ACCURACY ASSISTANCE TO MEDIA PROJECT
INVESTIGATIVE REPORTERS,& OTHER PRESS MEDIA - PYRAMID AND PONZI DEFINITIONS
The labels Ponzi scheme and Pyramid scheme are often mistakenly used interchangeably to describe specific forms of investment fraud where duration depends on the influx of new "investors" to the scheme. From a technical (and sometimes legal) perspective, there are big differences in the illegal operations of the two different schemes.
Ponzi schemes often grow larger (in investment amounts) than pyramid schemes as they can take in unlimited amounts from an individual and can continue to operate indefinitely, as long as payments demanded by investors from the scheme do not exceed payments by investors into the scheme. This often is fraud of the affluent who are looking for large gains on their investments.
Pyramid schemes are a form of fraud where the expected benefit to members depends primarily on the number of individuals they recruit, which is not necessarily the case in a Ponzi scheme. This is more commonly blue collar fraud because the investment amounts are generally smaller because the investors in the fraud can't afford the large amounts required to be put into Ponzi schemes.
However there are similarities between the life-cycles of Ponzi and Pyramid schemes. Both types of schemes go through the following stages:
1. Initiation - coming into contact (often by word of mouth - rich or poor) with the fraudulent scheme.
2. Validation - when large and easy rewards earned by initial members generate strong word of mouth publicity.
3. Expansion:
a. Ponzi - massive investments are received into the scheme from more investors. Inflows in a Ponzi scheme must also grow exponentially, if investors do not reinvest all earnings (a common sign of a Ponzi is persauding victums to re-invest).
b. Pyramid - when a large number of people join Pyramid schemes grow exponentially by recruitment of new participants until they exhaust the pool of potential members.
4. Collapse stage is when defaults occur, the inflows of new funds (Ponzi) or members (Pyramid) stops. Often the promoters try to abscond with money. Both Ponzi and Pyramid schemes are doomed to collapse and default paying the last members to join. Ponzi schemes have been in the international news with the global economic dive unmasking their fraud.
Rod Cook - Editor 6-2009
Also: FULL CHARLES (CARLOS) PONZI 1919 - 1929 STORY BELOW
Smithsonian Library Finds Ponzi Postal Reply Coupons!
The Williams Scheme 1889
DEFINITIONS TO IDENTIFY A PONZI OR PYRAMID
One of the big problems in educating people about these scams is the normal media reporter doesn't really know the difference between a Pyramid or Ponzi scheme. Some journalists use the terms incorrectly because they don't have time for research and the Internet is full of bad information. However, If you are a member of the press or media, feel free to use the reporter form below to contact us! We are glad to help!
PONZI ONE PERSON OPERATION INVESTMENT CENTERED
Full - Charles (Carlos) Ponzi Story Below!
A Ponzi scam is an investment scam run by one person where funds from new investors, rather than legitimate investment activities (stock sales as an example), are used to pay out returns to earlier investors. The original Ponzi scheme was run by Carlos Ponzi by himself (one person). These are usually sold by word of mouth augmented by some sort of advertising. Recent examples are forex, trading by others, high yield investment programs, stock frauds, and foreign trading desks. This Writer Reasearcher has it right! Here Tim Stanley Top Writer Researcher For Tulsa Daily News – GETS IT 100% RIGHT!
PYRAMID MULTI-PERSON OPERATION WITH SALESMEN
1. A pure money pyramid scam is a scam using just money. The money obtained from signing up new salespersons on "levels below" them is used to pay out returns to earlier sales people. The force of sales persons are working their way up a pyramid structure. When they get to the top they “cash out” with big returns. There is no product or service. This is a sheer pyramid. There may be a social club atmosphere of “fun games” or helping others to succeed that overlays the scam. Gifting clubs are recent innovations. Some of the recent ones have been Women Helping Women, The Dinner Party or the Nascar Club. Many claim since it is gifting, it is legal! Fat chance!
2. A second type of pyramid scam is a sales scam using overpriced goods/services where money from recruiting (signing up) is what pays the commissions. The product or service is used primarily as a disguise for bringing in money. As one head of FTC Consumer Affairs aptly put it, “The product is just a fig leaf.” Recent examples are Internet malls, name lists, and travel certificates. The quick test is... would anyone buy this product or service if they did not stand to make money? Today the FTC measurement is: Does half of the money to pay commissions come from end consumers that don't belong to the pay plan?
A GOOD MLM DOESN'T FIT ANY OF THESE DEFINITIONS
A good MLM provides goods or services that a consumer would buy if an income opportunity were not included! The question to ask yourself is: would I buy this product or service if no income opportunity were involved? If the answer is no..... RUN! Ur Editor Rod Cook
CHARLES (CARLOS) PONZI; WORLDS MOST RESEARCHED STORY 1919 - 1920
Also below: The Predecessor Williams Scam 1889
Charles (Carlos) Ponzi is the man we can thank for the term. In Boston, September 1919, Ponzi was a 37 year-old Canadian felon and smuggler who decided he would pose as a wealthy banker. Reported as dapper and quick-witted, he charmed people with a golden tongue (a clue to you with today's scamsters). He had a new scheme since his Canadian crashes that landed him in jail. In Charles Ponzi's new scheme, he would borrow money without collateral, promising to pay $15 for every $10 left with him for 90 days. Thus, Ponzi was a borrower who created a market in which sold his own personal debt, then suckered the same Investors into issuance of his new debt to pay off earlier promised interest and debt. One of the powers Carlos Ponzi had was that he used his golden tongue to get victims TO KEEP REINVESTING THEIR MONEY! By doing that, he didn't have to pay off what would have been a current liability. This is the most famous high yield investment scheme-scam in history based on the amount of money adjusted to today's current value of the dollar.
Ponzi, with his golden tongue, told his lenders (mostly Italian immigrants) he was buying International Postal Union reply coupons in poor foreign countries and then cashing them in at a high rate of return in rich countries, generating a huge cash flow. He told his investors he could take advantage of currency differences to make huge amounts of money. This is much like forex trading scams today. As writer Robert Sobel (2) writes in his book, "The Great Bull Market: Wall Street in the 1920s," "In this way, (Ponzi) could take advantage of differences in currency quotations to make profits." Ponzi's golden tongue suckered in thousands of people. If investors had checked, they would have found out that that Ponzi should have bought 10x more Postal Reply Coupons than were sold!
Throwing in a dash of credibility, Ponzi bought a controlling interest in the Hanover Trust Company, and voted himself president. Writer Robert Sobel (2) wrote that wherever Ponzi went, crowds followed. "You're the greatest Italian of them all!" Ponzi protested, "No, no. Columbus and Marconi. Columbus discovered America. Marconi discovered the wireless." "Yes," came the response, "but you discovered money."
The District Attorney started an investigation because Ponzi was shaking the upper echelons of "old money" in Boston. A reporter named Dunn of the Boston Post also began digging into the scam. Ponzi publicly said he took in millions and invested them in the coupons. Dunn found out that only an average of $75,000 worth of reply coupons were printed most years. In 1919 there were $58,560 worth issued, so that left millions of dollars missing. Dunn discovered in his searches that Ponzi was actually a crook named Charles Bianchi and had been involved in a remittance racket in Montreal back in 1907. Ponzi denied all of the findings. When the story hit the streets, Ponzi countered by more than doubling the interest and cutting the payoff to 45 days. On July 26 1920, things were shut down pending the district attorney's investigation. Ponzi screamed his innocence. When lenders lined up the street around his office, he paid them their initial principal. He managed to pay the long lines of people off. Then he and his golden tongue went to work, and he claimed he had $12 million in funds. For many suckers, confidence returned and some started to put money back in.
On August 2, 1920 the Boston Post claimed that Ponzi was broke. Suckers still lined up to deposit money. On August 11, 1920 all of his offices were closed forever. Sobel wrote in his book: "In the days that followed, it was learned that the dapper financier had purchased a few reply coupons, but used most of the money he received to pay those who presented 90-day notes. In effect, he was taking in money with one hand and paying out more with the other. Such a scheme could not last for long, unless increasing amounts continued to arrive. Ponzi was bound to collapse when the money ran out."
On August 16, 1920, Boston learned Ponzi had liabilities of $2,121,895 and no assets. On October 15, 1920 at a bankruptcy hearing the presiding judge, James Olmstead, commented: "While Mr. Ponzi is not to be classed in the same category with robbers and burglars, he was undoubtedly a clever manipulator who took advantage of the credulity of the investing public, which in this instance is the usurer. The investors who loaned their money for a return of the principal and 50% interest would seem themselves guilty of usury if such existed." The final numbers were: Ponzi took in about $15 million in 8 months, his books showed he was $5 million short and less than $200,000 was recovered from his holdings.
Ponzi was sentenced to prison. While out on bail, pending appeal of the sentence, Ponzi came up with another scam. His golden tongue went to work selling underwater lots in Florida to people who never saw them before buying. Ponzi made another small fortune. When his appeal was denied, Ponzi went to prison until 1934.
When Ponzi was released from prison he was deported to Italy. Using some of his hidden Florida money (reportedly), he bought his way into the Mussolini Fascist party and got a government position. His political connections got him a job with LATI Airlines. They sent him to Rio de Janeiro where he was a hit with the social elite. He died poverty stricken of natural causes in 1949.
Smithsonian Institution Libraries Information Summer/Fall 2005
Carlos Ponzi Postal Reply Stamps
Editors Note: Some historical writers have said that International Postal Reply Coupons never existed and that Carlos Ponzi invented the idea for his scam. Current historical research certainly indicates otherwise.
Marvin Murray, a volunteer, discovered unusual philatelic items in the National Postal Museum (NPM) library. While building a database search aid, Murray found two stamp designs that led him to the origins of the Ponzi pyramid scheme, made infamous by its developer, Carlos Ponzi.
At the beginning of the twentieth century, postal administrations all over the world were presented with a problem. Citizens had to send small amounts of money to businesses and individuals in other countries to pay for return postage. The Rome Postal Congress created an International Reply Coupon in 1906, but this did not solve the problem. The German Post suggested using a response stamp and sent a model to the United States, asking for its support at the next meeting. The United States was going to endorse it, but World War I intervened and the meeting was canceled.
A competitor of the German proposal was a stamp designed by A. L. Bancroft of Los Angeles, California. His stamp had a coupon attached that could be cut off and taken to the post office to trade for postage. The post office did not endorse this design. Both of these early concepts, rediscovered by Murray, are preserved at the NPM Library. Despite the failure of the two designs to gain acceptance, other coupon designs were in use.
Unfortunately, fluctuating currency exchange rates caused problems with international reply coupons. In 1919, Carlos Ponzi received an international reply coupon in a letter from a correspondent in Spain. The fluctuating currency exchange allowed him to buy coupons in Spain for one cent and trade them in the United States for six one-cent stamps. He sent a message to the public, promising 50 percent interest in 90 days. At one point Ponzi was taking in $1,000,000 a week. The authorities caught on and sent him to jail. After prison, he launched another pyramid scheme involving land in Florida, which got him thrown in jail again and eventually deported to Italy, where he served fittingly under the notorious Mussolini regime.
Murray is now working with Dr. Alan Hauck, a recognized author and authority on international reply coupons, to see if the items he found are known among the philatelic community. Although he is retired from a richly textured career path, including a term as Rector of George Mason University, volunteer Marvin Murray is busier than ever when he isn’t volunteering at the NPM Library.
Other Pyramid Ponzi Research
THE "MILLER SCHEME" 1889
Before Carlos Ponzi, in 1899 William "520 Percent" Miller opened as the "Franklin Syndicate" in Brooklyn, New York. Miller promised 10% a week interest and used some of the main themes of Ponzi schemes such as customers reinvesting the interest they made. He took lenders for $1 million and the scheme collapsed. Miller was arrested and at trial sentenced to jail for 10 years. After he was pardoned, he opened a grocery store on Long Island. During the Ponzi investigation in 1920 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 15 times as much money. (1) There is no record that Carlos Ponzi ever saw or knew about William Miller.
South Sea Bubble
Some writers claim the South Sea Company Bubble is the historical 1711-1719 precedent. This researcher does not find that true. Despite similarities, the South Sea Company Bubble was based on the run up of the South Sea Company stock prices and people buying it at high prices. This lead to the establishment of the first stock laws (4)
Reference Resources
(1) Zuckoff, Mitchell. Ponzi's Scheme: The True Story of a Financial Legend. Random House: New York, 2005. (ISBN 1-4000-6039-7)
(2) Source "The Great Bull Market: Wall Street in the 1920s," Robert Sobel
(3) "Manias, Panics, and Crashes," Charles Kindleberger
(4)Cowles, Virginia (1960). The Great Swindle: The Story of the South Sea Bubble. New York: Harper.
(5)Smithsonian Institution Libraries Summer/Fall 2005
TAGS: Media, Pyramid schemes, Carlos Ponzi, Ponzi Scheme, Boston, International Reply Coupon, Postal, Smithsonian Libraries,
