alone.

In 1993, her crime inspired a Portuguese soap opera titled A Banqueira do Povo ("The People's Banker").

3. The "Double Shah"

In 2005, a Pakistani high school science teacher Syed Sibtul Hassan Shah went to Dubai. When he came back to his hometown of Wazirabad, Pakistan, he convinced his neighbors to give him their savings, which he doubled in just 7 days, based on a "stock program" that he had learned in Dubai.

Words soon spread of the "Double Shah" and people began investing with him. In 18 months, he took in over Rs. 70 billion (about US$880 million) from 3,000 people and was even considered to be the next political leader from the area.

When police arrested Shah on charges of robbery in 2007, thousands of people descended to the streets to protest against his arrest (Source). He is now in custody and his case is pending.

4. Lou Pearlman: 'N Sync and 'N Investors' Pockets

Usually, Ponzi schemes are run by people you've never heard of before - but this one is different: Lou Pearlman is a famous boy band music mogul who founded the Backstreet Boys and 'N Sync.

In 1981 (incidentally, the same year that 'N Sync star Justin Timberlake was born), Pearlman started Trans Continental Airlines Travel Services, Trans Continental Airlines Inc, and 12 other companies. Problem was, they existed only on paper. For 20 years, he sold shares of the companies to investors and got loans from banks, to the tune of $300 million. To keep up the ruse, he invented a fake accounting firm Cohen & Siegel (he even hired an answering service to pick up the phone) and a fake branch of a bank in Germany. He falsified tax returns and other financial documents to appear legit (Source).

When his scheme unraveled, Pearlman fled the country and tried to hide. He was captured and was sentenced to 25-year in prison.

5. European Kings Club

In 1992, Damara Bertges and Hans Gunther Spachtholz founded the European Kings Club, a "non-profit" association that rallied against big European banks and promised to help the "little guys."

Investors buy a "letter," which was kind of a club share, for 1,400 swiss franc. This entitled them to 12 monthly payment of 200 swiss franc, which meant doubling their money in just a year.

The European Kings Club meetings were a hoot: they sang their own anthem, and the duo made a show of pressing money into the hands of the "club members."

When the scheme collapsed 2 years later, some 94,000 German and Swiss investors were bilked out of US$1 billion. In the Swiss cantons of Uri and Glarus, it was estimated that one in ten adults had fallen for the scheme. (Source)

But even after authorities raided the EKC offices and captured Bertges, her investors still believed that she was their champion. When Bertges went put on trial, her "victims" applauded so loudly that the judge had to clear out the room. (Source). For defrauding people out of US$1 billion, Bertges got 7 years and Spachtholz got away with less than 5 years in jail.

6. Bernie Madoff: How He "Made Off" with $50 Billion

Unless you've been living under a rock, you all should know by now that financier Bernard "Bernie" Madoff was arrested for running a Ponzi scheme. There are four notable facts about his operation:

  1. It was the largest (dollar-wise)
  2. It was the longest-running (known) Ponzi scheme in history. Investigators sifting through the record found evidence of hanky panky since the 1970s
  3. It was perpetrated by one of the pillars of Wall Street - Madoff was a former chairman of NASDAQ
  4. His victims are some of the most financially savvy and rich people in the world (you need at least $20 million to "invest" with him)

We're not going to talk about Madoff (this news is all over the Internet), but let me just re-print what his website used to say before it was taken over by authorities:

In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner’s name is on the door.

Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark. (Source)

Find out more about Bernie Madoff's $50 Billion Ponzi Scheme at Wikipedia (or just open a newspaper, folks)

7. Yilishen Tianxi: Ant Farming Scheme

If you think the ponzi schemes above were brazen, take a look at this one. It ensnared a million - yes, you read that right, a million - people in China ... with ants! (Photo via Asia Sentinel)

In 1999, Wang Fengyou founded the Yilishen Tianxi Group and hatched a scheme so crazy it's brilliant: ant farming. He convinced poor farmers to give him 10,000 yuan (about $1,500). In return, they got a box of "special ants" and a list of very strict instructions: spritz the ants with a sugar and honey solution at 9 a.m. and 4 p.m. every day, and feed them cake and egg yolk every three to five days. Under no circumstances were they to open the box. Every 74 days, workers from Yilishen would come by and pick up the ants to be ground up and made into an aphrodisiac. For their troubles, the farmers get 13,250 yuan, a 32.5% premium every 14 months. (Source)

By 2006, Wang was a very rich man. His company was featured in newspapers and on TV. He hired celebrities to publicize his company and hobnobbed with government officials. He even got the "China's Top 10 Entrepreneurial Leaders" award from the government. His ant aphrodisiacs were sold in some 80,000 pharmacies across China and by some accounts, over 1 million people bred ants for Yilishen, giving the company an annual turnover of 15 billion yuan (US$2 billion).

In October 2007, Wang's scheme collapsed. The company started to miss payouts and thousands of ant farmers descended on his company's headquarter and government offices. A month later, Wang Fengyou was arrested.

Unlike other Ponzi scheme con artists who got off after only a few years in jail, Wang's fate doesn't look good. In the same year Wang's scheme collapsed, the Chinese government started cracking down on 3,747 pyramid schemes. Wang's rival, who conned people with a similar ant-breeding scheme, was sentenced to death. (Source)

Oh, and did his aphrodisiac ants really work? Actually yes, but not because of the ants. His products contained sildenafil, the active ingredient in Viagra.

8. Sergey Mavrodi, the Scammer who Got Himself Elected to the Russian Parliament

Biletov or fractions of shares of the MMM Corp, bearing the likeness of Sergey Mavrodi (photo via PJ Symes, who wrote a fascinating article on the MMM Corporation)

Just one million people? Meh, said Sergey Mavrodi. His scheme duped two million people!

Mavrodi was a Russian scammer who along with his brother Vyacheslav Mavrodi and Vyacheslav's future wife Marina Murayveya, founded the MMM company in (the triple Ms came from the surnames of these three people). In the early 1990s, MMM promised dividends of 1,000%, promoted itself heavily in TV ads, and delivered on its promise. At its peak, Mavrodi's company was taking in more than $11 million a day from the public! Within 5 years, Mavrodi took in $1.5 billion from at least 2 million people.

When the whole thing unraveled and the police raided MMM offices for tax evasion, Mavrodi pulled another fast one: he convinced his "investors" that it was the government's fault that they lost their investment. He even ran for the Russian State Duma (the lower house of parliament) to get the government to initiate a "payback" program ... and he was elected! That was a good thing because he got himself a parliamentary immunity.

When his immunity was later revoked, Mavrodi went on the lam. In 2003, he was arrested , fined $390, and sent to a penal colony for four-and-a-half years (Source). That translates to about $38,052 swindled per hour in the slammer.

9. Social Security

President Roosevelt signing the Social Security Act of 1935. Photo: Library of Congress

Well, not exactly, but Social Security does have a few similarities to a Ponzi scheme.

But first, a little about Social Security. In 1935, President Roosevelt introduced a controversial "social insurance" to prevent the crushing poverty that hit many Americans in their old age during the Great Depression. As part of his New Deal, Social Security provided benefits to retirees and the unemployed, financed by taxes on current worker's wages.

The details have changed over the years, but the basics remain the same: just like in a Ponzi scheme, money from new investors (taxpayer) is used as payout to older investors (retirees).

From 1937 to 2005, Social Security has taken in more than $10.7 trillion in taxes and other income. In the same time period, it has given out more than $8.9 trillion (Source). The program is actually taking in more in taxes than it gives out in benefits (and invested it in Treasurys - this in itself is a complicated issue because it's akin to the government giving itself an IOU). It is projected to run a surplus until 2018, when the baby boomers are expected to retire and start draw their benefits. Though it's difficult to accurately predict, Social Security's own trustees expect the program to run out of money by 2040 unless big changes are made (Source).

There's one similarity between Social Security and Ponzi scheme that is irrefutable: the early investors/retirees get the better end of the deal. The first person to receive monthly retirement check was Ida May Fuller of Ludlow, Virginia. Ida retired in November 1939 at the age of 65 and started collecting her checks in January 1940. She lived to be 100 years old, and during her lifetime, she collected $22,888.92 in Social Security benefits. Ida put in a total of $24.75 into the system, thus giving a return of over 90,000%!

I'll be the first to admit that we've skipped a lot of Ponzi schemes, such as those run by Reed Slatkin (who co-founded the ISP Earthlink), Tom Petters, and many others. Interested readers are suggested to check out Wikipedia's entry on Ponzi scheme.

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Similar in France's after war: loans + new loans + loans to pay the interests of the loan... Today, it is finished. We cannot pay even any more the interests !
Europe of the bankruptcy !
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