Re: Ponzi or Pyramid Schemes

From: tooly (rdh11_at_bellsouth.net)
Date: 02/24/05 

Date: Wed, 23 Feb 2005 20:16:22 -0500

"Immortalist" <Reanimater_2000@yahoo.com> wrote in message
news:H5KdnTI_Pco-J4HfRVn-sg@adelphia.com...
> Ponzi or Pyramid Scheme
> Charles Ponzi 1882-1949
>
> Charles Ponzi managed to accrue an estimated $15 million in 1920, with a
> mansion in Lexington to go with it, by persuading 40,000 Bostonians that
> he had discovered the secret of making easy money. Psychology, charm, and
> an indefatigable hunger to be rich were his business assets.
>
> Sometimes called the Pyramid Scheme, or "borrowing from Peter to pay
> Paul," the game has many variations. In this case, Ponzi sold coupons that
> could be redeemed at a 50 percent profit in 90 days-and they were! As long
> as Ponzi could sell coupons to new investors to pay the previous group,
> the profits continued.
>
> Stories about Ponzi and his financial wizardry were newspaper headlines
> during the summer of 1920. When the scheme was revealed, Bostonians
> stormed his office by the thousands to retrieve their money. Ponzi went to
> jail, tried another quick-money scheme in Florida, and went to jail again.
> He died penniless in a charity ward in Brazil. His bravado, style, and
> tireless efforts at amassing wealth led to the bestowal of his name on
> this form of fraud.
>
> http://www.innovationodyssey.com/ponzi.htm
> http://www.mark-knutson.com/
>
> A pyramid scheme is a fraudulent system of making money which requires an
> endless stream of recruits for success. Recruits (a) give money to
> recruiters and (b) enlist fresh recruits to give them money.
>
> A pyramid scheme is called a pyramid scheme because of the shape of a
> pyramid: a three dimensional triangle. If a pyramid were started by a
> human being at the top with just 10 people beneath him, and 100 beneath
> them, and 1000 beneath them, etc., the pyramid would involve everyone on
> earth in just ten layers of people with one con man on top. The human
> pyramid would be about 60 feet high and the bottom layer would have more
> than 4.5 billion people!
>
> A diagram might help see this:
>
> 1
> 10
> 100
> 1,000
> 10,000
> 100,000
> 1,000,000
> 10,000,000
> 100,000,000
> 1,000,000,000
> 10,000,000,000
>
> Thus, in very short order, 10 recruiting 10 and so on would reach 10
> billion, well in excess of the earth's population. If the entire
> population of earth were 5 billion and we all got involved in a pyramid
> scheme, the bottom layer would consist of about 90 percent of the planet,
> i.e., about 4.5 billion people. Thus, for 500 million people to be
> WINNERS, 4.5 billion must be LOSERS.
>
> In a straightforward pyramid scheme, a recruit is asked to give a sum of
> money, say $100, to a recruiter. The new recruit then enlists, say, 10
> more recruits, to give up $100 each. In the simplest example, the
> recruiter keeps all the money he gets from his recruits. In our example,
> each recruit gives up $100 in exchange for $900 ($100 from each of his 10
> recruits minus the $100 he gave his own recruiter). In order for no one to
> lose money, the recruiting must go on forever. On a planet with a limited
> number of people, even if the planet is as large as Earth and has almost 6
> billion potential recruits, one runs out of new recruits rather quickly.
>
> Thus, the result of all these schemes is inevitable: at best, a few people
> walk away with a lot of money, while most recruits lose whatever money
> they put into the scheme. In fact, the only way anybody can make money
> through a pyramid scheme or chain letter is if other people are defrauded
> into giving money upon a promise of getting something in return when it
> will be impossible for them to get anything at all in return. That is to
> say, in plain English, these schemes always constitute fraud. They use
> deception to get money. That is why they are illegal. They are not illegal
> because they involve recruiting people to recruit other people to recruit
> other people. That is perfectly legal and is done to some degree in many
> legitimate businesses. They are not illegal because they involve giving
> money to people. It is perfectly legal to give money to people. They are
> illegal because they involve deceiving people in order to get money from
> them: that is the legal meaning of fraud.
>
> In actual fact, however, no pyramid scheme will ever work this way because
> the scheme will never get the number of recruits we've been speculating
> about. All pyramid schemes will begin to die when the later recruits don't
> sign on in numbers large enough to pay off the earlier recruits.There will
> always be enough people who will smell the scheme out. There will always
> be too many people who will say "if it sounds too good to be true that's
> probably because it is." There may even be a good number of people who
> will realize that though one person recruiting ten doesn't sound like
> much, it quickly adds up to unrealistic and improbable numbers. Also, all
> it takes is one person to stop the whole thing, either by adamantly
> persuading recruiters of their indecency, or by reporting them to the
> police.
>
> greed and wishful thinking
>
> Pyramid schemes are popular because people are greedy and greed can do
> wonders to a person's thinking. For a person desiring to make a lot of
> money from a small investment in a short amount of time, wishful thinking
> often takes over where critical thinking should step in. Wishes become
> facts. Skeptics become idiots for not getting on board. Desires become
> reality. Asking questions seems rude and unfriendly. Scam artists know how
> greed works and all it takes is one con man to get the thing started.
>
> With the odds so stacked against a person, why would one gamble on a
> pyramid scheme? Greed is only part of the answer. Most pyramid people
> don't envision themselves anywhere near the bottom layer of the pyramid.
> Even the most greedy person on the planet would probably see that if one
> is near the bottom layer of recruits it will be very hard to get new
> recruits. They have to see themselves near the top in order to envision
> the immense wealth from minimal effort that is going to come their way.
>
> Furthermore, if I hope to get people involved in a pyramid scheme, the
> first thing I must do is convince them they are not getting involved in a
> pyramid scheme. They may know they are illegal. Or they may realize that
> pyramid schemes are a losing proposition for at least 90 percent of those
> who get involved. So, I tell them they are joining a club. I give the club
> a nice name such as The Friendly Investors Club (FIC). I reassure them
> that the FIC is approved by the IRS and run by a CPA with a Ph.D. who is
> not an ASS. If I'm really good, my recruits will believe me and the police
> officers, secretaries, teachers, ministers, etc. whom I recruit. These
> well-respected, intelligent, honest people will pass on this line to
> others. If I am really, really good, I will have convinced my recruits not
> only that they are getting into a legitimate and lucrative Club, but that
> any earnings are tax-free. I would indicate to recruits that as long as
> their take in the scheme is less than $10,000, it wouldn't be taxable
> because gifts aren't taxable until they exceed $10,000. I would convince
> the recruits that, for legal purposes, they would be giving money away and
> others would be giving money to them.
>
> even the police like pyramid schemes
>
> In 1995-96, at least 67 employees of the Sacramento Police Department,
> including 45 officers, were investigated for their alleged involvement in
> a pyramid scheme (Sacramento Bee 10/28/95, 11/1/95 and 11/15 & 16/96). The
> scheme was similar to five others that had been operating in southern
> California, also involving police officers and support staff. The main
> suspect in the Sacramento scheme was a police captain's wife. The chief of
> police said that he would try to fire at least seven officers and
> discipline 60 other police department employees. Nine officers were placed
> on administrative leave and relieved of their guns and badges. According
> to a prosecutor, the scheme involved more than 200 people. However, only
> three of the accused faced criminal misdemeanor charges. Reportedly, some
> in the scheme made tens of thousands of dollars. The minimum amount lost
> by those who were on the bottom of the pyramid was $500.
>
> The police pyramid schemes are called "investment clubs" and have
> attractive names such as "The Friendship Investment Club" and "A Gift
> Network." They're sold to investors with the assurance that they are
> perfectly legal, approved by the IRS or a CPA, and that they definitely
> are not a pyramid scheme.
>
> The Sacramento scheme was called The Freedom Club or something like that.
> And it was hyped by a police officer as being legal because it required
> people to sign a waiver claiming that they were making an unconditional
> gift to the Freedom Club. A local news reporter, Mike Boyd, asked an IRS
> agent if this waiver meant the Freedom Club wasn't a pyramid scheme. The
> IRS agent said that since the people who were signing the waiver expected
> to get back money for the money they were allegedly making a gift of, the
> money wasn't really a gift. An attorney, also interviewed by Boyd, agreed
> that just signing a paper saying you're making an unconditional gift
> didn't make it so if your intention was not to make an unconditional gift.
> (Receiving gifts, of course, is legal, and tax free.) The cops and their
> recruits for the Freedom Club put in at least $500 each and expected
> something like $4,000 in return for their phony gifts, according to Boyd.
> The Bee reported that sources told them that some Police Department
> personnel got more than $10,000 out of the scheme. The WINNERS in the
> scheme got their money from "gifts" to the Freedom Club from those who
> later joined the Club. Such schemes continue, if the participants are not
> caught, until there are not enough new recruits to pay off the old ones.
> That is, they would continue until there were a good number of people who
> had "given" away $500 and got nothing in return because the scheme folded.
> The scheme would have to fold eventually, because there can't be an
> endless stream of recruits.
>
> The Sacramento Police Pyramid scheme involved what we might call "pyramid
> pods". An organizer (Numero Uno) would start the pod by getting six others
> to join as organizers. Presumably, the six would be ranked depending on
> when they were recruited. The organizers pay nothing to join the pod but
> together they must recruit enough people into the pod to buy eight spots
> at the bottom of their pyramid. Each spot costs $500. Numero Uno pockets
> the $4,000. The pod splits into two pods of seven people (or spots) each,
> with a new Numero Uno in each pod (and a new number 2, 3, 4, 5, 6 and 7).
> Each pyramid pod recruits more people at $500 for each of eight spots in
> the pyramid. The two new Numero Unos take their $4,000 each and the two
> pods split into 4 pods and those 4 into 16, ad infinitum. To make even
> more money, some joined more than one pod.
>
> How many in this scheme told the new recruits that 6.7% of those who join
> will get a 700% return on their investment ($3,500 on a $500 investment)
> as long as 93.3% get nothing? How many advised their recruits to "get in
> early"?
>
> To have police involved adds a special dimension to this pyramid scheme
> because (a) officers have ranks and can use their rank for recruiting
> leverage over those beneath them; (b) officers and ex-officers have
> positions of authority and trust which will influence potential recruits,
> especially young people; and (c) police personnel are supposed to enforce
> the law; when the law enforcers become lawbreakers and encourage others to
> break the law for monetary gain, respect for law and law officers
> diminishes.
>
> chain letters
>
> In the money chain letter, the recruiter sends the new recruits a letter
> with a list of names on it, including the recruiter's name at the bottom
> of the list. The recruits are asked to send money to the person whose name
> is at the top of the list and to add his or her name to the bottom. Money
> is made solely by getting new recruits to join the chain, adding their
> names to the list and recruiting others to do the same. In theory,
> eventually each recruit's name will be at the top of millions of lists and
> receive millions of dollars. In practice, most people will receive
> nothing. Anyone can break the chain, thus depriving all those on the list
> of any possible "earnings." But, even if no one broke the chain, 95% of
> those who sent money out will get nothing in return.
>
> If pyramid schemes are a bad investment, how about chain letters? The
> principle is basically the same, except that with chain letters, you don't
> have to deceive yourself as much as with pyramid schemes. You probably
> know up front that the scheme depends on duping friends into giving money
> to strangers in exchange for the promise of riches coming to you later on
> from other strangers. You get a letter with a list of names on it. You are
> told to send money to the name at the top, delete that name and add your
> name to the bottom, and recruit 5 or 10 people to do the same by sending
> them the letter with your name at the bottom.
>
> Ponzi schemes
>
> A Ponzi scheme, named after Charles Ponzi who defrauded people in the
> 1920s using the method, involves getting people to invest in something for
> a guaranteed rate of return and using the money of later investors to pay
> off the earlier ones. Who will make money from such a scheme? Those who
> start it and those who get in early. Does anyone really make money from
> these schemes. They must, or they would have died off long ago. How? If I
> start the scheme, I just skim off the top and pay off enough people to
> make it look like it's working, even if that means buying in again at the
> bottom. I might even be stupid enough to think that I can keep the scheme
> going when the recruiting has dried up. I can try to get money quickly by
> some other scheme. For example, I can take a big chunk of money and go to
> Las Vegas and hope to hit it big. This happened to a fellow I played
> Little League Baseball with long before we both grew up. He took his
> investors' money to the craps table where he "invested" their funds.
> Unfortunately, his "investments" didn't pay off and he went to prison.
>
> I don't know how many people lost money "investing" in my Little League
> buddy's scheme, but it could not have been as bad as what happened in
> Romania in 1993 or what happened in Albania in 1997.* In both cases,
> thousands of people with little opportunity for investment of capital were
> swindled by pyramid scheme operators. Romania's newspapers claimed that
> millions of Romanians lost their life savings in a scheme called Caritas.
> Reports from Albania claim that hundreds of thousands of Albanians "have
> invested their life savings or money they earned working abroad" in one of
> several outlawed pyramid schemes. "The schemes offered very high interest
> rates, with the first investors paid from later investors' deposits. They
> eventually failed when no new investors came in"("Investment-scam protest
> turns violent in Albania," by Merita Dhimgjoka, Sacramento Bee, Feb. 6,
> 1977). Any such scheme is doomed to fail because there cannot be an
> endless

I think 'Hope' must be a rare commodity. Do people really want 'something'
for 'nothing'? Or do they just want to escape suffering?

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