Ponzi Schemes: A Deep Dive Into America's Most Notorious Scams
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For many people, the term "Ponzi Scheme" is synonymous with Bernie Madoff. But the nefarious practice of fraudulent investing has actually been around for nearly a century. Ponzi schemes have affected everyone from Hollywood stars to billionaires, to the elderly living on fixed incomes. Unlike most scams, which carry certain hallmarks—sleazy sales tactics, spotty resumes of the people perpetrating it, a general feeling that something isn't quite right—they are typically run by some very brilliant businessmen who are well aware of the lack of sustainability of their schemes. This article will explore some of the most shocking Ponzi schemes throughout history, showcasing their stories and the lessons we can learn from them.
Understanding Ponzi schemes requires an examination of how they operate. At their core, these schemes promise high returns on investments with little risk, enticing investors to part with their hard-earned money. The money from new investors is used to pay returns to earlier investors, creating the illusion of a profitable business. As long as new investors keep joining, the scheme can continue to operate, but once the flow of new money stops, it collapses, leaving many individuals devastated.
In this exploration, we will delve into the lives of notorious Ponzi schemers, such as Charles Ponzi himself, Lou Pearlman, and Bernie Madoff. Each of these individuals not only fooled countless investors but also showcased the darker side of human greed and deception. By understanding their tactics and the eventual consequences, we can better protect ourselves from similar schemes in the future.
Charles Ponzi is the man for whom the scam is named, obviously. In the 1920s, Ponzi boldly not just told, but PROMISED his investors that they’d see a 50% return on their money in 45 short days. If they could hang on for 90 days, they’d double their original investment. And what was this revolutionary investment in? International postal coupons that Ponzi never even bothered to acquire. Ponzi became a millionaire in six months, earning $15 million. When he was caught a year later, his poor investors only got $5 million back. Ponzi was charged with 86 counts of mail fraud and sentenced to five years in federal prison.
While he was in prison, he was prosecuted a second time in Massachusetts. Ponzi argued that this was double jeopardy, which sent his case all the way to the Supreme Court. SCOTUS sentenced him to seven to nine years in state prison. Not surprisingly, once Ponzi was out of jail, he masterminded another scam in which he sold real estate that was LITERALLY underwater. He was sent to prison again. He died penniless in Brazil where he worked as a translator.
Lou Pearlman
Lou Pearlman was one of the biggest and most successful music producers of the 1990s. He was known for putting together and working with The Backstreet Boys, 'NSYNC, and LFO. But giving the world the most popular boy bands of the 1990s wasn't all Pearlman was up to. He also designed and ran one of the longest-running Ponzi schemes in the history of the United States. For more than 20 years, Pearlman convinced his investors to sink their money into two companies that only existed on paper. He created fake financial statements in order to obtain bank loans.
All in all, Pearlman, who surely made many millions as a music producer, also stole more than $300 million from his investors. Pearlman was convicted of money laundering, conspiracy, and making false statements during a bankruptcy proceeding in 2008 and sentenced to 25 years in prison.
Michael Eugene Kelly
Michael Eugene Kelly earned his spot on this list by defrauding almost 8,000 mostly retired or elderly people out of $500 million. Most Ponzi schemes leave very little or nothing left to return to their victims, but in Kelly's case, he had millions of dollars of real estate and other assets. His scam involved creating universal leases that paid high commissions for selling what were essentially time-share investments.
Those who invested could stay in the hotel rooms for up to one week each year or transfer that week to another company which was also owned by Kelly and which offered an annual return of 11%. Every investor in this scam chose the second option. Kelly was in federal custody for six years from 2006 to 2012 and was released under house arrest on a $10 million bond only so he could undergo treatment for colon cancer. Kelly died in 2013.
Gerald Payne
Gerald Payne was the Pastor of Greater Ministries International. He was a man of God, but rather than worshipping our Heavenly Father, Payne worshipped at the altar of the almighty dollar. The pastor used scripture to tell his followers that if they invested their money with him and his church, they could double their investment. He managed to get 18,000 people to invest $20 million.
He got away with this scam for years by cashing checks written for under the IRS's reporting limit of $10,000. Eventually, though, the tax man caught on. Payne tried to claim that the cash was not an investment but rather a gift protected under their First Amendment rights as a church. Payne was sentenced to 27 years in prison, and his wife was sentenced to 13 years.
Scott Rothstein
Scott Rothstein holds the distinction of orchestrating the biggest Ponzi scheme the state of Florida has ever seen and is currently serving a 50-year prison sentence for bilking investors out of $1.4 billion. The former lawyer was known for his incredibly flashy lifestyle. He owned Bugattis and other expensive cars, over 200 luxury watches, and had golden toilets installed in his home.
Rothstein guaranteed his investors a return of at least 20% in three months on the purchase of fabricated structured settlements. In early 2010, Rothstein pled guilty to five federal crimes. He was disbarred. During the investigation into his activities, his wife Kim attempted to hide jewelry and other assets and was sentenced to 1.5 years in prison as a result.
Gary Gauthier
What is it with these men of "God"? Gary Gauthier hosted a Tampa, Florida radio show called "It's God's Money". Something tells me, though, that God wouldn't look too kindly on the fact that he stole $6 million from 38 senior citizens living in Pinellas, Pasco, and Hillsborough counties. He lured his marks in by telling his listeners to call him, which is when he would set up a meeting with them, promising them an 8% to 40% return on real estate investments.
He ran his Ponzi scheme from 2005 to 2010. In order to lure more investors in, he had current investors call into his radio show to talk about how they got rich quick. Gauthier was charged with a number of crimes including racketeering and security fraud.
Adriaan Nieuwoudt
Back in 1984, Adriaan Nieuwoudt, a South African entrepreneur, decided to market a beauty product based on an ingredient found in his grandmother's milk-based cosmetics called "kubus". He sold activator kits to his investors, which consisted of a dried plant that would allow them to grow the milk cultures themselves in the kind of work-at-home scam that has gained in popularity in the years since. The investors would then sell the grown cultures back to the company to be used as an ingredient for the beauty product.
Oh, by the way, that beauty product did not exist. No matter how many activator kits he sold, Nieuwoudt would never receive more than one back in any given week. Eventually, the South African government shut him down by declaring it an illegal lottery.
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