Market Related Articles » Ponzi Scheme » Historical Ponzi Schemes
Historical Examples: Wall Street investor Bernard Madoff (2008) is not the first person to be charged with carrying out a massive Ponzi scheme. Sometimes people call it "robbing Peter to pay Paul," or a shell game. Pyramid schemes are close relatives. By any name, the Ponzi scheme has a long and colorful history.
Bernie Madoff's reputation as a money manager was so great that investors literally pleaded with him to take their money. He consistently made returns of 10 or 12 percent even in bad times. And hedge funds, charities and rich people were all dazzled by his track record. This trust has been played out in scams for hundreds, possibly even thousands of years.
1800's
• Sarah Howe, who in 1880 opened up a "Ladies Deposit" in Boston promising eight percent interest, although she had no method of making profits. This unique scheme was billed as "for women only." Howe was arrested on October 18, 1880 by New York City Police and sentenced to three years in prison.
• In 1899, William "520 Percent" Miller opened for business as the "Franklin Syndicate" in Brooklyn, New York. Miller promised 10% a week interest and exploited some of the main themes of Ponzi schemes such as customers reinvesting the interest they made. He defrauded buyers out of $1 million and was sentenced to jail for 10 years. After he was pardoned, he opened a grocery store on Long Island. During the Ponzi investigation, Miller was interviewed by the Boston Post to compare his scheme to Ponzi's. The interviewer found them remarkably similar, but Ponzi's became more famous for taking in seven times as much money.
1920's
• The eponymous Ponzi scheme was orchestrated by Charles Ponzi, who went from anonymity to being a well-known Boston millionaire in six months using such a scheme in 1920. Profits were supposed to come from exchanging international postal reply coupons. He promised 50% interest (return) on investments in 45 days or “double your money” in 90 days. About 40,000 people invested about $15 million all together; in the end, only a third of that money was returned to them.
1980's
• Between 1970 and 1984 in Portugal, a woman known as Dona Branca maintained a scheme that paid 10% monthly interest. In 1988 she was sentenced to 10 years in prison. She always claimed that she was only trying to help the poor, but in her trial it was proven that she had received the equivalent of 85 million euro.
• In January 1984 Adriaan Nieuwoudt started the so-called "Kubus" scheme with an apparent beauty product in South Africa. Subscribers to the scheme bought a supposedly biological substance called an "activator", that was used to grow cultures in milk. After growing for a week or two, the cultures were harvested and dried, and sold back to the scheme. The cultures were never used for a beauty product but were simply ground up and resold to further investors as activators. Other schemes by Nieuwoudt include investment in a holiday resort and a scheme involving collecting useless old postage stamps.
• Sixteen hundred investors in Diamond Mortgage Company and A.J. Obie, two firms with the same managers, lost approximately $50 million in what the Michigan Court of Appeals described as "the largest reported 'Ponzi' scheme in the history of the state." It led to the passage in 1987 of the MBLSA (Mortgage Brokers, Lenders, and Servicers Act)."
• In 1984 in San Diego, California, J. David & Company, an alleged currency and commodity trading and investing operation named after its founder, J. David Dominelli, a withdrawn and shy (and thus, presumably, "genius") currency and commodity trader, was revealed to be a Ponzi scheme which took in $200 million and returned $120 million to investors, leaving a net loss of $80 million. The scheme touched all levels of upper class business and professional life in San Diego and environs, and involved the Mayor of Del Mar, California, a cozy upscale beach town just north of La Jolla, who was J. David's assistant and live-in companion, and others, including the prominent New York law firm Rogers & Wells (now Clifford Chance), which had advised J. David (through a rogue partner) and others. News articles of the era indicate that by late 1983 there were scattered reports of bounced checks, and Dominelli was asking for short-term loans to ease cash-flow problems. By February 1984, angry investors filed suit to force J. David into bankruptcy. After an attempt to flee to the Caribbean island of Montserrat, which had served as a tax haven along with Switzerland, Dominelli was brought back to San Diego to face trial for fraud. He pleaded guilty to four felony charges in March 1985. The counts carried a maximum penalty of 20 years in prison, of which Dominelli served just over 10 years at Boron Federal Prison Camp. He was released in February 1996. The immediate impact of Dominelli's conviction was severe. Countless numbers of investors in San Diego, Palm Springs, Orange County and elsewhere were devastated by the financial loss.
1990's
• In Romania, between 1991 and 1994, the Caritas scheme run by the "Caritas" company of Cluj-Napoca, owned by Ioan Stoica promised eight times the money invested in six months. It attracted 400,000 depositors from all over the country who invested 1,257 billion lei (about a billion USD) before it finally went bankrupt on 14 August 1994, having a debt of 450 million USD. The owner, Ioan Stoica was sentenced in 1995 by the Cluj Court to a total of seven years in prison for fraud, but he appealed and it was reduced to two years; then he went on to the Supreme Court of Justice and the sentence was finally reduced to one year and a half.
• "MMM" was a Russian company that created its successful Ponzi scheme in mid-1993. It involved at least two million people and collected as much as $1.5 billion before its collapse. Founder Sergey Mavrodi was sentenced to 4.5 years in prison in 2003. The name of the company was taken from the first letters of the three founders' surnames, Sergey Mavrodi, his brother Vyacheslav Mavrodi, and Marina Muravyeva, Vyacheslav's future wife.
• In late 1994, the "European Kings Club" collapsed, with ensuing losses of about $1.1 billion. This scam was led by Damara Bertges and Hans Günther Spachtholz. In the Swiss cantons Uri and Glarus, it was estimated that about one adult in ten invested into the EKC. The scam involved buying "letters" valued at 1,400 Swiss francs that entitled buyers to receive 12 monthly payments of 200 Swiss francs. The organization was based in Gelnhausen, Germany.
• In May 1995, Pennsylvania's attorney general moved to freeze the assets of the "Foundation for New Era Philanthropy" and its chairman, John G. Bennett, Jr. The organization had raised over $500 million from 1,100 donors. Participants, including the Red Cross, had believed they were participating in a matching-gifts program through New Era but, in fact, it was really a Ponzi scheme. Losses amounted to $135 million.
• In early 1996, the SEC filed a civil action against "Bennett Funding Group", its chief financial officer, Patrick R. Bennett, and other companies Bennett controlled, in connection with a massive Ponzi scheme. The companies fraudulently raised hundreds of millions of dollars, purportedly to purchase assignments of equipment leases and promissory notes.
• From 1993 until 1997 a church named "Greater Ministries International" in Tampa, Florida, headed by Gerald Payne bilked over 18,000 people out of 500 million dollars. Payne and other church elders promised the church members double their money back, citing Biblical scripture. However, nearly all the money was lost and hidden away. Church leaders received prison sentences ranging from 13 to 27 years.
• In the mid-1990's, Albania was transitioning into a liberalized market economy after years under a State-controlled economy reinforced by the cult of personality involving longtime Communist leader Enver Hoxha; the rudimentary financial system became dominated by pyramid schemes, and government officials tacitly endorsed a series of pyramid investment funds. Many Albanians, approximately two-thirds of the population, invested in them. By 1997 the inevitable end came: Albanians, who had lost $1.2 billion, took their protest to the streets where uncontainable rioting and attacks on government infrastructure led to the toppling of the government and the temporary existence of a stateless society. Although technically a Ponzi Scheme, the Albanian scams were commonly referred to as Pyramid Schemes both popularly and by the IMF.
2000+
• In 2000, a Ponzi scheme perpetrated by "Scientology minister Reed Slatkin" came unraveled when the U.S. Securities and Exchange Commission regulators became aware that Slatkin was not a licensed investment adviser. Slatkin had raised some $600 million from over 500 wealthy investors, mostly Hollywood celebrities.
• In 2001, the Haitian population fell prey to Ponzi schemers offering rates up to 15%. The outfits called "cooperatives" appeared to be implicitly backed by the government and became wildly popular in the population at large who felt safe since the coops were openly advertising on the radio, TV ads, and used as spokespeople Haitian pop stars. It is estimated that more than $240 million were swindled from investors, equivalent to 60% of the country's GDP.
• "The Brothers" was a large investment operation, eventually exposed as a Ponzi scheme, in Costa Rica from the late 1980s until 2002. The fund was operated by brothers Luis Enrique and Osvaldo Villalobos. Investigators determined that the scam took in at least $400 million. Most of the clientele were American and Canadian retirees but some Costa Ricans also invested the minimum $10,000. About 6,300 individuals ultimately were involved. Interest rates were 3% per month, usually paid in cash, or 2.8% compounded. The ability to pay such high interest was attributed to Luis Enrique Villalobos’ existing agricultural aviation business, investment in unspecified European high yield funds, and loans to Coca Cola, among others. Osvaldo Villalobos’ role was primarily to move money around a large number of shell companies and then pay investors. In May 2007 Osvaldo Villalobos was sentenced to 18 years in prison for fraud and illegal banking. Luis Enrique Villalobos remains a fugitive.
• In December 2005, in Los Angeles, California, "Larry Toshio Osaki", who ran a Ponzi scheme (of large proportion) and continued to offer bogus investments in accounts receivable factoring after being ordered to cease and desist by a Federal judge, was sentenced to 20 years in federal prison. In addition to the prison term, Judge Stephen V. Wilson ordered Osaki to pay more than $145 million in restitution to victims.
• In May 2006, James Paul Lewis, Jr. was sentenced to 30 years in federal prison for running a $311 million Ponzi scheme over a 20-year time period. He operated under the name "Financial Advisory Consultants" from Lake Forest, California.
• In October 2006 in Malaysia, two prominent members of society and several others were held for running an alleged scam, known as "SwissCash or Swiss Mutual Fund". SwissCash offered returns of up to 300% within a 15-month investment period. Currently, this HYIP investment is offered to citizens of Malaysia, Singapore, and Indonesia. It claimed investors’ funds were channeled to business activities ranging from oil exploration to shipping and agriculture in the Caribbean. The company claims to be operating out of New York and incorporated in the Commonwealth of Dominica.
• In Oct, 2006 "Gregory Nathan", a Sydney fund manager, was arrested on charges including dishonest conduct and obtaining money by making false and misleading statements, in what investigators discovered to have been a Ponzi scheme. Nathan, a notorious gambler, reported returns that were always stellar, prompting many to invest their life savings. Nathan didn't discriminate when it came to pitching his investment opportunities with victims including his mother, his girlfriend, his flatmate, the elderly and handicapped. Nathan falsely reported his fund had $22 million under management, when the most it could have had at any one time was approximately $4.9 million. From 2001 - 2006 an estimated $8.8 million was lost by an untold number of investors believed to be in the hundreds. In a desperate late bid to perpetuate the scheme, Nathan sent an email to existing clients on Oct 9, 2006 just days before placing his companies in administration, encouraging them to increase their investment. On 19 Sept, 2008, Nathan was sentenced to a total of seven years imprisonment including a five year non-parole period.
• On April 13, 2007, Sibt-e-Hassan Shah, aka "Double Shah", was arrested by government officials in Wazirabad, a small town of Pakistan. Sibt-e-Hassan claimed to double investors' money within 30 days in the beginning of his scheme, later extended to 90 days. He is suspected to have gathered very large investments (approx US$ 1 billion) in a very short time period.
• On June 27, 2007, former boy band mogul and notorious con artist "Lou Pearlman" was indicted by a grand jury on several counts of fraud which is turning out to be one of the largest and longest running United States Ponzi schemes ever. His scheme lasted for over 20 years. The final total damage may rest somewhere near $500 million. Pearlman's scam involved bilking investors out of their savings with a fraudulent savings and loans program claiming it to be FDIC insured though it was not. On March 4, 2008, Pearlman agreed to plead guilty to charges of conspiracy, money laundering, and making false statements during a bankruptcy proceeding, and to testify for the prosecution of several accomplices, according to law enforcement officials. On May 21, 2008, Pearlman was sentenced to 300 months in jail with the stipulation that he could cut one month off his sentence for every $1 million he paid his investors back.
• On August 17, 2007, the Philippine National Bureau of Investigation (NBI) filed syndicated estafa cases against 27 officers and investors of "FrancSwiss Investment", a "Ponzi" pyramiding scam on the Internet. Charged were Michael Mansfield, chief financial officer; Kurt Sandelman, risk management team leader; Rupert Benedict Da Vinco, investment team leader; Julia Rodriguez, international banking team leader; Hector Willem Sidberg, marketing and international affairs; and Fernando Munoz, customer service leader; Roger Smith, the British chief operation officer of FS Investment in the Asia-Pacific region; Bensy Fong, the Singaporean system operation officer; Raymond Chua, Singaporean marketing officer; a certain Michelle and Mike, Filipino secretaries and collectors of money from investors; 16 investors, including arrested suspect Eleazard Castillo, 26, a native of Cabuyao, Ilocos Sur, allegedly one of the financial advisers of FrancSwiss Investment. 41 investors claimed they lost a total of $75,000 to the investment scheme. FrancSwiss deceived investors in the Philippines of ₱1 billion ($50 million).
• In the third and the biggest Philippines Ponzi scam (involving $150 million and $250 million), criminal charges, based on suit filed by 21,000 complainants were filed on June, 2008, with the Department of Justice, against against "Performance Investments Products Corp (PIPC)" officers and incorporators for violation of the Securities Regulation Code (SRC), versus: Singaporean national Michael H.K. Liew, PIPC president; Cristina Gonzalez-Tuason, general manager, and other officers and agents - Ma. Cristina Bautista-Jurado, Barbara Garcia, Anthony Kierulf, Eugene Go, Michael Melchor Nubla, Ma. Pamela Morris, Luis Aragon, Renato Sarmiento Jr., Victor Jose Vergel de Dios, Nicoline Amoranto Mendoza, Jose Tengco III, Oudine Santos and Herley Jesuitas.
• Minnesota, USA - allegedly orchestrated by Minneapolis, Minnesota celebrity businessman Tom Petters. On December 1, 2008 "Tom Petters" was charged by the Federal government as the mastermind behind a $3.5 billion Ponzi scheme that bilked investors over a 13-year period. Tom Petters lived an extravagant lifestyle supported by his Ponzi scheme. Petters faces 20 counts of wire and mail fraud, conspiracy, and money laundering for the alleged investment scheme that ran from 1995 through September of 2008. He is expected to plead not-guilty, but his co-conspirators in the Ponzi scheme, Deanna Coleman, Robert White, Michael Catain, and Larry Reynolds, have all plead guilty. The Petters Ponzi scheme came to an end when Petters' top co-conspirator Deanna Coleman turned government informant and wore a wire. Petters and the others were planning to flee to countries without extradition agreements with the U.S. Deanna Coleman and Michael Catain had properties in Costa Rica.
The Largest Ponzi Scheme on Record
• Bernard Lawrence Madoff (born April 29, 1938) is a businessman and former chairman of the NASDAQ stock market. He started the Wall Street firm "Bernard L. Madoff Investment Securities LLC" in 1960 and was its chairman until December 11, 2008, when he was arrested and charged with securities fraud. Bernard L. Madoff Investment Securities was one of the top market maker businesses on Wall Street (the sixth-largest in 2008), often functioning as a "third-market" provider that bypassed "specialist" firms and directly executed orders over-the-counter from retail brokers. The firm also encompassed an investment management and advisory division that is now the focus of the fraud investigation.
On December 11, 2008, at 8.30 a.m. Federal Bureau of Investigation agents arrested Madoff on a tip-off from his sons, Andrew and Mark, and charged him with one count of securities fraud. On the day prior to his arrest, Madoff told his senior executives at the firm that the management and advisory segment of the business was "basically, a giant Ponzi scheme." Five days after his arrest, Madoff's assets and those of the firm were frozen and a receiver was appointed to handle the case. Madoff's alleged fraud may be valued at a loss of up to a US/$50 billion in cash and securities. Banks from outside the U.S. have announced that they have potentially lost billions in U.S. dollars as a result.
The FBI complaint states that Madoff told his sons he believed the losses from his scheme could exceed that $50 billion sum. To date, it is the largest investor fraud ever attributed to a single individual. Madoff was a prominent businessman and philanthropist. The freeze of his and his firm's assets significantly affected businesses around the world and a number of charities, some of which, including the Robert I. Lappin Charitable Foundation, the Picower Foundation, and the JEHT Foundation, have been forced to close as a consequence of the fraud. It is alleged that one of Madoff's biggest investors, Rene-Thierry Magon de la Villehuchet, of Access International Advisors, committed suicide following the disclosure of the scheme. At the time of this writing, it is unclear to what extent Access International's funds were involved in the scheme. Villehuchet is alleged to have lost as much as $1.4 billion in Madoff's scheme. Investors have questioned Madoff's statement that he alone is responsible for the large-scale operation, and investigators are looking to determine if there were others involved in the scheme.