Ponzi schemes have made headlines since Charles Ponzi first used the technique to defraud investors nearly 100 years ago. Today, they cost investors approximately $10 billion per year. Yet, they all share common characteristics that should warn investors and keep them from investing. How, then, have con artists, from Charles Ponzi to Allen Stanford and every one in between, been able to use the same techniques to dazzle and defraud wealthy, educated individuals and sophisticated institutions for nearly a century?
That’s the central question in renowned legal scholar Tamar Frankel’s new book, The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims.
"Con artists remind us of honest people,” Frankel writes. “They are similar to entrepreneurs, eternally and unshakably optimistic, and they act like (and are) gifted salespeople."
To make her case, Frankel “offers clear yet comprehensive descriptions of the various designs of Ponzi schemers' attractive offers and flags the ways in which they mask their deception through specialized methods of advertising and selling. She then constructs lucid profiles of the con artists and their victims, exposing the core nature of the people at the heart of the schemes and showing how over time the lines between predator and prey are blurred.”
If the similarities are as convincing as Frankel seems to suggest, the methods for protecting oneself against a Ponzi schemer should be similar to those used against an affinity fraudster: Know the tricks and techniques the con artists use to gain their victims’ trust and access to their funds.
In addition to the red flags that I’ve repeatedly warned investors about, Frankel’s book offers a few new warning signs to watch for, including 1) complicated strategies and/or complex stories to explain the expected level of returns, 2) feigned reluctance to take an investor’s money or let him/her in on the “opportunity,” and 3) excessive secrecy.