The Ponzi Scheme Puzzle - A History and Analysis of Con Artists and Victims (PDFDrive)
The Ponzi Scheme Puzzle - A History and Analysis of Con Artists and Victims (PDFDrive)
Tamar Frankel
1
Oxford University Press
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1 3 5 7 9 8 6 4 2
Printed in the United States of America
on acid-free paper
To my husband, Ray, and my children, Anat Bird
and Michael Frankel
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CONTENTS
Preface xv
Acknowledgments xvii
Introduction 3
vii
CONTENTS
viii
CONTENTS
ix
CONTENTS
3. Legitimate Lying 89
4. Exploiting the Weakness of the Social System 91
5. The Slippery Slope: From Honesty to Fraud 92
6. Ponzi Scheme “Businesses” Mirror
Respectability 97
a. Legitimate Businesses: Banking
and Financial Institutions 97
b. Stock Market Trading: Following the Trends 98
c. Salespersons and Traders 99
d. Entrepreneurs 101
e. Con Artists Are Believable: They Believe
in Their Activities and View Them
as Businesses 103
f. Longevity of the Businesses Breeds
Respectability 106
x
CONTENTS
xi
CONTENTS
xii
CONTENTS
Epilogue 188
Notes 193
Index 227
xiii
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PREFACE
xv
P R E FA C E
seems to be, patterns began to emerge. The tales that con artists tell
investors are enticing in a consistent way. The narratives hide the
truth in a consistent manner. Con artists share features of their char-
acter and conduct. And so do many of their victims!
Yet the main puzzles remained. How do con artists dazzle and
lure wealthy and educated individuals, and representatives of large
institutions, to hand over huge sums of money? How do the con art-
ists divert the investors’ attention from the “soft” (false) spots of their
stories? What kind of businesses do con artists describe to their vic-
tims? Why do they choose those business stories to gain the trust of
the marks? And why is it so hard to eradicate Ponzi schemes? What
kind of people are these con artists and their victims?
There are already many books and articles about Ponzi schemes.
There are so many warnings and constant advice on how to detect
and avoid con artists. We are told time and again: “Here is informa-
tion! Use it! Educate yourself! Protect yourself from fraud!” Yet,
these messages seem to do little good. Warnings go unheeded. People
are endlessly caught in the net of con artists. Why can’t we learn from
the mistakes of others? Why don’t we heed past disasters?
We can learn much by analyzing the behavior of the victims.
Warnings against fraud and lists of red flags seem to offer little protec-
tion against treacherous charmers. This book suggests a somewhat
different approach to investor self-protection. It is by exploring the
con artists’ fascinating power of persuasion and deception, and by
recognizing the subtle signals that mimic truth and honesty, that
knowledge can help us recognize our own vulnerability to alluring
promises that cannot be fulfilled. This awareness can protect us.
Tamar Frankel
Massachusetts, 2012
xvi
ACKNOWLEDGMENTS
xvii
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THE PONZI SCHEME PUZZLE
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Introduction
I can calculate the motions of heavenly bodies, but not the madness
of people.
—Nicholas Dunbar, Inventing Money: The Story of Long-Term Capital
Management and the Legends Behind It 1 (2000, quoted in Robert Prentice,
Whither Securities Regulation? Some Behavioral Observations Regarding
Proposals for its Future, 51 Duke L.J., 1397–1398, 2002, “quoting Sir Isaac
Newton, speaking after he lost £20,000 in the stock market”)
What are Ponzi schemes? How do they work? Whom do they affect?
And why do they raise interest, awe, anger, and anguish? They are
3
THE PONZI SCHEME PUZZLE
4
INTRODUCTION
5
THE PONZI SCHEME PUZZLE
might lose less “only because they had less wealth to lose,” even so
“when it comes to gullibility, New Mexicans proved to be no different
from the swells in New York and Florida.”14
Yet con artists treat the rich and the less affluent alike. Middle-
and low-income people are caught in the net as well. As we shall see,
their motivation may be mixed with religious affinity, or pride in the
rising star of one of them, or total and unquestioning belief. But they
too follow the con artist. In addition, there are pyramid schemes.
These are somewhat similar to Ponzi schemes, except that they target
the less affluent. The victims are invited to recruit salespersons to sell
products that are not in fact sellable. The “buyers” of the privilege to
sell pay those who recruited them. Each recruit pays for sales mate-
rials and the permission to sell the product. The recruit then seeks to
sell this right to another recruit, and be paid by the latter. In reality,
what is being sold is the right to sell a product that is rarely or never
sold. New recruits pay to the parties that recruited them. Each of the
recruiters keeps part of the money received from the new recruits and
pays the rest of the money to the persons who recruited them. Thus,
the top of the pyramid collects from all sellers below; the amount of
the collection falls with the position of the person in the pyramid.
Those at the lower level pay people at the higher level a percentage of
the amounts their new recruits pay and receive payment from those
below. At some point, the number of potential buyers of the privilege
to sell is exhausted, and the scheme comes to an end.
Are Ponzi schemes unique to the United States? Not at all. These
schemes have attracted investors all over the world, in different cul-
tures and countries. They have been highly successful in Russia15 and
India16 and resulted in investors’ riots in Albania.17 In Romania, about
a hundred such schemes have operated; the largest was Caritas. Esti-
mates of the number of Caritas investors vary from two to eight mil-
lion, and the amount of money involved was in the billions—some
say up to a third of the country’s liquid reserves.18 Portugal had its
6
INTRODUCTION
7
THE PONZI SCHEME PUZZLE
8
INTRODUCTION
Ponzi schemes and investment frauds seem to have reached the pro-
portion of an epidemic. These schemes have their share around the
world; during 2001, global investment frauds amounted to about $35
billion;34 for example, “The annual loss from all varieties of fraud
in Canada is estimated to exceed 1.5 per cent of the country’s $800-
billion gross domestic product—or more than $12 billion a year stolen
from individuals, corporations and governments.”35
As Debra A. Valentine, general counsel for the U.S. Federal Trade
Commission, stated, “Ponzi [pyramid] schemes not only injure con-
sumers. In many cases, they affect the daily operations of banks and
taint the banking industry’s overall reputation for safety and sound-
ness.”36 Charles Ponzi used a bank for his operations, opening many
accounts in fictitious names and using his influence to cover over-
drafts. The bank went under as Ponzi’s scheme unraveled.37
Ponzi schemes raise many questions. What is it that makes these
schemes so appealing? How do con artists entice educated, wealthy
individuals and representatives of large financial institutions to hand
them huge sums of money?38 How do they tempt middle income and
low income investors to follow them unquestioningly? What is it that
makes this type of fraudulent scheme “international and global” like
a virus that catches all humans? What is it that makes these schemes
so difficult to uncover and almost impossible to eliminate?
Among the plots of confidence men, or “con artists” as they are
called, there is much that is especially instructive about human weak-
ness and antisocial behavior. Ponzi schemes are just as appealing to
con artists as they are to their investing victims. For the investors, the
schemes offer many enticing features, not the least of which is an in-
credibly high return. For con artists, the schemes provide a means of
repeat “plays” with the same “marks,” that is, the victims who roll over
or increase their investment.39 Some fraudulent games can be played
only once or a few times, as in games with loaded dice and marked
cards; these frauds are discovered fairly quickly. In contrast, a Ponzi
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THE PONZI SCHEME PUZZLE
scheme can last two to three years, and in the good times of a market
bubble even longer.40 A tax consultant who “managed” his client’s as-
sets kept his scheme alive from 1978 to 1989.41 In rare cases, a scheme
may last more than ten years;42 Madoff ’s case was unique and seems
to have gone on for over twenty years. Perhaps he did start his busi-
ness legitimately, and only later began to defraud investors. Or per-
haps by drawing investors from around the world he could continue
the scheme longer.
Yet the main feature of every Ponzi scheme is its inevitable end. As
the number of investors grows, the number of new investors must
grow exponentially. This is because as their money is used to pay the
previous investors, the new investors must now be paid as well.
Because one of the attractive features of a Ponzi scheme is the prom-
ise of a higher return than current market yields, payments to these
new investors must be covered from yet other new investors. There-
fore, a Ponzi scheme is the inverse of compounding in finance. New
investors’ money must cover not only the high obligations to the new
investors but also the high returns to the previous investors (who
covered the obligations of the investors before them).
Inevitably, when the fountain of new investors dries up, the
scheme ends in a “bust.”43 Ponzi schemes usually last longer than the
con artist’s payment obligations suggest, because many investors are
repeat players. They not only roll over their investment but also add
to it, as payment of very high interest rates persists. In the case of the
Baptist Foundation of Arizona, 94 percent of the investments, which
were in the form of short-term loans, were reinvested when the loans
came due, until the scheme came to an end.44
In the end, both parties lose. But each party loses in a different
way. Though most investors end up losing all or much of the money
they invested, there are notable exceptions among them. Ponzi
schemers share the fruits of their embezzlement with the early group
of investors. However, even the early investors may lose their profits;
10
INTRODUCTION
they are not immune from the claims of the losing investors, as we
shall learn in Chapter 6. The “winning” investors may have to repay
their gains (if not all their recouped investments) to a bankruptcy
trustee and share these payments with other, less fortunate, investors.
Only those who managed to retrieve their capital and earnings in
time—usually many years before the scheme is uncovered—may
perhaps retain their investment and in some cases their gains as well.
As for the con artists, if caught they may lose the money they embez-
zled, unless they have spent it all or managed to stash away some of it.
They end up in court, and sometimes in prison.
This book analyzes the reasons for the local and global success
and the longevity of such schemes and seeks to understand the nature
of the con artists and their victims. Therefore, the book does not tell
the story of any particular con artist. Nor does it offer statistical data
even though it does occasionally cite published numbers. Instead, the
book takes a middle road. It combines many stories, derived mostly
from court cases, and some from studies, newspapers, and articles, to
show the patterns of such frauds, the nature of the con artists, and the
character of their victims. To be sure, these patterns are not without
exceptions. And yet, because they are based on a sufficiently large
number of cases, the patterns tell us much about human nature, about
our society, and also about ourselves.
Finally, a word about the theoretical structure of this book, or
lack of it. The Ponzi Scheme Puzzle does not belong to any particular
discipline. In fact, it is the product of a mix of disciplines. The facts are
drawn mostly from legal cases, but not from the legal rules that are
the focus of these cases. Yet, there are few exceptions, especially in
Chapter 6, which discusses the legal proceedings after the schemes
are uncovered and the victims make their claims from third parties,
and from other victims who fared better. The descriptions and
analysis of sales by con artists and the receptivity of affinity groups
draw to some extent on sociology. Psychology helps understand the
11
THE PONZI SCHEME PUZZLE
character of con artists and the nature of their victims. The context
combines finance and business; pyramid schemes are built on sales
and advertising. Although the book does not aim at arguing about
the theory of interdisciplinary work, it might demonstrate the use of
drawing on many disciplines—and probably also the weakness of
doing so.
Chapter 1 analyzes the design and pattern of the con artists’
attractive offers and how they hide their deception. The deceptions
are covered not only in the words con artists use but also in their
actions, forms of payments, and misleading attitudes; a striking
example of deception is the con artists’ professed reluctance to accept
the investors’ money. But that is not enough; schemes must be sold.
This issue leads us to Chapter 2, which deals with how Ponzi schemes
are advertised and sold. It shows how con artists draw attention to
themselves, and how they recruit their sales force and target the vul-
nerable victims. But that too is not enough; schemes must be believ-
able. So Chapter 3 focuses on the core of con artists’ success. It
demonstrates how close their actions are to those of many humans—
and even animals. We all “make believe.” Not only adults but even
children learn such behavior instinctively at a very early age. Even
chimpanzees and gorillas can conspire to defraud one of their spe-
cies. In addition, con artists remind us of honest people. They are
similar to entrepreneurs, eternally and unshakably optimistic, and
they act like (and are) gifted salespersons. Con artists make it hard to
distinguish their schemes from lawful activities. If so, are we all con
artists, or victims? The suggested answer is that the players in these
games have unique and sometimes treacherous character flaws.
Chapter 4 discusses the character of con artists and their victims:
the kind of people who are driven to act as con artists—mimics of
trustworthiness—and why they can be mistaken for trustworthy in-
dividuals.45 We deal with the tendency of both con artists and their
victims to become addicted to the game, and we highlight the dark
12
INTRODUCTION
13
THE PONZI SCHEME PUZZLE
14
Chapter 1
15
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16
C O N A R T I S T S AT W O R K
later: “It never occurred to me to pocket all the ready cash and duck
out. If I had, I wouldn’t have been called the darn fool as many times
as I have been.”6 He could choose to disappear with the money or stay
and continue the game. He chose to stay because, he wrote without
elaborating, “what kind of life I would lead [if I disappeared].”7
The meaning of this statement becomes clear in the later part of
his autobiography. Ponzi had “an unlimited confidence in luck [and
his] ability to exploit it,” clinging to the belief that there was a chance
of success: “I went headlong, like a bull in a china shop, to smash all
precedents and principles of high finance as it was preached, but not
practiced on Wall Street.”8 He hoped to invest the money in a legiti-
mate profitable business, such as banking, while gradually lowering
the promised returns.9 In the meantime, unbeknownst to investors,
he used the money raised from later investors to pay the promised
return to earlier investors, cover marketing costs, and finance a lavish
lifestyle.
When rumors that Ponzi was bankrupt began to circulate, inves-
tors clamored for their money. He paid them back quickly, to reduce
his obligations of the enormously high returns, which were depleting
his resources. But he remained $4 million short and was arrested,
convicted, and sent to prison; on his release, he was deported to his
homeland, Italy.10
A Ponzi scheme uncovered in 2000 was identical. The defendants
“allegedly sold promissory notes with no source of income other than
the investors’ funds. The indictment alleged that, after collecting
funds from investors, the defendants would facilitate the deposit of
these funds into bank accounts controlled by co-conspirators. The
deposited funds would then be used to further the operation of the
Ponzi scheme and the personal enjoyment of the defendants.”11
It should be noted that the investors and followers of Charles
Ponzi had similar approaches to these investments and shared a sim-
ilar dream. He may have instinctively offered them what they sought:
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THE PONZI SCHEME PUZZLE
2. Bernard Madoff
Perhaps the most astonishing characteristic of Bernard Madoff ’s
$40–60 billion (who knows?) Ponzi scheme is not its magnitude
or worldwide reach, but rather the identity of his investors. Many
sophisticated people and heads of large organizations were misled.
Among them were investment management firms, foreign banks,
hedge funds, wealthy individual investors, brokerage firms, pension
funds, charities, universities, and insurance companies. All these
investors relied on Madoff ’s reputation for “absolute returns” of profits
in a down market as well as an up market. “‘Bernie had a good reputa-
tion at the SEC with a lot of highly placed people as an innovator as
somebody who speaks his mind and knows what’s going on in the
industry. I think he was seen as a valuable resource to the commission
in its deliberations on things like market data,’ noted Donald C. Lan-
gevoort, a Georgetown University law professor who specializes in
securities regulation and served with Madoff on an SEC advisory
committee.”12 One person remarked: “It’s extraordinary how the
hedge fund industry in some way works like Hollywood. You know,
you have stars. You don’t understand, but you have big stars. And you
need to invest in big fund with big names, famous people. You need
to invest in that thing because it’s a big name.”13
Seldom did investors dare to question Madoff ’s enigmatic and
“proprietary” investment strategy, and those who did were given an
ultimatum to either cease probing or be expelled from the select
investor group—with their money. Few risked the latter option.
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C O N A R T I S T S AT W O R K
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THE PONZI SCHEME PUZZLE
3. Gregory Bell
In late 2001, Gregory Bell established a number of funds, which he
represented in various capacities (agent, director, manager, partner).
The ostensible purpose of “Funds” was to lend money to Thousand
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Lakes LLC, whose purpose was to buy consumer goods from two
suppliers, Enchanted Family Buying Company and Nationwide
Resources International, Inc. Thousand Lakes was assumed to sell
the goods to the retailers before it borrowed the money from Funds.
The Funds would profit from interest payments on the Thousand
Lakes notes, which were ostensibly secured by the goods held by
Thousand Lakes, and by its accounts receivable and credit insurance.
Added protection for the Funds was a purported “lock-box” arrange-
ment with Thousand Lakes “which gave the Funds control over the
bank account into which the retailer was supposed to wire payments
for the underlying goods.” This design is similar to securitization of
loans. It combined financial assets such as loans and notes with real
assets (consumer goods), presumably easily tradable.
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C O N A R T I S T S AT W O R K
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a con artist. In one case, the regional sales manager of a national cor-
poration that sold corn, bean, and alfalfa seed, offered a discount pro-
gram to customers who prepaid for these products before the
planting season. The “early pay” to gain a discount had to be depos-
ited in Agri-Management Corporation, which the con artist con-
trolled and misappropriated. In this case the customers were lucky;
the corporation deducted their misappropriated payments from
their bills. After all, these were customers, and the manager had
been picked by the corporation.33
Attractive Ponzi schemes accompany the sky-high interest rate
with assurance of very low risk. Madoff ’s scheme promised lower
returns than those offered in most schemes, though they were still
higher than usual. However, his scheme entailed the unbelievable
feature a return consistently higher than market prices. This consis-
tency had an effect similar to reduced risk; it lowered the anxiety of
risk-averse investors and attracted conservative, long-term, nontrad-
ing investors. Madoff offered the members of his “exclusive invest-
ment club . . . steady, double-digit returns even when the market was
down.”34 In contrast, the con artist Randall Treadwell promised an
unbeatable complication: investments in loans that were “zero risk”
and could pay “50% interest per month and 2% interest compounded
monthly.”35 These terms too attracted some investors who were suffi-
ciently impressed by the returns to accept the zero risk promise as
well.
Low risk is sometimes supported by promised collateral, such as a
real estate mortgage, insurance, or government or bank obligations.
In United States v. Hayes, investors lost more than $1 million in an
offering of individual equity shares in oil and gas properties. The con
artist attracted investors by assuring them that 85 percent of their in-
vestments would be used to “acquire and operate income-producing
oil and gas properties” and that the investments were “risk-free because
they were covered by insurance.”36 An offer involving promissory
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this voucher at ninety days from date, the sum of exactly $1500
at the company office, 27 School Street, Room 227, or at any
bank. Signed: The Securities Exchange Company, Per Charles
Ponzi.81
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C O N A R T I S T S AT W O R K
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investments were secured. The con artist told the investors that one
of his employees was fired when he misapplied received funds.104
These facts could be verified, and indeed investors attempted to
verify whether the investments were secured and, on finding no veri-
fication, made no more investments.105 Therefore, people assume
that a liar would not be inclined to offer details, give the listeners an
opportunity to verify, and risk discovery. Con artists take advantage
of this assumption.
We should remember, however, that “[c]on artists are good
liars.”106 They may fudge the truth and the lie together. One scam was
described as “relatively safe certificates of deposit,” but what was also
mentioned was an offshore arrangement.107 The true part could be
used as an escape route.
36
C O N A R T I S T S AT W O R K
[Someone] once ran into Madoff and asked him how he deliv-
ered such consistently high returns. “He says, ‘Well, I don’t
tell you my trading strategy; that’s proprietary,’ which is not
unusual. He says, ‘But I can tell you this: I can make money
when the market goes up; I can make money when the market
goes down; I cannot make money when the market stays flat,’
which indicated to me that maybe he’s doing some sort of
day-trading.”110
“The way it was vaguely described to us,” said a person who asked
Madoff the question, “was that the ‘New York people’ had a system
whereby they placed a series of instant trades—at once with futures,
currencies and stocks—and out of this magic recipe fell a tiny 1%
guaranteed, no-risk profit for the group. You do that 20 times a year,
take away management fees and, voilà, a steady 15% return. Man,
these guys were good.”111
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C O N A R T I S T S AT W O R K
In addition, when checks are paid they may give investors the
pleasure of receiving money, almost like an instantaneous gratifica-
tion. For some investors, there seems to be more pleasure in collect-
ing small amounts often than in receiving a large amount less often.
In addition, the checks bring investors the satisfaction of “being
right”—a reminder that the investors were correct in deciding to
invest with the con artists and in rolling over their short-term invest-
ments. The checks provided proof.
When people try to predict the future, they may focus on the
results of a past decision—for example, in our discussion, that an
investment will bring high returns. As returns keep on coming, people
predict they will continue to be paid. On the basis of promised and
delivered returns, they conclude that this investment is a “sure thing.”
They focus on the particular evidence—payment of the profits—and
view it as evidence of the reliability of the entire transaction. There
are many cases in which this assumption is not true. Past perfor-
mance does not signal future performance in the financial markets,
and in the case of Ponzi schemes longevity is in fact a signal for an
imminent end, not continued stability. And yet, many new investors
who focus on what they learn about the longevity of the purported
enterprises may invest toward the end of the scheme, while those
who invested at the beginning of the scheme may recoup their invest-
ment or even retain some of the profits.123
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C O N A R T I S T S AT W O R K
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of the letter (“I inquired and found that you are an honest person”),
a proposal to do something that may not be completely “kosher,” a
repeated request for secrecy, and of course a promise of millions.129
Ponzi schemes may contain these features. A tinge of “safe ille-
gality” adds flavor to the treasure story. In one case, Kenneth Weiner
told a story about the source of profits, which was “a clandestine mul-
tinational group, a cartel of large international corporations that pur-
portedly had the power to provide investment opportunity and
returns.”130 This story smacks of an “insider” tip. It allows insider
trading and capture of large profits in something that seems, at least
at the time, virtually safe from detection. A clandestine cartel and
large corporations are powerful, and the fact that the entire plan was
to be executed abroad seemed to keep this investment safe enough. It
contained the ingredients of secrecy and bonding together with
safety and profits.
[The con artist] insisted that I not reveal where I was, ever. He
pulled out a legal document requiring me to keep secret the loca-
tion of these supposed gold mines, which, he said, would yield
fantastically lucrative treasure worth tens of billions of dollars.
44
C O N A R T I S T S AT W O R K
I was told that I couldn’t see the mines, not until I signed that
paper. . . . [N]ow that I’ve seen two mine shafts, both of which
appear to be abandoned, dusty relics, I am allowed only to reveal
only this: We’re in Mexico. . . .132
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When pressed for details, con artists may produce forged finan-
cial statements and other false documents.138 In one case the con
artist forged the signatures of the officers of a reputable company in
order to establish his purported affiliation with that company.139
These documents were difficult to authenticate. In fact, what looks
like evidence may not be reliable in the context of the entire picture.
David Phillip Munoz and his accomplices led investors to believe that
the sales agents were receiving less in commissions than they were.140
In the Great Rings scheme, the promoters made statements that may
have been difficult to verify, including a statement that the general
partners would not receive commissions.141
Con artists may offer assurances from trusted professionals—
lawyers and accountants, and regulated intermediaries such as bro-
kers or insurance salespersons. In fact, during an IRS audit one con
artist provided fabricated minutes of a board of directors meeting
and misrepresented the true condition of the not-for-profit organiza-
tion he managed. Consequently, this organization “received a favor-
able audit letter from the I.R.S.”142 Ironically, that letter was a source
of comfort to investors.
Dennis L. Helliwell ran a Ponzi scheme as a bank employee,
promising investors 18–20 percent annually and paying investors’
claims with the proceeds of money from new investors. He used the
bank’s stationery to send the clients “official receipts.” Investors
accepted these receipts as proof that their investments were safe with
the bank. After leaving the bank, Helliwell continued to use the
bank’s stationery. Few investors demanded their money back and
were happy with the frequent income checks. The bank was unaware
of the scheme, until by chance the bank received a complaint letter
addressed to Helliwell’s home address. An investigation followed,
eleven years after the scam began.143
Although many items of con artists’ stories are costly to verify,
some are less expensive to pursue, especially if the con artists are not
46
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C O N A R T I S T S AT W O R K
This may be one reason investors and clients seek the friendships of
those who advise them.
Friendship may provide a kind of insurance against the dishon-
esty of the people on whom one must rely. This feeling of insurance is
deep and natural. Yet it may be deceptive, which tends to convince
the believers that the other person likes them for their own sake and
not for the sake of monetary gain, and that it is justifiable to trust the
person. Mixing friendship and business could reduce reliance. It
seems that people lie more to business partners than to close friends
with whom they have only personal relationships. The assumption is
that people would not defraud a friend, while they might defraud a
business partner. After all, business is not supposed to be guided by
emotion. Con artists who engage in Ponzi schemes may exploit this
belief and tendency.
Friendship may play a role in the relationship between con artists
and representatives of institutional investors. Con artists offer insti-
tutional representatives a chance to bring higher income for their
institution. Profits for their institution provide institutional repre-
sentatives with an opportunity to show their investment acumen, as
well as gain recognition, gratitude from superiors, and promotion
along with a higher salary and bonuses. These benefits are linked
to the representative’s personal career while they divert the represen-
tatives’ attention from the value and details of the transaction and
investment at hand.
Con artists frequently offer individual investors nonmonetary
personal relationships that are uniquely valuable to these investors.
In the film The Producers, Bialystock, a chronically unsuccessful pro-
ducer of theater shows who finances his failing shows by courting
rich “little old ladies,” induces a nondescript, timid bookkeeper to
join him in a wild scheme that makes some sense. The producer
would raise double the amount needed for production by promising
lady investors a very high return. In fact, he promises 25,000 percent
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54
C O N A R T I S T S AT W O R K
harks back to an earlier era in the financial world: The owner’s name
is on the door. Clients know that Bernard Madoff has a personal
interest in maintaining the unblemished record of value, fair-dealing
and high ethical standards that has always been the firm’s hallmark.”168
Even as he made it very difficult to reach him and gave the impression
of his heading an exclusive club, he advertised the relationship with
his investors as personal.
Fake love appears in many ways. In 2002, Joseph Zirkel offered
much happiness to a number of women. Convicted of an investment
scam in 1994, he served fifty-seven months in prison. Then he moved
to New York from which he reported to his probation officer. His
reports showed a meager salary backed by a weekly pay stub of $434,
and modest living conditions backed by a story of his parents’ small
apartment. From that salary, he could make restitution of $300 a
month to repay his victims the sum of $1.9 million. In fact, Zirkel was
not working at all, and his paychecks were forgeries issued by a shell
corporation. He was living in luxury, a familiar face in the best restau-
rants in town, posing as a wealthy heir to a New England family of
fortune. The source of his money was wealthy women who trusted
him to manage their investments. His relationship with them was
close, and at least on two occasions it involved a marriage proposal.
Love and marriage were mixed with investment management.169
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“At an age when most people slow down and consider retire-
ment, [his] criminal activities were just getting started,” Assis-
tant U.S. Attorney Reed Brodsky said in a court filing. “[Nadel]
used his old age and frail appearance as a weapon to deceive
others in believing that he was experienced, wise, kind and trust-
worthy. In reality, nothing could have been further from the
truth. He was a con man dressed up as a kind, old soul.”
Nadel pleaded guilty to a 15-count indictment in February,
including charges of mail fraud, wire fraud, and securities fraud.170
56
Chapter 2
A . ADVERTISING
1. The Importance of Advertising
To attract investors, Ponzi schemers need a widespread reputation.
Unlike the victims of thieves and burglars, the victims of Ponzi
schemers offer their money to the con artists eagerly, and sometimes
beg them to accept their money. The tools of these con artists are not
force but persuasion; not breaking into homes to rob the victims, but
charming their way into the victims’ hearts to be offered the victims’
money.
Ponzi schemers differ from the one-shot con artists who play
with loaded dice or marked cards. These con artists must avoid pub-
licity and move on quickly, or else they could be tarred and feath-
ered and locked up by the sheriff to stand trial. Thieves, burglars,
and one-shot con artists must shun the glare of publicity in order to
remain free. In contrast, publicity and reputation are the lifelines of
con artists of the Ponzi variety. For their scheme to work, Ponzi
schemers must make their offerings and trustworthiness as public as
possible and for as long as possible. Their scheme depends on inces-
sant advertising and rising reputation to continuously attract new
investors. These con artists must stand out in the crowd to develop
a following.
Thieves, burglars, and one-shot con artists seek reputation among
their peers and within their groups of trusted friends, which are fairly
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THE PONZI SCHEME PUZZLE
small. To hide from the authorities they must avoid repute among
strangers. In contrast, Ponzi con artists must develop a double image.
They must know what they are actually doing, and be publicly well
known for what they seem to be doing.
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3. Showing Generosity
Among the many ways in which con artists draw attention is showing
generosity and engaging in civic activities. Their contributions are
well publicized. A Ponzi scheme operator, Cornerstone Prodigy,
“attracted publicity for sponsoring a celebrity golf tournament. The
event raised money to help offset the medical expenses of Justin
Laird, the 16-year-old paralyzed in the Wedgwood Baptist Church
shootings in September, and Chassidy Young, a 12-year-old Fort
Worth girl who was born without arms and legs.”7
The benefits that con artists bestow often extend to their commu-
nity. As one court commented, “Mr. Bennett made a large number of
civic, charitable and public service contributions and performed
good works in the areas of substance abuse, children and youth, juve-
nile justice.”8 Con artists may donate funds to a town to build a golf
course9 and represent themselves as the operators of “a thriving real
estate business” whose business is to buy and refurbish run-down
homes, remodel them, and sell “the newly renovated residences at a
handsome profit for the company and its investors.”10 One con artist
who was a chief financial officer lulled his employer’s suspicions by
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SE L L I N G T H E STO R I E S
4. Entertaining
Entertaining can help strike friendships. Con artists entertain lav-
ishly. Spending money satisfies the con artists’ need to tell their
stories without telling them in full. In her book Crooks and Squares,
Malin Akerstrom describes thieves and their similar need to spend
money. Thieves, she wrote, “often display successful scores by
spending freely, offering drinks, etc. to colleagues at bars known to be
criminal hang-outs.” They do so despite the risk that this lavish enter-
tainment and generosity might raise the suspicion of police or in-
formers. Because the thief ’s activities must remain secret, he must
communicate his successes and competence in some other way, one
of which is entertaining.16
“Unless someone shares the knowledge of his activities with
others, there is no way he can get the respect, fear, or admiration
which he has earned. . . .” Money is furthermore one of the few
measures of status in the criminal world. People in the conventional
world have more areas through which they can attain respect or
status: work, family, a house, a new car, etc. The same argument can
probably explain the conspicuous consumption that some criminals
engage in. . . . Where persons are firmly entrenched in public statuses
that are respected, trustworthy or powerful, they can afford the art of
understatement, subtlety and modesty. With so many virtues it is
easy to wait for someone else to point them out.”17
Akerstrom describes the environment of Swedish thieves and
burglars, who need to hide their identity, rather than the American
Ponzi con artists, who need to advertise their offerings of investments.
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Yet her description seems to fit both groups. Ponzi con artists too
have something to hide. They too have an insatiable desire and need
for recognition. If this need has no bounds, and in many cases it
indeed is insatiable, then it makes no difference how much recogni-
tion they receive; they always want and need more. Spending money
is one way to feed these needs. But in addition, unlike the Swedish
thieves, whose generosity may raise the authorities’ suspicions, gen-
erous con artists are likely to allay such suspicion and gain protection
from the law. Neither their financial success nor their lavish spending
would provoke wide suspicion, although, as mentioned, a watchful
examination of these con artists, who spend other people’s money,
can raise attention and concern.
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pyramid con artist could not explain how he would manage to pay
investors up to 1,300 percent in six months.20 Yet his claim of superi-
ority over the established financial system served his purpose: it drew
attention.
B. RECRUITING HELPERS
1. Cooperation, Competition, and Congregation
Among Con Artists
Con artists connect with each other and forge friendships, in and
outside prison. Many become friends.21 Some are family members.
Because con artists can hardly speak about their exploits outside the
group, they strengthen their self-image by feeding each other’s egos.
With “their own kind,” they share and reinforce their conception of
the world. In the con artists’ world, everyone is engaged in the con-
ning business. The same reinforcement is evident in other groups as
well, as in corporate settings, including managers of legitimate busi-
nesses in distress.
Con artists behave as legitimate competing merchants do. For ex-
ample, legitimate businesses that sell the same merchandise may
open their shops in the same area even though shoppers may enter
their competitors’ shops rather than their own. Such competitors
may share marketing and advertising costs. Except for very large en-
terprises, the gains to each merchant from this cooperation exceed
the losses from the competitors’ sales. It seems that in the con artists’
business, as in any other business, there are customers who are drawn
to Ponzi schemes.22 Con artists may sell to each other lists of possible
victims. Many of the victims do not recognize the same elements in
the new stories and fall for them. Thus con artists who must move on
to another area can nonetheless sell their stories to other con artists
who would draw the attention of the same victims.
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do not regulate them closely. For example, a gift program called Sov-
ereign Ministries was founded shortly after a court ruled that a sim-
ilar program, initiated by the founder’s uncle, remained outside of
state scrutiny and regulatory power so long as the program promised
no guaranteed returns. Gifts are not subject to securities regulation.44
Further, because the relationship between religion and tax ex-
emption, for example, is unclear to many people, believers invest
with the con artist without asking for details. The mantle of religion
and charity can serve as a means of limiting information to investors.
Similar and sometimes overlapping targets for con artists are af-
finity groups and their membership, such as employees in the same
unit. In Sydney, Melbourne, and Brisbane, Australia, a large group of
police officers invested in such a scheme. Apart from a few who man-
aged to get their money back in time, as many as two hundred police
agents (including the wife of an Australian federal police commissioner)
were believed to have invested in the Ponzi scheme. The members'
losses were significant. Of these participants just one couple lost
$400,000.45
Not surprisingly, such institutions have fallen prey to con schemes
with regularity. For example, Charles Blair was the promoter of three
nonprofit Colorado corporations that sold securities through a “De-
partment of Development.” For more than two years, the corpora-
tions and related entities were insolvent and in desperate financial
condition, with no real hope of recovery. The money the corpora-
tions raised by selling new securities was used to cover the payments
on their current debt, but these facts were not disclosed to investors.
Representatives of the corporations and the entities told investors
that the assets exceeded liabilities by $3 million and gave assurance
that the investments were safe. In fact, the corporations had a deficit
of about $6 million and finally filed for reorganization in a bank-
ruptcy court. Only then did investors discover the fate of their
investments.46
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THE PONZI SCHEME PUZZLE
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group members, saying in private what they are not likely to utter in
public or repeat in front of the group members. This is one way in
which social culture is fashioned. People follow the crowd and me-
diate this following with their own convictions.
Members of affinity groups share beliefs and interests. They meet
often, support one another, and trade influence. Members of pyr-
amid schemes are similar. These organizations fuel a tendency to
follow others rather than rely on one’s own information and judg-
ment. However, people can be influenced by the behavior of others
even if they do not belong to a group.
In one experiment, the subject was told he should come to an
office to be interviewed. He entered a small room and found other
people there. The others then stood up and took off their clothes.
The interviewee looked on in amazement, but after a few minutes he
did the same and stood naked, waiting to see what was to come. This
illustrates one aspect of following a group unthinkingly. The flip side
of this behavior is the joy of mastering and directing what other
members of the group will do.49 It seems that this is what con artists
feel when they lead and implicitly dictate what the members of the
target group are doing. Or a member of an ethnic group may draw
investors from that group, individuals who trust “one of us.” If the
con artist is a successful and respected leader, the members of the
group bask in his warmth. Identity draws trust. Proliferating warn-
ings and enforcement actions against con artists who are members
of cultural, ethnic and affinity groups appear to be less than fully
effective.50
Because they share faith and values, members of religious organi-
zations offer attractive victims to con artists. These groups are almost
as cohesive as institutional investors, the con artist enjoys lower costs
of advertising the scheme and establishing personal contacts with
potential investors. Within the groups, information spreads quickly.
The number of investors that each person must personally recruit is
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relatively small because group members are likely to follow the rec-
ommendations of brother and sister worshippers and their leaders. In
addition, group members may be more vulnerable and amenable to
influence if they are older retirees, living a more secluded life and not
as informed as active investors might be, or worshippers who simply
follow their leaders.
Member of such groups tend to influence one another even in
matters outside their faith. Therefore, the business sense and inde-
pendent judgment of congregation members is dulled by their mu-
tual reliance. If a scheme is introduced by a fellow member, other
members tend not to investigate it closely.51
In one case, “Alice Faye, as everyone called her, had been oper-
ating a pyramid scheme for nine years, wheedling an estimated $10
million from fellow church members, many of them elderly.”52 An-
other con artist solicited investments by invoking his position in the
congregation and announcing: “I consider it a real honor and a privi-
lege to be able to be an elder of this church . . . and when we finally get
this facility, were [sic] gonna be able to minister to so much [sic]
more people.”53 The church reciprocated by building up his reputa-
tion; he “was constantly being praised from the pulpit as an ‘anointed
Christian businessman.’”54 A victim of this same con artist described
how he took advantage of her faith: “Luca [the con artist] skillfully
manipulated my faith in God to his advantage, looking me in the eye
while praying to God to bless the investment.”55 One victim testified
that Luca would pray with her “just before he showed her fraudulent
layouts for his purported developments.”56 This victim added: “Nor-
mally I could spot someone like Luca a mile away, but believing [the
church’s] active promotion of him, I turned off my internal alarms.”57
Investors who belong to a religious group tend to believe, rather
than to question. When an accountant questioned the reliability of
an investment in the Baptist Foundation of Arizona, his client who
was investing in the foundation answered: “I’m not worried about it.
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It’s for the glory of the Lord. I have faith in the organization and espe-
cially in the Good Lord. To me it’s as safe as if it’s Bank One.”58
Con artists’ religious cover is effective in creating credibility and
in blocking information to investors even if they seek details. A con
artist defendant who refused to comply with a court order to refund
investors’ “gifts” explained that “to do so, I would have to deny my
faith in God.”59 His supporters “crammed into [the] courtroom, mur-
muring ‘amens’ when [the ministries’ attorney] asserted that the
state’s actions violated [the constitutional protection of religion].”
The ministries subsequently issued a statement announcing that
“overall the hearing was very successful. Our position regarding the
Lordship of Jesus Christ was made very clear and established for the
record. We are ready and willing to ‘stand and fight’ by taking this
case all the way to the United States Supreme Court.”60
A similar scene was described in another case, where the con
artist “was like a pastor to them [the investors, and] as a business
guru.” When the government sought to shut down the con artist’s
operation, “nearly 150 of them, some making 15-hour drives,
attended the hearing. They huddled in groups to pray. They hugged
[the con artist] and expressed support for him. They assailed the gov-
ernment for interfering in their business. Since then, they have bom-
barded the U.S. attorney’s offices with faxes and praise for [the con
artist] and have contributed to a legal defense fund for him.” One of
the investors said: “Most of us are Christian people. . . . My source is
God almighty. He will see me through this.”61 This investor did not
lose money in her dealings with the con artist, but she was disap-
pointed nonetheless. She was counting on more to come in order to
support her son and finance her grandson’s college education.62
Though recognizing that more money was not forthcoming, she
accepted the con artist as a fellow believer.
Rabbi Marc Gellman noted that people called Madoff “their
brother, their best friend,” and “used to talk about getting in with Bernie.
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He was a member of a club and clubs that defined who is in and who
is out, maybe that is what this is all really about, who is in and who is
out.”63 Bette Greenfield, a retired event planner for Merrill Lynch,
noted:
My father was told that this is the man that really knew how to
keep his money safe. He never met Bernie Madoff, but . . . he
kept telling us: “This man has a stellar reputation. He’s brilliant.”
[Although] he couldn’t figure out how Madoff made such con-
sistent returns, he wasn’t suspicious. My father—an accountant,
and a very smart man—was dumbfounded, amazed, and had
just such admiration [for him].64
C. RELIGIOUS INSTITUTIONS
Con artists target not only church members’ money but also the
churches’ coffers. Most churches are investors, raising funds to main-
tain their assets and serve good causes. Serving as a church official
can help expand the Ponzi scheme. Con artists have acted as minis-
ters,66 managers of church plans,67 and members of other charities.68
One con artist was a nun, recruited by con artists one of whom had
served time in prison. Soon after their release, one of the recruiters
pleaded guilty to helping operate a Ponzi scheme.69 The nun contin-
ued the project and later left the religious order.70
Creating a church can help a con artist’s scheme. In early 1977 a
man named Hakeem Abdul Rasheed founded the Church of Hakeem
Rasheed and preached “about the importance of a positive self-image
through belief in one’s self.”71
He taught that one could achieve one’s desires by focusing and con-
centrating on those desires. The central tenet of [Rasheed’s] Church
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was the belief in “the God within you.” One of the aspects of the
Church’s beliefs was the “law of increase, or the law of cosmic abun-
dance,” which provided that if one gave freely one would receive
returns greater than the initial gift.
Shortly after founding the church, Rasheed established the “Dare
to be Rich” program. Rasheed preached that this program was consis-
tent with the law of cosmic abundance: He taught that if one donated
money to the Church, one would receive an “increase of God” of four
times that amount within a particular period of time. . . . These time
periods were based on “psychic birth cycles,” which Rasheed claimed
had a basis in scripture.72
To combine benevolence and faith with personal benefits, a
church might offer investors special tax-exempt deals.73 It is not sur-
prising that unrecognized churches are among the institutions that
attract con artists. In 1994, wealthy film stars and their friends were
attracted to the Church of Scientology. There they met Reed Slatkin:
charming and giving, with an excellent taste in cars, a passion for
flying, and the lifestyle of the very rich. He prayed with members of
the community, listened to their problems, and magnanimously of-
fered them free advisory management of their assets with fabulous
results. They rewarded him with valuable gifts and unlimited trust. In
fact, he made no investments. Instead, he used the assets of new in-
vestors to pay these great profits to earlier investors. With each new
recruited investor his obligations increased, and inevitably the bubble
burst. Investors suffered great losses.74 In Great Britain, a multimil-
lionaire commodities dealer “claim[ed] that he and his family and
friends have lost [£35 million ]in such a scheme. . . . [H]e invested
not only his money but that of his wife, children, and parents.”75
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victims of about $40 billion. Not all frauds are classic Ponzi schemes;
a con artist may simply sell a product, and fail to deliver. But some
frauds are close to financial schemes, for example soliciting dona-
tions for charities that do not exist.86 An unemployed single father,
who faced rising debts, started a dot.com fund—EE-Biz Ventures—
promising 40 percent to 100 percent in seven to ten days. EE-Biz
claimed to be a Christian-based humanitarian organization and
received about $50 million from thousands of people. A number of
investors collected the promised returns, but others lost their in-
vestments. The plan lasted less than a year as investors’ interest in
the fund flared quickly and then died.87
Technology can help con artists in a number of ways. First, it re-
duces the cost of establishing personal face-to-face relationships, or
the need to finance a large sales force to spread the word. One can
send hundreds of thousands of letters and reap gains even if only a
small percentage respond. Second, through the Internet con artists
are better shielded from detection. Third, technology can help con
artists avoid paying their obligations (the high return) by collecting
investments and disappearing. Unless victims belong to an affinity
group, news of failure to pay one investor does not travel so quickly to
the other investors. Fourth, a change of name and style of the con
artist’s message can restart the game with little cost. Fifth, impersonal
relationships have an emotional benefit for con artists. It may reduce
any empathy for their victims; it is easier to hurt those you do not see
or hear. Many con artists lack such empathy even in personal contact.
But avoiding personal contact may produce more con artists today
than there were in the past. A fascinating “blog” discussion that lasted
at least four years relates to pyramid schemes.88 It is worth reading
because it demonstrates the enticing power of the scheme as well as
its corruption. Some participants just aim at the money, while others
point to the developing pressures they must exert over friends and
family. Some encourage joining a plan and others recommend avoid-
ing it in capital letters: DON’T.
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investors pay for the franchisor’s name, reputation, and services (e.g.,
a franchise to operate a Holiday Inn hotel). Investors-franchisees
then build and operate their hotel as their own business under the
franchised name. They continue to pay part of their hotel business
profits to the franchisor for its ongoing services. The similarity of a
pyramid scheme to franchising is that investors pay for a sales pro-
gram, and continue to pay that person a percentage from the sales
they made. But unlike a franchise, the so-called investors’ income is
derived not from any business or sale of products but from selling
the same idea to others who pay for the plan to further sell to others.
An example of a pyramid scheme is the “Fulfillment Center.” It
promised investors $50 for each new recruited investor plus 20 per-
cent of the new recruit’s earnings from the fund. The promoter
receives 10 percent from the earnings of recruits, raising about $6.5
million.106 Another con artist allegedly raised more than $10 million
through such a scheme based on the sale of cell phones. However, the
business brought negligible returns. Most of the profits came from
selling the same idea to others.107 To draw investors into a pyramid
scheme, some con artists place a newspaper advertisement in the
“help wanted” section, implying a paid job. The people who respond
are then pressed into buying “participations” in the scheme.108 There
is something enticing and challenging in the image of the pyramid: “Oh!
To climb to the top of the pyramid!” And there is a very supportive
group to boost the morale of the participants.109
From 1995 to 1996 the wife of a police captain in Sacramento
operated such a club. The club involved at least sixty-seven employees
of the police force. Some police personnel reportedly received tens
of thousands of dollars for the $500 they invested. Others lost their
investment of $500 or more. Police involvement added a special
dimension to this scheme, for it provided legitimacy, trust, and
authority to the recruitment. Needless to say, once the scheme was
discovered it undermined the legitimacy, trust, and authority of the
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police department itself.110 In the United States, high returns and low
risk are sufficient to draw the marks. In other countries, additional
allure may be clothed in associating with the upper class. In England,
“Upper School Charm” has been added in the form of “The Oxford
Savings Club [with] business addresses in Amsterdam and Antigua,
West Indies.”111
Fraudulent schemes of this kind share one prominent feature: in
all cases, the victims contribute to the distribution of the schemes.
And yet, the victims’ involvement, and the methods employed are
very similar to legitimate and reasonable forms of nonfraudulent
distribution of investments. It makes sense for investors to rely on
friends and people they know, instead of suspecting foul play. It
makes sense to be drawn to leaders of a group to which they belong.
And it makes sense for those who look for a source of income to be
drawn to pyramid schemes.
To distinguish a pyramid system from a legitimate “multilevel”
distribution system, one needs only to find out who is buying. If the
buyers are consumers, the system is a multilevel distribution system.
If most buyers are future distributors, and if they are paying for the
privilege of selling, the system is likely to be an illegal pyramid
scheme.112
How can con artists be so successful, especially when they must
act in the limelight of publicity rather than hide? Why is it so diffi-
cult to distinguish honest persons from con artists? What is it that
tempts the victims to sell fraudulent plans? Chapter 3 deals with
these questions. We will find out how close the behavior of con art-
ists is to the behavior of humans generally—including children. We
discuss how similar Ponzi and pyramid schemes are to legitimate
businesses and behavior, and how difficult it can be to distinguish
between them.
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Chapter 3
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86
C O N A R T I S T S ’ B E H AV I O R S E E M S A “ N O R M A L U S U A L B E H AV I O R”
and then one of the baboons diverted his attention while the other
retrieved the bananas, only to enjoy the loot with the other conspirator
later.4
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88
C O N A R T I S T S ’ B E H AV I O R S E E M S A “ N O R M A L U S U A L B E H AV I O R”
3. Legitimate Lying
Lying and manipulation can be a respected profession or entertain-
ment, as in acting, and a source of amusement, as with practical jokes.
An interesting study of theater and movie actors, related to under-
standing con artists, suggested that actors can put on different per-
sonalities very quickly, but in order to do so they must feel nothing.
Then they can “counterfeit all feelings,” because “[t]rue feeling was an
obstacle.” Actors do not act their own feelings or the feelings of the sub-
jects whom they mimic. This is why actors improve over time; they do
not continue to exercise and experience feelings that might wane and
be depleted with repetition.12
Not everyone agrees with this study, but it does resonate with
respect to con artists and manipulators. As we shall see in Chapter 4,
most con artists are unable to empathize with others. In fact, they
may have little ability to feel anything at all. This may be the link to
acting. Actors think; they do not feel.
Another study explains how actors can be so convincing without
feeling. The actors think their characters’ thoughts, and make these
thoughts their own, acting the part and becoming the part.13 It may
well be that con artists act the character they have long been dreaming
of. Therefore, the character comes naturally to them. They may not be
able to act any other part, except to be the rich and powerful and
famous that they crave and dream to be. This enables them to act
naturally and be as convincing as good actors are.
Masks have been used in the theater for centuries. Perhaps one of
the purposes of using masks is to make it easier for spectators to iden-
tify and understand the characters in the plays, and to interpret what
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the characters say and do in the context the plays. There are “universal
faces,” prototypes we accept, at least in our particular cultures. Hence,
one can generalize, and create a mask or a prototype of con artists. The
problem is that too many honest people have the characteristics of
good actors, and the distinction between true and fake remains diffi-
cult. But one difference is obvious: theater actors tell the truth about
their lying. The context—the stage or film or the circus—puts specta-
tors on notice that they are witnessing mimics, and not real, active
persons. Con artists send the opposite message: the spectators are
witnessing not mimics but real people. This is the lie.
Practical jokes and hoaxes, some cruel, some pure fun, some
fraudulent, some innocent, have been around for decades in the
United States. Americans are willing to laugh at themselves, and
some feel quite good about making fun of others. Jokes and hoaxes
can be very profitable. Some are wholesome entertainment, and
some are downright illegal. P. T. Barnum was a practical joker and a
great American entertainer. His family and the village in which he
grew up relished a good practical joke, and the inhabitants of the vil-
lage retold the joke for years. Barnum is reputed to have authored the
saying “There is a sucker born every minute,” which his biographer
disputes, probably quite rightly. Barnum was not about to humiliate
and offend his vast audiences. But he did play jokes on them, and
they loved him for it nonetheless. They loved his museum, his fake
mermaid, and later his circus. In fact, until it became illegal, he ran a
lottery, which served as a significant source of income for him and
fun for the visitors. Barnum was first and foremost an advertiser, a
master of “herding.” He knew how to draw attention, build expecta-
tions, and whip up curiosity to a frenzied pitch. This was a significant
part of the pleasure he gave.14
In a special double issue of U.S. News & World Report of August
26, 2002, the magazine presents “The Art of the Hoax.” It does not
mention P. T. Barnum. However, it reminds us of Charles Ponzi’s
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saga. The magazine suggests that ours “is the golden age of hoaxes”
and proceeds to name and describe dozens of such hoaxes. They
include a hoax by the Allies on Hitler during the Second World War,
an anti-Semitic fraud, a lie about the Freemasons, stories about
hidden treasures of pirate captains, life on the moon and other sci-
ence fiction tales, fake medicines, psychics’ connection to the dead,
and so on. People believed, and more often wanted to believe. The
“age” covers more than one hundred years, and it includes today’s
frauds.
So what drives a magazine to call this day and age the golden age
of hoaxes? The choice of the frauds in the article may signal the
answer. They are not entertainment material; they are materials of
serious deception. They end not in innocent fun but in severe losses
by the believers. Some, like Charles Ponzi’s story, are downright
financial fraud. The difference between the types of deceptions has
been blurred. This is therefore the age of “mixed hoaxes” that com-
bine truth and falsity and slipping toward the fraudulent.
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the scheme could receive $300 and pay back $600 a few days later. He
“solved the problem by suggesting he would invest money in other
people’s Ponzi schemes.”19
Some businesses start as lawful businesses and have a Ponzi
ending. There seems to be little difference in the way legal businesses
and Ponzi schemes operate and in how they end. After all, a business
that is lawfully conducted can fail just as a Ponzi scheme does. But
the circumstances which lead to the failure differ. For example, in
1998 a money manager, who invested clients’ money in a friend’s
company, faced tremendous losses as that company was on the brink
of bankruptcy. His choices: he could try to save the investment, he
could disclose the losses to the clients, or he could “try to stave off
the clients’ wrath” and the regulators’ examination. He chose the
third option. When the regulators caught on, they accused the man-
ager of operating a Ponzi-like scheme to cover the loss of $200 mil-
lion by diverting the money of new investors to pay interest to current
investors.
The manager and his partner started very young and were known
for risk taking. The manager had legal problems before, in 1982,
1992, and 1995. But even though his business flourished, there were
persistent signals of problems. A newspaper reported that from 1996
to 1998 his company “helped finance expensive hunting and fishing
trips for at least nine trustees from five different union trust funds.”20
The company financed a moose and caribou hunt in Alaska to the
tune of $22,000. There was a consulting contract worth $950,000 to
the co-chairperson of investing trust funds.
Then, as a large investment was going to default, the manager
began hiding the losses, according to the government’s accusation. To
the clients, the manager described his actions as a “heroic” attempt to
save their investments. He told the clients that an “unknown com-
pany had promised to pay them $160 million for their future stake in
the nearly dead” investment. They did not question the statement,
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Ponzi stories except in how their owners (and the controlling per-
sons) chose to solve their difficulties.
Borrowing with good intentions to repay the loans can slip into a
Ponzi scheme. Thus a travel agent, who had many clients, solicited
short-term loans (usually thirty days) from these clients and in return
promised to “give them free travel benefits, such as cruises and first-
class airline tickets.” But then the scheme expanded and the agent
sought loans to repay previous loans or buy airline tickets for previous
lenders. Eventually, the agent “used clients’ personal information and
credit card numbers to open new lines of credit or to purchase tickets.”
One thing led to another, as the agent “left vendors or cooperating
travel agents with unpaid bills and ‘repaid’ some lenders with bad
checks.” Complaining clients received one-way international tickets
as round-trip tickets, leaving them (including one person who was a
minor) “stranded in foreign countries.”25 These activities, which may
have started as small-scale borrowing with a sincere intention to
repay, ended up in Ponzi criminal activities.
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creditors, they may end up backing into a Ponzi scheme.26 The differ-
ence between banking and Ponzi schemes is not necessarily in the
structure of the institution, or in the nature of the transactions, but
mainly in the truthfulness of the information about the borrowers,
and the reliability of the guarantees that the investors receive from
the con artists.
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some animals develop rules on how much cheating they will tolerate.
They pay less attention to the alarms of females than to the alarms of
the male members of the group.34 They have developed simple rules
on limiting interaction with strangers, and reciprocating in kind.
Therefore, it seems that trading, reciprocity, tolerating some decep-
tion in the interactive process, and drawing a line on how much
deception is acceptable is innate in some animals as well as humans.
It is not surprising that investors cannot easily distinguish between
similar products that carry different prices, so long as the price differ-
ence is not glaring.
D. ENTREPRENEURS
Many con artists behave like entrepreneurs. Entrepreneurs are crea-
tive, and their offerings are usually unique. This is also true of con
artists operating Ponzi schemes. Entrepreneurs are optimistic, and
sometimes overoptimistic. The managers of newly established com-
panies are more optimistic than the managers of old and diversified
companies. So are con artists.
Studies suggest that competitors win not because they are more
fit before they enter the arena to compete, but because they are more
optimistic: “Optimistic people are inclined to take more and higher
risks, and are less affected by failures. As they try more often, they
have a better chance of succeeding than those who do not try.”35 Fur-
ther, in business “people exhibit significant overconfidence in the
validity of their predictions.”36 Like entrepreneurs, con artists show a
remarkable inclination to be optimistic.
An example of optimistic behavior is the case of the con artist
Terry Spirk, who started his career in insurance and became the owner
in 1991 of an annuity service business. He operated the business prof-
itably for several years. Then he decided to found American Senior
Alliance, Inc. (ASA). He created a holding company that held two
subsidiaries: the insurance business and the new business offering
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the height of their dreams. Yet even this trait is not unique to them.
Investors and managers may start out or find themselves on a losing
route. But they might continue to follow it, and sometime escalate
their commitment to it in the hope of recouping losses. The psycho-
logical explanation for such behavior is the “need to justify previous
investments and reduce the dissonance provoked by high invest-
ments and little or no returns.”39
Charles Ponzi had an unshakable faith in a magical idea that
would come to him and materialize. He had no doubt about it, and
this made him a formidable persuader.40 Believing that this magical
idea would come, if one idea did not work out, he erased it from his
thoughts and went on to try another. After a fiasco in promoting a
publication venture, he wrote: “I dismissed The Trader’s Guide from
my mind. Another house of cards had collapsed. That did not matter.
I was getting accustomed to chasing rainbows. As one would fade
away, I would pursue another. For a dreamer, I certainly was perse-
vering. I never was a quitter. Undaunted by failure, I transferred my
attention . . . to international reply coupons.”41 He hoped to acquire
banks. That would enable him to reduce the returns he would prom-
ise investors, and manage a legitimate business.42 Unshakable belief
in his destiny and its success was catching and persuasive.
When con artists speak of their enterprise enthusiastically, they
speak the truth—their truth, as they see it and feel it and want it to be.
People who truly believe are convincing, regardless of whether they
are telling the truth as others see it. The self-representation of con
artists does not conflict with their dreams. Con artists may be like
those who believe they have experienced a miracle. Studies have
shown that recent events affect people’s long-term predictions.43 Con
artists who live the fairyland life of the rich while being poor get
trapped in their own fantasy. In fact, they may get so used to the roles
they play that their businesses and their lifestyle, friends and connec-
tions become real to them: “Many first-time perpetrators of this
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To recoup their seed money and use the reputation they estab-
lish, it is rational for Ponzi con artists to continue the game. To con-
tinue, they must keep on acting in a trustworthy manner, and pay
investors the promised profits. Thus the very nature of the scheme
induces con artists to deviate from short-term trustworthy behavior
and continue to behave in a trustworthy manner long-term. Such
behavior serves their interests.
In addition, acting in a (partially) trustworthy manner does not
mean deprivation for Ponzi schemers. It means refraining from
embezzling all the money that they collect. For them, the fruits of
trustworthiness are sweet because they do embezzle part of the
money, and enjoy signaling trustworthiness. Donations, entertain-
ment, and social activities are not only beneficial but also pleasing
and satisfying.
Con artists continue to savor substantial profits, luxury, self-
worth, prestige, rubbing shoulders with the rich and famous, and
even achieving political power. The monetary and emotional rewards
for acting in a trustworthy manner and for not embezzling all, but
only part, of the entrusted money exceed the benefit from a one-time
embezzlement of the entire amount entrusted to them.50
Many con artists, especially those addicted to their opulent way
of life, cannot do anything else but continue to operate their schemes.
“Byron Keith Brown was sentenced to a 15-year prison term . . . for
stealing $17 million from investors through an internet Ponzi
scheme.” He accumulated an extensive car collection, including
BMW, Bentley, Mercedes-Benz, Lamborghini, and Land Rover
models, “as well as a decent replica of a 1936 Auburn Speedster.”51
Thus, compared to any alternative, the schemes bring enormous
monetary and ego rewards and excitements. They help con artists’
meteoric rise to the ranks of the rich and powerful; they feed their
self-worth and gain their investors’ admiration. Acting trustworthy,
rich, powerful, and smart comes naturally, often with the support of
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education and practice. This way of acting is their tool of the trade,
rather than a wrongful act. For these schemers, the benefits of cre-
ating a reputation for trustworthiness are far greater than they are for
hit-and-run con artists. They may hope to enjoy the good life of the
rich as long as they can, to “do the honorable thing” or to “go legiti-
mate.” The probability of spending time in prison is remote, and a
prison term is likely to be shorter than the good life during the exis-
tence of the scheme. Besides, prison does not seem daunting to some
(if not all) con artists. Therefore, it is not surprising that Ponzi
schemers are rational, repeat offenders. Most con artists continue
playing the game to the bitter end.52
Ponzi schemes are risky for con artists, even if they share the risk
with some of their marks. Yet con artists have an advantage over the
marks because they know that no real business will bring the prom-
ised profits, although the con artists do not know how many investors
will join the game and when investors will cease coming on their
own—or as a result of government intervention. Most importantly,
as noted, most con artists do not view their particular scheme as a
stand-alone, one-time venture. A scheme is but one project in their
business. Therefore, they attempt to maximize their benefits from
every project they operate, recognizing, however, that some projects
will last a shorter period than others. They are likely to wait until they
are caught, settle their fines or prison sentences, and then leave to
start their projects in another place.
And yet, what about the danger of prison sentencing? What about
the risk of being discovered and shamed? As we will note in the next
chapter, con artists are risk takers. Tempting the authorities is part of
their fun. Fear of prison does not cloud their enthusiasm; indeed, it
may increase it. In order to understand them and their investors, we
turn to Chapter 4.
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Chapter 4
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traits are combined some psychiatrists conclude that they can result
in a character disorder.2
Individualism does not mean self-interest and self-love to the
exclusion of others and society. We have the ability to combine
self-love with love and sacrifice for others. In fact, a total negation
of the self is not healthy, and perhaps impossible so long as life is
valuable. But the other extreme of feeling nothing for others is
both unhealthy and antisocial. Therefore, healthy people view
themselves as special and worthy of friendship and love. Yet they
possess a relatively realistic internal picture of who they are and
what they are capable of doing, even as they may engage in day-
dreaming. Narcissists are fundamentally different. They have a
deep feeling of inferiority that must be denied.
There are examples of famous narcissists, such as Louis XIV, who
declared, “L’etat, c’est moi” (I am the State). He viewed everyone else
as an incarnation of himself. Marie Antoinette wondered why the
starving people begging for bread did not eat cake; she could not per-
ceive of starvation unless she experienced it.3 Both could imagine no
other feelings but their own.
This character was noted as a disorder and described in the
DSM-11 (The Diagnostic and Statistical Manual of Mental Disorders,
11th ed.) as
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and nice, and because, not surprisingly, the notes paid higher-than-
usual returns. Investors trusted him fully, but complaints began to
trickle in. About three years after the first complaint against him, the
Canadian police secured an indictment for fraud, theft, and money
laundering. He fled just before the frauds were discovered, and in-
vestors began to demand their money. His marriage collapsed and
ended in a messy divorce. The liberal congregation where they had
lived felt betrayed. The reaction of the community members was not
unusual; they felt “a lot of pain” and wanted “to forget about it.”
The con man started to prepare for his disappearance in 1990. On
a trip that year he deposited altogether over £1.5 million. When he
fled, he took with him one of his daughters. They moved to London,
Harrogate, and Devon, and they settled in Essex. First, they posed as
David and Noelle Davis, father and daughter; then they became Ron-
ald and Noelle Platt, husband and wife. (Platt was the name of a
friend whose identity the con man had stolen and later killed.) Platt
had offered his driving license and birth certificate, which the con
man used.13
Platt (the real one) was a TV repairman, who lived in Harrogate
and dreamed of returning to Canada, where he had lived as a young
man. When the con man met Platt, he seized on the opportunity to
acquire another identity and offered Platt money, including an air
ticket to Canada. Platt left a birth certificate and driver’s license with
the con man. But in 1995 Platt returned to live near the con man
whom he knew as Mr. Davis—who was now known as Mr. Platt. The
con man realized that his new identity was in danger. He killed Platt,
telling Platt’s family that he had left the country; the family believed
him and did not report Platt missing.
When Platt’s body was discovered, the authorities were not par-
ticularly eager to begin a murder investigation. But a coroner’s officer
decided to investigate, and followed the Rolex watch—the only thing
found on the body. As mentioned, the registration number helped
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the office to trace an agent, who named the owner of the watch as
Platt and offered his address. The coroner notified Platt’s family,
who then notified the police about Platt’s friend, Davis, the con
man. The con man told inquiring police that he loaned Platt £2,500,
whereupon Platt left for Paris. But by chance the police discovered
that the man to whom they spoke was called Platt. Upon his arrest in
1996, the police found in his cottage a part of the fortune that he had
stolen.14
Not all contemplated murders are successful. One con artist was
accused of operating an $18 million Ponzi scheme involving prom-
ises of sham currency trades and real estate investments. This man
tried unsuccessfully to have four witnesses who invested with him
killed. He finally pleaded guilty to charges of fraud in order to avoid a
charge of attempted murder.15
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imagine any feelings except their own, or imagine and identify with
other people’s feelings.32
Fraudulent telemarketers are likely to lack empathy, guilt, or
remorse.33 One such telemarketer considered his victims to be idiots:
“‘I had it so perfected that I could get these customers to buy again. . . .
I made sure they were happy so I could sell them again,’ the telemar-
keter told the researchers. ‘I wanted to sell these people 10 times.’”34
He did not target old people because they were old. He merely sought
vulnerable victims, and because older people happened to be more
vulnerable they were more likely to become his victims. But any other
type of vulnerable person would have been just as attractive.
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can see through his disguise. Behind the grandiose parading, the nar-
cissist feels empty and devoid of value.”
True to character, con artists present themselves as special, su-
perior, risk takers. After all, this “dare to” attitude draws attention,
strengthens reputation, and feeds the ego.36 Con artists can be viewed
as the Evel Knievels of the financial world, just as thieves and burglars
enjoy being chased by the police. Taking risks makes them feel alive.
Success makes them feel superior. As we shall see later, a study of
Ponzi scheme victims suggests they too have a relatively high inclina-
tion to take risks. However, the two groups differ. Con artists initiate
risks; their victims are enticed to take risks. Con artists initiate risks
for themselves and for others. The victims are enticed to take risks
that only they bear.
A con artist named Sam Antar, who called himself a crook,
explained the nature of con artists in a revealing way. He emphasized
two important points in answer to the question, Why do “Ponzi
operators and fraudsters steal money by taking advantage of ‘nice
people’ for years, only to be arrested after their schemes collapse and
lives are wrecked”? One explanation is the con artists’ disdain for the
“squares.” “‘Criminals like me consider your humanity a weakness to
be exploited in the execution of our crimes,’ Antar told participants at
a recent conference at the John Jay College of Criminal Justice.” The
other explanation for the behavior of con artists is pride. “‘We can
steal more money with a smile than we can steal with a gun.’”37 This is
pride in ability and superiority.
Colorful con artist behavior attract attention and sometimes
admiration. Ponzi schemers, like other white-collar criminals, exhibit
outwardly a very high level of self-esteem. They work hard at main-
taining this image.38 Research in the psychology of self-serving
behavior points out other characteristics common to con artists. The
explanation for this behavior is similar to that of narcissistic behavior.
Self-serving behavior is used as a person’s defense against a threat to
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boasted of being a child prodigy who was not only playing steel
guitar at 9, but [also taught] others who have been playing for
years. By 19, he owned a chain of music schools . . . and also per-
formed on radio and television. . . . At 23, he went to work for [an
instrument company and his innovation enabled them] “to triple
the employees’ wages, quadruple the production, cut costs by 40
percent and make a profit [where they had lost before].”40
Another con artist told his investors that he was a financial genius,
“who made his first million by the age of 21.” He declared time
and again to his employees: “I do not seek to be a common man.”41
And indeed he was not. Thus, most Ponzi schemers are characters,
standing out in the crowd.
This behavior may reduce admiration of prudent people who take
prudent risks. But such behavior often draws admiration from people
who would like to take unbounded risks but do not dare to do so,
people who would like to be noticed but fear criticism or ridicule (or
who have sufficient self-knowledge and a good picture of who they are).
Like their magnetic stories that draw attention, con artists may
present the mystery that some people cannot resist: “Few have seen
the likes of someone as beguiling as [Luigi] DiFonzo. The man
depicted in dozens of interviews, court records and personal letters
seemed to have lived five or six lives . . . who adopted a more fantastic
persona with each incarnation.” His impact on investors is telling.
Since the collapse of his empire “investors have become obsessed
with unraveling the mysteries of its alleged mastermind.” One woman
who lost $75,000 in her investment “knew she’d been had the mo-
ment she finished DiFonzo’s biographical work, ‘St. Peter’s Banker.’
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But the revelation that the same man behind the book and DFJ also
had worked with the FBI to investigate organized crime left her angry
and grimly determined.” She did not expect to get her money back,
“but I need to know the truth’ she said. ‘Were the FBI protecting him
instead of the people he was ripping off ?” The mystery, attraction,
and attention remained after his death.42 Of such mysteries, reputa-
tions are built. Luigi DiFonzo, the self-styled Don, was most hurt
when police led him away shackled for questioning. Although he was
also ill and wrote that he “lost everything,” this incident may have
contributed to his decision to commit suicide.43 Thus the presenta-
tion of such a con artist has a singular effect in creating followers.
Similarly, in Crooks and Squares Malin Akerstrom describes the
condescending view that con artist criminals have toward “squares.”
This attitude, and a feeling of superiority,44 fuel con artists who con-
duct Ponzi schemes. Not surprisingly, con artists are sensitive to
slights. Charles Ponzi wrote: “when somebody tries to put on airs
and make me feel like thirty cents, I am off on a rampage.” He remem-
bered the slight he received from a small bank that required him to
furnish references before opening an account. When Ponzi was done,
he had acquired that bank.45 White collar criminals in general “have a
high sense of self-esteem.”46
Consumers may be proud of buying bargains. Thieves find bar-
gaining “demeaning.” They are proud of being able to handle “big
money,” which the marks do not seem to be able to do. The thieves
are not willing to accept budgets and restrictions, which are “the
opium for the middle classes.”47 Said one thief: “You know, for you
money is probably worth a lot, but for me one thousand is like one
hundred for you . . . I can always go out and buy me a Bacco chisel and
steal my money again.”48 Yet at the same time these criminals are
driven to get more money. As one con artist said, “It gets to the point
where you spend money just to have the motivation to continue,
because without that motivation you might as well quit.”49
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The executives “believed that they were not engaged in fraud just for
their own benefit but for the benefit of the company to which they
had intense loyalty and dedication.”75 Thus, con artists sometimes
assert not only that the government is doing evil, but that they are
doing good.
Con artists attempt to prove their innocence: after all, they did
not abscond with the investors’ money even though they could have
done so. An Australian con artist who operated a Ponzi scheme made
this argument in 1988: “He said he could have decamped with $10–
12 million ‘if I was that way inclined.’”76 Yet, coming from people who
are repeat offenders, the claim sounds hollow. As discussed, con art-
ists view each of their schemes as just one “project.” It therefore
makes sense to exploit the project fully, until it is no longer produc-
tive, from their point of view. Corporate con artists can hardly make
this argument. Before their company goes under, they usually distrib-
ute what money they can among the members of their group. Before
Enron was publicly announced insolvent, millions were distributed
among its top management.77
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the number of shares that were offered doubled on the first trading
day. This suggests that many shares were handed to the underwriters’
favorite investors, most of whom may have “sold the stock during the
morning run-up. It’s the easiest money you can make on Wall Street.”80
After a short period, some shareholders were left holding shares for
which they paid far more than the current price, and perhaps more
than what the price would be for a long time to come. Whether the
favored shareholders who reaped large amounts from the flipovers
and the underwriters who favored them committed actionable fraud
is not the issue here. What is important is that the favored shareholders
seem unconcerned about other shareholders to whom they sell such
shares at a much higher price. Perhaps they believe that this is the way
markets should work. Yet in this case the markets act like a Ponzi
scheme. Losing investors can sue for the payments other investors
were paid as “non-existent principal and fictitious profits.” This was the
claim in the case of Bayou Hedge Funds.81 To the extent that the inves-
tors who benefited had a suspicion about the source of their profits,
there is a question about the level of their empathy.
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envy. But then they find that having these things does not make any
difference; it does not satisfy their self-esteem. This is why when they
get the things they crave greedy people still want more. Con artists as
well as some of their victims may have the psychological makeup of
such people. For them, there is never enough. Therefore, we may find
not only greedy con artists but also greedy victims. Although con art-
ists’ greed may drive them to fraud, investors who suspect such fraud
may be driven to invest even when they have an inkling that their
profits consist of other people’s money.
Greedy people may desire to maintain their status or advance
within their organization.83 They may seek to avoid losing what they
have acquired, rather than acquire more. Perhaps this happens when
a company’s financial fortunes are deteriorating, and its managers
fear losing income, prestige, and self-worth. They might believe that
the company will turn around soon. Therefore, they push the enve-
lope and slowly cross over to the illegal side. Hiding a small loss by
using accounting tricks or misstatements in vouchers leads to keeping
two sets of books and forging signatures. As it is hard to extricate
from the results of this behavior, they sink further into the quicksand
of criminal actions until exposed. But some white-collar criminals
simply are not willing to wait for the changing fortunes of the organi-
zation. Like con artists, they want the benefits of great wealth, power,
and prestige in the present and not in the future. The greed they expe-
rience is the need to have it now. And once they acquire wealth and
prestige by illegal means, there is no reason to stop—and perhaps no
way to stop, especially if the hunger is all-consuming.
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A. GULLIBILITY
Gullibility means unbound and unreasonable trust. Trusting is desir-
able in a society that thrives on investments and reliance on experts.
Gullibility and trust are very close and sometimes hard to distin-
guish. But they differ in degree. Gullibility is unreasonable trusting—
believing fully in others and their stories. But especially in business
transactions, trusting people base their belief on reasonably sufficient
evidence; gullible people believe on insufficient evidence. The trust-
ing are drawn by rational considerations and sufficient relevant infor-
mation that they can gather; the gullible may be drawn by emotion,
hope, or fancy.88
Those who accept an offer that is too good to be true could be
viewed as gullible.89 After all, if on its face an offer suggests that it
cannot be true (because it is too good) then the offer itself sends
the message, “Do not trust me because I am very likely to be false.”
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A person who ignores this message is not a trusting person but a gull-
ible one. In addition, the gullible are internally more dependent and
therefore weaker than skeptical and suspecting people, who depend
more on themselves than on others. As between the two personal-
ities, con artists put on a front of invincible, never wrong, strong indi-
viduals. Compared to these indestructible and supreme persons,
victims feel inadequate. They have more doubts and are not as
assured and strong as the con artists. They feel less smart or insuffi-
ciently sophisticated. Above all, when victims cannot deny their
inferiority, they wish to hide it. To some extent, the victims seem to
adopt values and behavior that are similar to those of the con artists.
They too hide their feeling of being weak.
Foreigners may be more gullible than local residents merely
because they have less information. The con artist George Parker tar-
geted immigrants and tourists in New York City and sold them pop-
ular landmarks. He preyed on unsuspecting foreigners who believed
that America was the land of opportunity, assuring them they could
buy as an investment the right to charge tolls or fees for access to the
landmarks.90
There are examples of high-level gullibility among investors. Con
artists’ stories can be “a fairytale world” of “fantasy money, imaginary
banks and bogus $US1000 billion government certificates.” One
scheme offered enormous returns from “1934 US government gold
bond certificates, which Euro Credit is about to purchase from a
Dominican company and that have a total value of as much as $US600
trillion.”91 Another supposedly obtained the bonds he offered “from a
woman who is said to be in short-wave radio communication with
Hatton, ‘a 9ft 6in [2.8 meter tall] extraterrestrial.’” And yet another
“claim[ed] to be acquiring old US government bonds worth as much
as $US600 trillion.” The schemes “are so wacky it is hard to under-
stand how any half-sane person could believe them.”92 But some
people are caught nonetheless.
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even though wealthy people were ready to experiment and take some
risks, they were not ready to put their life savings at high risk. In con-
trast, those investors who viewed their financial condition as average
or poor were willing to take greater risks and overexpose themselves
to Ponzi schemes.96 The poor have less to lose and more to gain.
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people who value and crave more money. Money represents many
other gratifications: feeling strong, immortal, special, admired; being
powerful enough to do what we want to do when we want to do it;
and being able to tell others to do our bidding. These are the ingredi-
ents risk taking is made of. These are the payoffs for taking risks.
Investors in Ponzi schemes may be driven to take the investment
risks in these schemes for any of these payoffs. The investors who
value these returns are ready to take greater risks.
D. SOCIAL STATUS
Pressure to belong and feel special, and risk reduction while taking
risk, all play a role in the victims’ behavior. We noted in prior chapters
that Ponzi schemes generate excitement in potential investors, and
that affinity group members can influence each other in encouraging
investment in these schemes. David Tennant’s study found that when
many “close friends are getting rich by investing in Ponzi schemes the
temptation to invest larger proportions of income becomes harder to
resist.” Yet here is a puzzle: the study found that if potential investors
discover that more people are invested in the scheme, the investment
becomes less attractive and potential investors are less likely to invest. If
potential investors know that only a few of their friends are investing in
the scheme, they are more likely to invest in it.101
This “twist” suggests another influencing factor that we noticed
before as well. As discussed previously, Ponzi schemes often promise
exclusivity.102 Exclusivity makes some investors feel special. Not all
investors crave this feeling, but those who need it or enjoy it are more
susceptible to the allures of the scheme and are more likely to invest
if the number of their investor friends is relatively small. Similar con-
clusions were reached in another study concluding that there is a uni-
versal need for people to feel unique.103 We need a sense of identity
and self-validation; our unique traits help define and enforce our
sense of a stable identity. Being somewhat different from others, we
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144
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con artist fraud, and should have. For their lack of vigilance, they
are condemned.
Sophisticated victims blame themselves for their weaknesses and
seek to hide their losses, rather than complain to the police. These
victims’ attitude and behavior support the view that they could
indeed have avoided losses. Their behavior after the discovery of the
fraud further helps the con artists, since many would rather just for-
get it, from embarrassment at having been “taken for a ride.”117 This
attitude is true in the United States and in other countries.118 As a
former well-known sports star, who declined to discuss the Ponzi
case in which he was a victim, revealed, “It was a chapter in his life he
would rather forget.”119 This attitude may have changed in recent
years, with frauds surfacing in large numbers and affecting quite a
variety of victims. For example, one case represented “a collection of
claims brought by many individual pharmacies, pharmacists, veteri-
narians and veterinary clinics.”120 These victims too, for all their pro-
fessional prominence, fear guilt, and shame,121 societal condemnation,
indifference and social isolation.122 For these many reasons, victims
tend to remain silent. By their silence, they may produce an unin-
tended consequence of helping con artists prolong their game.
As one court explained, “When the circumstances would suggest
to an investor of ordinary intelligence the probability that she has
been defrauded, a duty of inquiry arises, and knowledge will be
imputed to the investor who does not make such an inquiry. Such
circumstances are often analogized to ‘storm warnings.’”123 The “storm
warnings” doctrine has been used to evaluate inquiry notice in cases
involving claims for violations of the securities acts.124 The victims
“simply swallowed the losses to avoid the public humiliation of a law-
suit.”125 Large corporations that were caught and lost in a Ponzi
scheme have a business reason to avoid publicity. They may fear
losing customers. Careless in managing their assets, they might be
thought to be careless in other activities as well.126 They remain silent.
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small Canadian town fiercely supported the con artists who had
robbed it, while vehemently opposing and even obstructing the
government investigators. This community attributed its financial
success to the con artists and blamed the government for ending
its prosperity.
On May 10, about 500 of the 6,000 residents [of the town], . . .
a forestry-dependent community 1,000 kilometers north of
Vancouver, gathered to proclaim their support of Glenn
Anderson—a.k.a. Uncle Glenn—and their disdain for the big-
city bureaucrats who had shut down his little bank a week ear-
lier. They carried placards declaring “God sent Uncle Glenn
Anderson to help people in Burns Lake and the Lakes District”
and “Glenn Rocks, Government Sucks.” One by one, they
stepped up to a microphone outside Anderson’s tiny office on
the main drag, where he conducted most of his firm’s business
under its original incorporation name, 439288 BC Ltd. “If we
can get Glenn back up and help him out, we’ll see him back in
his office helping us out,” said resident Jack Sebastian, to
rousing cheers.
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Ponzi schemes are addictive for con artists, and for some of their
victims. Arguably, a Ponzi scheme suggests that con artists engage in
mathematical calculations. A schemer would compute the max-
imum dividend payout rate, given a certain investment growth rate,
and estimate the surviving years of the scheme. In other words, the
con artist would adopt a system and a strategy. And yet the wild va-
riety of the schemes, the enormous range of promised returns, and
the diverse approaches that the con artists adopt, on the one hand,
along with the more stable psychological tendencies of the players,
on the other hand, suggest that mathematical and rational calcula-
tions are not on the mind of either player. In fact, it seems that a
feature shared by con artists and many of their victims is addiction to
the game.
1. What Is Addiction?
Addiction is an irresistible impulse that a person/actor cannot
control. It is a compulsion, dependence, obsession, or craving that
mature into a habit.134 Addicts may not recognize or admit their
addiction; they “live in a fantasy world and deny reality.”135 Even
though the activities could ruin their lives, addicts cannot stop.136
For example, one con artist cashed the insurance policies of fellow
church members, forged checks, sold bogus guaranteed investment
certificates, and took money from his church. He also took the
“money that his daughter’s quarter horse riding association had
raised by selling chocolate bars.”137 It seems that this con artist lacked
the internal controls that would deter most people from behaving
this way.
Speculative activities are not addictive in and of themselves,
even if they result in losses. Derived from the Latin word for “to see,”
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152
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153
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154
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155
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156
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On July 12, 1995, the Crowes and their company were sued,
among other things, for operating illegal pyramid and Ponzi schemes,
substantially as they had done over the entire period. The Crowes’
argument that they ran a legitimate multilevel marketing system (like
Amway) was rejected. They were convicted. The district court sen-
tenced Martha Crowe to 121 months in prison and David Crowe to
135 months in prison, and the corporation was fined $3,000. The
couple were allowed to remain free until their sentence began. The
Crowes opted not to report to prison on January 21, 1997; instead
they fled, and presumably are still at large. They may be outside the
country.162
Speaking about another con artist who ran a pyramid scheme, the
head of a Better Business Bureau office said: “He doesn’t seem to get
it. . . . We’ve had him in our files since 1995. He had one pyramid
scheme after another.” Clearly this man was an addict. By now the
authorities must understand that as well.163 In Australia, Craig John
McKim was convicted of a Ponzi scheme. Out of prison, he contin-
ued to entice investors with promised returns of 5 percent a week. He
“invested” in gambling debts and was convicted again.164 Con artists
are addicted to their schemes and the joys of success in persuading
potential investors to part with their money. The behavior of Ponzi
victims after their losses, and their reluctance to complain about the
scheme, fit this profile as well.
Compared to other perpetrators of large-scale financial frauds,
con artists of the Ponzi variety are not as successful financially. Not
surprisingly, Madoff, the “prince of the Ponzi schemers,” fits in this
category. For many years he and his family lived in unbelievable
luxury. They used great wealth during this long Ponzi career. But
Madoff did not seem to have accumulated and saved sufficient wealth.
It seems that the need to spend was greater than the need to save or
even think about the future. Other types of offenders accumulate suf-
ficient resources to live in luxury ever after, provided they are not
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159
Chapter 5
Some people may admire the con artists’ talents; many con artists are
indeed gifted people. Yet Americans condemn wasted talent. They
may pay attention to the challenge that the cons pose to society, but
as their danger is recognized, the charm of con artists palls and con-
cern, or even fear, for the welfare of society’s survival emerges. The
harm done by their schemes to the integrity and existence of the mar-
kets becomes clearer. The dark side comes into view; the cruelty and
lack of empathy of the con artists surface. The difficulties of uncover-
ing the schemes and the great losses they cause to individuals and
institutions stand out for all to see.
In addition, the public seems to distinguish between two groups
of con artists. The first includes those who started as con artists; the
other group includes those who resolved their problems by resorting
to a Ponzi scheme. The “professional” con artist (illustrating the former
group) rarely enjoys the benefit of the public’s doubt as to crooked-
ness. Everyone agrees that this con artist is a crook; nonetheless this
person often is admired for his cleverness.
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161
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162
H O W D O E S T H E P U B L I C V I E W T H E C O N A RT I S T S
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2008 has again marked how the power elite are viewed. Madoff is an
example because he shamed many leaders of charitable and nonprofit
organizations, perhaps because of the extraordinary amounts
involved and perhaps because his fraud brought to the bankruptcy
court conflicts among the victims themselves. These conflicts
involved those investors who lost their investments (or expected
returns) and those who managed to benefit from the fraud and
retrieve not only their investments but also returns on these invest-
ments (which in truth constituted stolen money).4
164
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165
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166
H O W D O E S T H E P U B L I C V I E W T H E C O N A RT I S T S
167
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168
H O W D O E S T H E P U B L I C V I E W T H E C O N A RT I S T S
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Is it really difficult to detect a Ponzi scheme? After all, there are many
people who are not caught in the net. If one cares to look, the flags
waved by the con artists are bright red warnings. As noted in Chapter
1, although there is an enormous variety of Ponzi schemes, they all
have a few prominent features in common. First, the con artist always
promises very high returns at low risk. Second, in every scheme the
source of the payments is costly to evaluate directly and cannot be
tested by comparison because the scheme or story is novel. Third, in
every Ponzi scheme, even if the con artists are not with a financial
institution, they continue to issue their obligations. Fourth, in most
of the schemes the salespersons attempt to establish close personal
relationships with the investors; and fifth, when the schemes involve
securities, there is no compliance with securities law. Stripped of all
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171
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172
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173
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174
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175
Chapter 6
The law comes to the fore when the Ponzi scheme lasts for a long
time and the victims lost significant amounts—sometimes their life
savings. In such cases, the victims may fight each other to cover
their losses. The reason for these conflicts is inherent in the nature
of the scheme. A Ponzi scheme starts and ends with three kinds of
“players”: one is the con artist (or the group of con artists), the
second kind is the early group of investors; the third kind is the later
investors. Not all investors lose in this scheme because the early
investors receive their investments and “profits” from the money
paid by later investors. The “unlucky” investors came too late and,
rather than gain, lose all or most of their investment.1 Thus, investors
can be divided into those who collected their investments with or
without profits and those who received part of their investment
or none.
When a Ponzi scheme is uncovered, law plays one role in bringing
fraudsters to justice and two additional roles. The first is collecting
the fraudsters’ remaining assets and claiming funds from those who
helped the con artists. The second is dividing the assets fairly among
the victims.
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B. THE ISSUES
Many legal issues rise upon the discovery and dissolution of a Ponzi
scheme. One of these issue, relates to taxation. What if victims paid
taxes on the profits they must now repay? How much tax, if any,
should the victims recoup? And what if the value of money in the past
was more or less than the amount the victims accept or pay now? We
are not going to deal with the tax and value issues because these are
complicated problems, outside the parameters of this book; and
besides, I am neither a tax expert nor an evaluator of money. There-
fore, I mention these issues but go no further.
Another legal topic that results from the demise of Ponzi schemes
involves the con artist’s bankruptcy. This topic raises a number of
questions. First, who collects the remaining assets? Second, from
whom should the assets be collected? And third, to whom should the
assets be distributed?
Although some of the victims may sue other victims directly, the main
scene in a Ponzi scheme case takes place in the bankruptcy court that
oversees collection and division of a bankrupt debtor’s assets.2
The bankruptcy court appoints a trustee to collect the assets that
the con artist accumulated or hid. If another agency becomes liable as
a guarantor of losses from such Ponzi schemes, such as the Securities
Investor Protection Corporation (SIPC), and guarantees against losses
of broker-dealers’ customers, SIPC may appoint a trustee as well, and
the process may differ.
The trustee sues the holders of the con artist’s assets and those who
helped the con artist in perpetrating fraud, such as feeders (organiza-
tions that brought investors to the con artist), persons who received
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significant gifts from the con artist, and anyone with whom the con
artist “parked” substantial amounts of money. The trustee claims the
assets these helpers received unlawfully or inequitably from the con
artist. Some con artists stash their assets in various bank accounts in
the United States and abroad. If the money was hidden and then spent,
some institutions might be liable if they knowingly helped to perpe-
trate the fraud by hiding the money (an action usually to their great
benefit).3 Thus the court supervises the collection of the remaining
assets of the con artist and division of the collected assets among the
creditors, in this case the victims.4
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that the bank had done its “due diligence” and collected information
about the borrower. The bank was aware of the investors’ assumption,
but after approval it is hard for a bank to withdraw approval or publicly
announce doubts about the borrower’s creditworthiness. There may be a
case in which a bank goes further and assists in the fraud, in spite of suffi-
cient facts to suspect a Ponzi scheme and a violation of securities laws.9
Regardless of intentions, a respectable bank can feed financial fraud
by neglecting to supervise its employees. One bank was found liable
for helping a securities fraud that was perpetrated by an employee, to
whom the bank provided a false and “severely reckless” reference.10 A
financial institution that hired an independent contractor to create and
manage its insurance program was liable for this contractor’s manage-
ment and choice of personnel. Yet, probably without the knowledge of
the financial institution’s managers, at least one of the hired brokers
used this program to operate a Ponzi scheme, adding unaffiliated com-
panies to the policies and retaining the premiums.11
Investment companies are not spared con artists’ abusive use
either. Charles Lewis and his partner conducted a Ponzi scheme by
using a number of “ostensible investment companies.” The con artists
promised investors “that they would be participating in an exclusive
program that purchased high-yield notes whose principal was
guaranteed by reputable insurers.”12 The names of these reputable
companies helped sell fraudulent products.
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180
T H E L E G A L A F T E R M AT H
Dividing the remaining con artist’s assets among the victims can
create conflicts among the trustee in bankruptcy and some of the vic-
tims, among receivers of the failing Ponzi business and some of the
investors, and sometimes among the victims themselves. There is not
enough money to repay all victims. Yet some receive payment not
only of their investment with the con artist but also additional money
drawn from other victims’ payments. Most of this money may be
deemed stolen. Therefore, the issues of how much money the victims
are entitled to, from whom they can collect, and under what circum-
stances become complicated. They involve two warring groups of
victims whose personal situations may differ. The question is: what is
a fair division among them?
As one court noted: “It is clear that the principal invested by any
of Madoff ’s customers ‘gave value to the debtor,’ and therefore may
not be recovered by the Trustee absent bad faith. As for transfers
made by Madoff Securities to its customers in excess of the cus-
tomers’ principal—that is, the customers’ profits—these were in
excess of the ‘extent’ to which the customers gave value, and hence, if
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182
T H E L E G A L A F T E R M AT H
people who receive stolen money or stolen goods do not gain owner-
ship of the money or goods. One exception to this rule is if the re-
ceivers paid value for the property and did not know nor suspect that
the money and property were stolen.21 Similarly, a broker must return
the commissions that the con artist paid in connection with the
fraudulent scheme.22
According to Harold R. Weinberg, the rules concerning stolen
goods are shaped by two conflicting public policies. One aims at en-
suring that innocent buyers will acquire ownership of assets they buy
in an open market. The other policy aims at deterring thieves by
making it difficult to sell stolen goods, and deterring buying from
thieves. These rules regulate the costs of verifying the source of the
goods. If buyers can easily determine whether goods are stolen (for
example, if a watch carries personal initials, or its price is very low,
and the seller offers the watch in an alley rather than in a shop), then
the buyer may be required to return the watch to its rightful owner.
The rules may change depending on how much support markets
require. Thriving markets might involve stricter rules against trading
in stolen goods; in “thin markets” the buyers of stolen property may
gain higher protection by law.23
One court justified lower protection to the buyers of stolen goods
in periods of increasing theft. The court, noted that reduced protection
gives people incentives to “prosecute felons, and . . . discourage per-
sons from buying stolen goods,” even in an open market.24 The court
thus protected good-faith buyers and provided incentives to prosecute
those who were aware of the possibility that they were offered stolen
goods.
Yet the “net winners,” those who collected from the con artists
their initial investments and perhaps returns on their investments
are fighting to keep some of their winnings and contest the way the
collected assets are distributed. They have brought claims in courts
as well.25
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184
T H E L E G A L A F T E R M AT H
refused to do so. The court held that comparing the total amount the
investor received ($73,290.70), with the amount he had to return
($31,555.32) showed that the investor would be permitted to retain
$41,735.38. This amount represented a total return of approximately
83 percent of his investment, while most of the scheme’s fifty-two hun-
dred net losers were likely to recover only pennies on the dollar for their
initial investment.28 This investor had to return the money, as required.
The issues become more complex when some victims retrieved
their own investments and profits that constitute stolen money but
used the money or lost it. They no longer have the money to return.
Suppose Lucky invested in a Ponzi scheme fifteen years ago. Having
retired, she collected her investment during the ten prior years as well
as the profits from these investments. She then purchased a home in
one of the islands and invested her savings in an annuity promising to
provide her a comfortable income for the rest of her years.
Now suppose that ten years later she receives a demand from the
trustee in the con artist’s bankruptcy to return the entire amount of
her investments and profits, and after pooling this amount with sim-
ilar others she might receive a pro rata share of the pool. First, she
does not know how to get her money from the insurance company.
After all, she received the annuity for the amount of $42 million,
which is what she paid for it. Second, she will have to offer the entire
amount (her own investment and her profits) and might receive very
little, depending on the losses of the investors who came after her.
With the money she received from the con artist, she bought an
expensive house that is now worth less than its purchase price. And
she topped it with a mortgage she was paying off from the annuity
payments. If the annuity goes, what is she to do?
On the other side of the fence is Angry Investor, who lost all his
investments and gained nothing. He is angry because he believes that
part, if not all, of Lucky’s annuity was bought with his money. If both
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were imprudent to invest with a con artist, why should Lucky get it
all, and he get nothing?
And then there is a third party, Suspicious Investor. She bought
into a Ponzi scheme but soon thereafter smelled a rat and decided
to reduce her risks, as well as the enormous profits that were of-
fered, and retrieve her investments (perhaps with a little profit).
Suspicious Investor may have had some information that supported
her suspicions, but she shared it with no one. She just wanted to
escape.
Finally there is the Very Suspicious Lucky Investor. This person
too suspected foul play, imagining that the source of the high profits
constituted the payments of new investors. However, he decided to
collect as much as he could before demanding his money; being
friendly with the con artist, he succeeded in collecting the invest-
ments and a significant amount of profits.
How should the law divide the losses among the victims? What
role should the suspicions and intentions of the investors play? What
role should the effect of the demand on investors for repayment play?
What is fair and right in this case? Should the law play the role of a
teacher in this case, teaching people not to be gullible, teaching them
to be more careful about their investment decisions? How should
victimized investors be judged?
In fact, the current evolving spectacle poses all these questions
for the courts. The questions are percolating, and many are still unre-
solved. Yet conflicting principles and policies are emerging.
One way is to look at the source of the money that any of the vic-
tims, the feeders, and victims’ friends are holding. They distinguish
between legitimate and stolen money that they invested with the con
artist. “Profits” that constitute stolen money should be repaid. How-
ever, because money is fungible, perhaps even the payment that vic-
tims invested with the con artist would be viewed as stolen money. In
such a case, all victims should return all the money that they received
186
T H E L E G A L A F T E R M AT H
from the con artist, and this amount should be divided as a pro rata
share of what they invested.
A second way to resolve the issues is to mitigate the demand for
repayment by the years that have passed since the payment and
according to the situation of the victims. “Profits” that were paid in
stolen money years ago and were spent or lost should not be recovered
if the recipient investors did not know or suspect they were receiving
stolen money.
A third way is to examine the investors’ state of mind. Public
policy encourages vigilant investors. But if they suspected foul play,
they might not be permitted to collect profits that constituted other
people’s money. The answers are unclear and, sadly, cannot and will
not satisfy everyone.
187
Epilogue
What can we learn from the stories and analyses in this book?
We can learn that con artists mirror trustworthy people. Deceitful
actions can resemble legitimate activities. We noted that there are
those who seem to be entrepreneurs and produce nothing. Promises
of unbelievable profits can be, and often are, false. Following in the
footsteps of others may be beneficial, but also dangerous if we follow
blindly. We recognize that some people ignore signs of danger and are
overwhelmed by the positive (though misleading) signals that con
artists send. For these people it is harder to discover Ponzi schemes
before they end up with devastating losses. We can learn that society
is populated by people who mimic trustworthiness, who may be
self-centered, ruthless narcissists; and that there are true victims as
well as foolish or fake victims. We recognize that con artists are
addicted to the game and can corrupt their victims, drawing investors
into defrauding each other.
America is ambivalent toward con artists. It does not condemn
them as it would, say, the slayers of helpless elderly people, even though
the actions of con artists may have a similar devastating effect on their
victims, and even though their methods may be just as heartlessly
cruel. Con artists are gifted, although they do not gift their talents to
others or to society. Con artists possess admirable qualities. Had they
used their talents differently, society would greatly benefit. Instead
they are smart predators who seek to prove that they are smarter than
those who trust them.
188
EPILOGUE
189
THE PONZI SCHEME PUZZLE
the potential risk and benefit of the financial instruments that they
offer? Who can understand these instruments without becoming an
expert? And who has the time to become an expert in an area so far
from daily life and expertise? Therefore, today, more than in the past,
we ask: How can people protect themselves from financial fraud?
It is not as difficult as it seems—that is, provided we maintain
self-awareness. Having read the stories of con artists’ operations and
their victims’ reactions, the nature and the characteristics of the actors,
we can focus on a number of easy-to-remember and understand
questions.
First, who is trying to sell us an investment, and under what cir-
cumstances? Are we easily enchanted and charmed by people we do
not know well? Do we follow too eagerly our friends’ information
about a “fabulous investment”? Are we drawn to investments in inno-
vations we do not fully understand, or new ideas that have not been
tested? Do we want to belong to an “exclusive investment club”? Let
us recognize our own vulnerability to the con artists’ allure. After all,
very few of us remain entirely insensitive to some aspect of fraudulent
schemes.
Knowing our weaknesses constitutes our strength and protection.
In Greece, the Temple of Apollo in Delphi carried the inscription
“Know thyself.” Even the great Achilles had a vulnerable spot: his
heel. People who are aware of their weaknesses (such as a tendency to
become addicted to gambling, or to alcohol) can either succumb to
their tendency or avoid casinos or drinks altogether. We may read, or
be told, about a person who became a millionaire in no time. We may
wish to become millionaires too. But if someone with the character-
istics of a con artist approaches us with a great and tempting offer, or
if our friends excitedly tell us about a wonderful once-in-a-lifetime
opportunity, we will stop and consider our own tendencies and sus-
ceptibilities. And we might remember the stories we read in this
book, and say, “Not now, thank you. Let me think about it.”
190
EPILOGUE
191
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NOTES
Introduction
1. Merrill v. Abbott (In re Independent Clearing House Co.), 41 B.R. 985, 995
(Bankr. D. Utah 1984); subsequent history omitted.
2. Sushil Bikhchandani and Sunil Sharma, Herd Behavior in Financial Markets, 47
Int’l Monetary Fund Staff Papers 279, September 1, 2000, at § 3.
3. Gary Cohen, Dark Clouds over a Guru to the Stars, U.S. News & World Rep.,
May 28, 2001, at 35.
4. United States v. Treadwell, 593 F.3d 990 (9th Cir. 2010).
5. Scott Bernard Nelson, Fleet Writing Off $70M in Ponzi Scam; 4 in N.J. Accused of
Bilking 8 Banks With Phony Metals Trading, Boston Globe, May 15, 2002,
at D1.
6. BankAtlantic v. Coast to Coast Contrs., 22 F. Supp. 2d 1354 (S.D. Fla. 1998).
7. Al Lewis, Global Finance: Plea in Ponzi That Sacked Elway, Wall St. J., Novem-
ber 2, 2010, at C3, LEXIS, News Library, WSJ File.
8. Id.
9. A Century of Ponzi Schemes, Dealbook, December 15, 2008, http://dealbook.
nytimes.com/2008/12/15/a-century-of-ponzi-schemes/ (last visited February
21, 2012).
10. Joanne McCulloch, Cash Plan Director Faces Jail, Sunday Times (Perth),
May 26, 2002, at 17.
11. Obsatz, Con Left Entities Wiser, Poorer, at B1; see also Diana B. Henriques, $450
Million Fraud by Bill Collector Is Charged by U.S., N.Y. Times, February 18,
1994, at A1; United States v. Bennett, 161 F.3d 171, 174 n.2 (3d Cir. 1998)
(“Later, in 1993, non-profit organizations were also permitted to participate,
193
N OT E S TO PA G E S 5 – 7
and by the end, hundreds had sent funds to New Era.”), cert. denied, 528 U.S.
819 (1999).
12. See, e.g., United States v. Deters, 184 F.3d 1253, 1255 (10th Cir. 1999); “From
a date unknown until August 1994, Ms. Deters operated a Ponzi scheme, in
which individuals and church organizations invested money believing their
investment returns were generated by profits from legitimate businesses.”
13. Diana B. Henriques and Zachery Kouwe, U.S. Arrests a Top Trader in Vast
Fraud, N.Y. Times, December 12, 2008, at A1, LEXIS, News Library, Arcnws
File (noting Madoff ’s confession); Exhibit A, http://online.wsj.com/public/
resources/documents/madoffclientlist020409.pdf (last visited Feb. 21, 2012)
(list of clients); Diana B. Henriques, Madoff Will Plead Guilty; Faces Life for Vast
Swindle, N.Y. Times, March 11, 2009, at A1 (noting length and size of scheme);
Diana B. Henriques, Madoff, Apologizing, Is Given 150 Years, N.Y. Times, June
30, 2009, at A1 (noting sentence).
14. William P. Barrett, New Mexico Mini-Madoff Case Provides Lesson for Investors,
Forbes, Investment Guide, June 28, 2010, at 90, LEXIS, News Library, Curnws
File.
15. Adi Ignatius, As “Pyramid Scheme” in Russia Begins to Collapse, Rubble May Trap
Many, Wall St. J., July 27, 1994, at A6.
16. Furor Fin Does the Vanishing Act with Investors’ Rs350 Crore, India Bus.
Insight, December 24, 2001.
17. Chris Jarvis, The Rise and Fall of the Pyramid Schemes in Albania, 47 IMF Staff
Papers 1 (2000).
18. Katherine Verdery, “Caritas” and the Reconceptualization of Money in Romania,
Anthropology Today, February 1995, at 3 (and authorities cited there).
19. Russell B, Bottom Lines, Courier-Mail (Brisbane), February 9, 1990, LEXIS,
News Library, Arcnws File (noting conviction for aggravated fraud and issuing
uncovered checks); People’s Banker Is Put on Trial, Globe & Mail (Canada),
February 19, 1988, LEXIS, News Library, Arcnws File (noting scheme
involved at least $13.5 million and ran for fifteen years, ending in 1984); Mad-
eline Prowse, Where Does Granny the Banker Get Her Money? Globe & Mail
(Canada), August 2, 1984, LEXIS, News Library, Arcnws File (noting that
Dona Branca “insists that she runs her business purely out of altruism”).
20. Torsten Ove, Southern Exposure; Investment Operation in Costa Rica Took in
Hundreds of Millions, Then It All Fell Apart, Pittsburgh Post-Gazette, May
11, 2003, at C-1, LEXIS, News Library, Arcnws File.
21. Cooperative Crisis Continues to Escalate in Haiti, Haiti Progres, July 24–30,
2002, http://www.hartford-hwp.com/archives/43a/467.html (last visited
May 2, 2011).
22. SEC Files Action to Halt International Investment Scheme and Obtains Emergency
Asset Freeze and Repatriation Order, Litigation Release No. 21,864 (Febru-
ary 22, 2011), http://www.sec.gov/litigation/litreleases/2011/lr21864.htm
(last visited May 2, 2011).
194
N OT E S TO PA G E S 7 – 1 0
23. Humberto Cruz and Diane Lade, Don’t Lose to Investing Scams—Watch for
Signs, Sun-Sentinel (Fort Lauderdale, FL), September 18, 2000, at 21; see
Curt Anderson, Ponzi Scheme Collapses Nearly Quadrupled in ’09, Boston
Globe, December 29, 2009, Business, at 6 (“More than 150 Ponzi schemes
collapsed in 2009”).
24. The list of these cases is with the author.
25. United States v. Reynolds, 643 F.3d 1130 (8th Cir. 2011) (“Reynolds pleaded
guilty to conspiracy to commit money laundering . . . and was sentenced by
the district court to 130 months’ imprisonment. Reynolds appeals from his
sentence”; his appeal was affirmed).
26. United States v. Treadwell, 593 F.3d 990 (9th Cir. 2010), cert. denied, 131 S. Ct.
280, and cert. denied, 131 S. Ct. 281, and cert. denied, 131 S. Ct. 488 (2010).
27. Id.
28. A Century of Ponzi Schemes, Dealbook, December 15, 2008, http://dealbook.
nytimes.com/2008/12/15/a-century-of-ponzi-schemes/ (last visited Febru-
ary 21, 2012).
29. Joe Dejka, Thieves to Learn a Lesson; Sarpy County Tries Shoplifting School; Court
Cases Diverted; Shoplifting Facts, Omaha World-Herald, June 17, 2002, at 1b.
30. Id.
31. Humberto Cruz and Diane Lade, Don’t Lose to Investing Scams—Watch for
Signs, Sun-Sentinel (Fort Lauderdale, FL), September 18, 2000, at 21.
32. People v. Sandy, 236 A.D. 2d 104 (N.Y. App. Div. 1997); BCCI case.
33. Dejka, Thieves to Learn a Lesson, at 1b, at Introduction n. 29.
34. Holly Howard Preston, The Sophisticated Investor’s Worst Nightmare; Investment
Fraud—A New Bumper Crop, International Herald Tribune., June 15,
2002, at 13.
35. Paul Palango, Mountie Misery, Maclean’s, July 28, 1997, at 10.
36. Prepared statement of Debra A. Valentine, General Counsel for the U.S. Federal
Trade Commission on “Pyramid Schemes,” presented at the International Mon-
etary Fund Seminar on Current Legal Issues Affecting Central Banks, at http://
www.ftc.gov/speeches/other/dvimf16.shtm (last visited February 22, 2012).
37. Noted Banker Chmielinski Among Losers, Daily Boston Globe, June 28, 1957,
at 23.
38. See, e.g., Glenn Puit, Victims Say Beware of Scams, Las Vegas Rev.-J., June 27,
1999, at 1B; Richard L. Stern and Reed Abelson, The Second-Oldest Industry?
Forbes, June 24, 1991, at 236, LEXIS, News Library, Arcnws File (describing
a pyramid scheme under the auspices of the Church of God).
39. Arthur A. Leff, Selling and Swindling 71 (1976) (Ponzi schemes being prefera-
ble to the numbers game or other one-time hits).
40. See, e.g., Floyd v. Dunson (In re Rodriguez), 209 B.R. 424, 428 (Bankr. S.D.
Tex. 1997) (“The business of debtors was conducted as a Ponzi scheme from
about November 1990 until its demise on or about April 23, 1993”); United
States v. Londe, 587 F.2d 18, 19 (8th Cir. 1978) (“This finding was based in
195
N OT E S TO PA G E S 1 0 – 1 7
part on uncontroverted evidence which showed that from 1969 to 1972 Londe
had represented to numerous individuals that he was able to purchase ambu-
lance ‘shells’ direct from the factory, equip them himself and resell them at a
substantial profit”), cert. denied, 439 U.S. 1130 (1979); New Jersey v. Childs,
242 N.J. Super. 121, 126 (1990) (“‘Between on or about January 1, 1982 and
on or about August 31, 1984’ defendant used these misrepresentations . . .”).
41. In re Taubman, 160 B.R. 964, 973 (Bankr. S.D. Ohio 1993).
42. See, e.g., Richard Behar, Wall Street’s Most Ruthless Financial Cannibal, For-
tune, June 8, 1998, at 212 (“But Dennis Helliwell, who was sentenced to fed-
eral prison last October, ran his Ponzi for 11 years”).
43. See From the “Lectric Law Library” Stacks: How to Avoid Ponzi and Pyramid Schemes,
at http://www.lectlaw.com/files/inv01.htm (last visited February 22, 2012).
44. Terry Greene Sterling, The Moneychangers; A New Times Investigation; First in
a Series, Phoenix New Times, April 16, 1998, LEXIS, News Library, Arcnws
File; From the “Lectric Law Library” Stacks: How to Avoid Ponzi and Pyramid
Schemes, at http://www.lectlaw.com/files/inv01.htm (last visited February
22, 2012). (If new investors constituted the only source of added capital, the
number of investors needed to keep the scheme going would be astronomical.
It was calculated that at month 11 the number of new investors must exceed the
U.S. population and at month 13 it must exceed the world population.)
45. Michael Bacharach and Diego Gambetta, “Trust in Signs,” in 2 Trust and Society
148, 149 (Karen S. Cook ed., 2001).
Chapter 1
1. Charles Ponzi, The Rise of Mr. Ponzi (1935), at http://www.pnzi.com (last vis-
ited February 29, 2012).
2. Id.
3. “Ponzi” Schemes, at http://www.sec.gov/answers/ponzi.htm (last visited July
10, 2001).
4. Ponzi, The Rise of Mr. Ponzi, at Ch. 1, n. 1.
5. Id.
6. Id.
7. Id.
8. Id.
9. Id.
10. Charles Ponzi, Useless Information, at http://uselessinformation.org/ponzi (last
visited February 22, 2012).
11. United States v. Lindsey, 200 Fed. App’x 902 (11th Cir. 2006), unpublished
opinion; see also Stafford v. Giddens (In re New Times Sec. Servs., Inc.), 463
F.3d 125 (2d Cir. 2006) (“Goren conducted a Ponzi scheme using the two
brokerage houses (the ‘Debtor’). He solicited investments in fictional money
196
N OT E S TO PA G E S 1 7 – 2 2
197
N OT E S TO PA G E S 2 3 – 2 5
26. BULLETIN: Man Implicated by Jamaica in Alleged $326 Million Ponzi Known
as “Cash Plus” Now Accused by United States of Orchestrating Separate HYIP
Scheme That Funneled Cash to Latvian and Jamaican Accounts, PatrickPretty.
com, February, 24, 2011, http://www.patrickpretty.com/2011/02/24/bulle-
tin-man-implicated-by-jamaica-in-alleged-326-million-ponzi-known-as-cash-
plus-now-accused-by-united-states-of-orchestrating-separate-hyip-scheme-
that-funneled-cash-to-latvian-and-jamaican-a/.
27. United States v. Moreland, 622 F.3d 1147, 1153 (9th Cir. 2010).
28. Katherine Verdery, “‘Caritas’ and the Reconceptualization of Money in Roma-
nia,” Anthropology Today, February 1995, at 3.
29. Joanne McCulloch, Cash Plan Director Faces Jail, Sunday Times (Perth), May
26, 2002, LEXIS, News Library, Arcnws File; see also United States v. Cook,
573 F.2d 281 (5th Cir. 1978).
30. United States v. Bach, 172 F.3d 520, 521 (7th Cir.), cert. denied, 528 U.S. 950
(1999) (emphasis added).
31. United States v. Mathison, 157 F.3d 541, 544 (8th Cir. 1998).
32. SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1111 (9th Cir. 2006).
33. United States v. Utlaut, 497 F.3d 843 (8th Cir. 2007) (instead of buying seed he
used the money to support his gambling addiction. Although he gave the seed
orders to his employer, he concealed his “early-pay” program. The employer
delivered the seed to the customers but was not aware that the customers had
“prepaid” and therefore billed the customers later in the summer. The cus-
tomers forwarded the invoices to the employee. He then paid the employer
from the funds in Agri-Management. Where did the employee receive the
money? After all, he spent the money that the customers forwarded to him ear-
lier. He obtained the money to pay the later invoices from new seed orders. In
addition he “solicit[ed] direct investment in Agri-Management in exchange for
the promise of a guaranteed return.” The scheme was discovered in July 2004,
when a customer contacted the employer upon noticing that his large payment
for seed was not recorded on his invoice. The company investigated, and fired
the employee. The fraud cost the employer $3,895,962.90 in reimbursements
to customers).
34. Greg Allen, Florida’s Palm Beach Rocked by Madoff Scandal, NPR, December
16, 2008, http://www.npr.org/templates/story/story.php?storyId=98317793
(last visited February 23. 2012).
35. United States v. Treadwell, 593 F.3d 990 (9th Cir. 2010).
36. United States v. Hayes, 231 F.3d 1132, 1134 (9th Cir. 2000) (emphasis added).
37. CFTC v. M25 Invs., Inc., No.: 3-09-cv-1831-M, 2010 U.S. Dist. LEXIS 118823
(N.D. Tex. October 25, 2010); unpublished opinion.
38. United States v. Gragg, No. 96-5586, 1998 U.S. App. LEXIS 9577, at *3 (6th
Cir. May 7, 1998).
39. Lisa Singh, “Fool’s Gold,” Dallas Observer, November 16, 2000, Features, at 1.
40. United States v. Gragg, No. 96-5586, 1998 U.S. App. LEXIS 9577, at *5 (6th
Cir. May 7, 1998).
198
N OT E S TO PA G E 2 6
199
N OT E S TO PA G E S 2 6 – 2 7
200
N OT E S TO PA G E S 2 7 – 3 3
States News Service, June 7, 2005, LEXIS, News Library, Arcnws File.
http://www.justice.gov/usao/cac/pressroom/pr2005/087.html.
78. See SEC v. Bennett, 904 F. Supp. 435, 437 n. 3 (E.D. Pa. 1995); United States
v. Bennett, 161 F.3d 171 (3d Cir. 1998), cert. denied, 528 U.S. 819 (1999).
79. Singh, Fool’s Gold, at 1, at Ch. 1, n. 39.
80. Avner Offer, “The Mask of Intimacy: Advertising and the Quality of Life,” in
In Pursuit of the Quality of Life, 211, 225 (Avner Offer ed., 1996); id. at 226
(“Reciprocal giving gives rise to obligation . . .”).
81. Ponzi, at http://www.crimes-of-persuasion.com/Crimes/InPerson/Major-
Person/ponzi.htm (last visited February 25, 2012).
82. Id.
83. Keith O’Brien, Jeff Man Accused of Scam Netting Millions; He Got Rich Prosecu-
tors Say, Times-Picayune (New Orleans), September 16, 2000, Metro, at 1.
84. Terry Greene Sterling, The Moneychangers; A New Times Investigation; First in a
Series, Phoenix New Times, April 16, 1998, LEXIS, News Library, Arcnws File.
85. United States v. Gragg, No. 96-5586, 1998 U.S. App. LEXIS 9577, at *2 (6th
Cir. May 7, 1998).
86. United States v. Goheen, No. 98-4033, 1999 U.S. App. LEXIS 4622, at *1 (4th
Cir. March 18, 1999).
87. United States v. O’Toole, No. 99-6072, 1999 U.S. App. LEXIS 18192, at *2
(10th Cir. filed August 3, 1999) (in fact, the bonds were close to worthless;
investors lost $163,284 in this scheme).
88. Id.
89. United States v. Farris, 614 F.2d 634, 637 (9th Cir. 1979).
90. Inland Empire Man Who Orchestrated $26 Million Ponzi Scheme Sentenced to 14
Years in Prison, States News Service, June 7, 2005, LEXIS, News Library, Arc-
nws File. http://www.justice.gov/usao/cac/pressroom/pr2005/087.html.
91. State v. Haas, 138 Ariz. 413 (1983).
92. Id. at 417.
93. Ponzi, at http://www.crimes-of-persuasion.com/Crimes/InPerson/Major-
Person/ponzi.htm (last visited February 26, 2012). The term “units of indebt-
edness” rings a bell and is remindful of “evidence of indebtedness,” contained
in the definition of a security in the securities acts. See, e.g., Securities Act of
1933, § 2(a)(1), 15 U.S.C. § 77b(a)(1) (2006) (this scheme earned Ponzi a
prison sentence as well).
94. Sterling, The Moneychangers, at Ch. 1, n. 84.
95. Perlman v. Delisfort-Theodule, No. 09-80480-Civ-Hurley/Hopkins, 2010 U.S.
Dist. LEXIS 116510 (S.D. Fla. November 1, 2010) (memorandum opinion)
(unpublished opinion).
96. United States v. Goheen, No. 98-4033, 1999 U.S. App. LEXIS 4622 (4th Cir.
March 18, 1999).
97. Gary Cohen, Dark Clouds over a Guru to the Stars, U.S. News & World Rep.,
May 28, 2001, at 35.
201
N OT E S TO PA G E S 3 3 – 3 8
98. Assessing the Madoff Ponzi Scheme and the Need for Regulatory Reform: Hearing
Before the H. Comm. on Fin. Servs., 111th Cong. (2009), Fed. News Service,
January 5, 2009, LEXIS, News Library, Curnws File (testimony of Allan Gold-
stein, investor with Bernard L. Madoff Investment Securities).
99. For a description of the complicated structure in Enron, see Tamar Frankel
and Mark Fagan, Law and the Financial System: Securitization and Asset-Backed
Securities—Law, Process, Case Studies, and Simulations 67–82 (2009).
100. United States v. Gragg, No. 96-5586, 1998 U.S. App. LEXIS 9577, at *3 n.1 (6th
Cir. May 7, 1998).
101. See Thomas Schelling , Choice and Consequences 210–12 (1984); see also
Gary Johns, A Multi-Level Theory of Self-Serving Behavior in and by Organiza-
tions, 21 Res. in Organizational Behavior 1, 16–17 (1999) (“reduction
of uncertainty regarding performance leads to less group-serving responses”),
citing S. L. Grover, Why Professionals Lie: The Impact of Professional Role Conflict
on Reporting Accuracy, 41 Pers. Psychol. 55, 251–72 (1993).
102. Iain Pears, An Instance of the Fingerpost 502 (1998); Singh, Fool’s Gold, at
1, at Ch. 1, n. 39 (a purported mine owner refused to give details to the
reporter. The reporter said that this “reticence made him look suspicious.”
In this case the con artist defended his reticence. “‘Suspicious?’ he coun-
tered. ‘I have projects to protect. I have no use to publicize a project that’s
in development.’”).
103. United States v. Masten, 170 F.3d 790, 792 (7th Cir. 1999).
104. Smith v. Young (In re Young), 208 B.R. 189, 194 (Bankr. S.D. Cal. 1997).
105. Id. at 201–2.
106. Cruz and Lade, Don’t Lose to Investing Scams, at 21.
107. Clifford Krauss et al., Fraud Parade: $8 Billion Case Is Next in Line, N.Y. Times,
February 18, 2009, at A1, LEXIS, News Library, Arcnws File.
108. Charles Ponzi, The Rise of Mr. Ponzi (1935), at http://www.pnzi.com (last vis-
ited February 29, 2012).
109. Singh, Fool’s Gold, at 1, at Ch. 1, n. 39.
110. Greg Allen, Florida’s Palm Beach Rocked by Madoff Scandal, NPR, December
16, 2008, http://www.npr.org/templates/story/story.php?storyId=98317793
(last visited July 27, 2009).
111. Robert Chew, How I Got Screwed by Bernie Madoff, Time, December 15, 2008,
http://www.time.com/time/business/article/0,8599,1866398,00.html (last
visited Feb. 27, 2012).
112. Ex-Conn. Resident Admits Running $100M Ponzi Scam, Associated Press
Financial Wire, Business News, September 14, 2010, LEXIS, News Library,
Curnws File (a recent resident “has pleaded guilty to federal charges he oper-
ated a $100 million Ponzi scheme that ripped off hundreds of investors.” He
“stole more than $30 million in 12 years,” promising quick high returns on buy-
ing and reselling diamonds or buying foreclosed assets from JPMorgan Chase
& Co. Bank).
202
N OT E S TO PA G E S 3 8 – 4 5
113. United States v. Hickey, 580 F.3d 922 (9th Cir. 2009), cert. denied, 130 S. Ct.
2115 (West 2010).
114. Id.
115. Scott Bernard Nelson, Fleet Writing Off $70M in Ponzi Scam; 4 in N.J. Accused of
Bilking 8 Banks with Phony Metals Trading, Boston Globe, May 15, 2002, at D1.
116. Rose v. Texas, 716 S.W.2d 162 (Tex. 1986).
117. United States v. Van Alstyne, 584 F.3d 803 (9th Cir. 2009).
118. People v. Luongo, 47 N.Y.2d 418, 425 (1979).
119. United States v. Gragg, No. 96-5586, 1998 U.S. App. LEXIS 9577 (6th Cir. May
7, 1998).
120. Katherine Verdery, “Caritas” and the Reconceptualization of Money in Romania,
Anthropology Today, February 1995, at 3 (and authorities cited there).
121. In re Taubman, 160 B.R. 964, 971 (Bankr. S.D. Ohio 1993).
122. Ponzi, at http://www.crimes-of-persuasion.com/Crimes/InPerson/Major-
Person/ponzi.htm (last visited February 27, 2012).
123. See Diana B. Henriques, Court Sets Madoff Case Limitations, N.Y. Times, August
17, 2011, at B1, LEXIS, News Library, Curnws File (noting that some investors
in Madoff Ponzi scheme received “fictional profits” from money stolen from
other investors).
124. Charles Ponzi, Useless Information, at http://uselessinformation.org/ponzi (last
visited February 27, 2012) (revealing that Ponzi received enough money to
purchase 180 million postal coupons; however there is evidence to prove that
only two coupons were actually purchased. Charles Ponzi established a token
investment. Of the millions raised from investors, about 1 percent was invested
in a legitimate income-producing business; it produced negligible returns).
125. SEC v. Homa, 514 F.3d 661 (7th Cir. 2008).
126. United States v. Calozza, 125 F.3d 687 (9th Cir. 1997).
127. Donn B. Parker, Fighting Computer Crime 120 (1983) (describing the rise and
fall of Charles Braun).
128. Id.
129. See Steve Weisman, The Truth About Avoiding Scams 181, 185 (2008).
130. United States v. Weiner, 988 F.2d 629, 631 (6th Cir. 1993).
131. Michelle Singletary, Con Artists Target Retirees with Promissory Note Scam, Sun-
Sentinel (Fort Lauderdale, FL), June 12, 2000, at 2 (citing Bradley Skolnik).
132. Singh, Fool’s Gold, at 1, at Ch. 1, n. 39.
133. Walter Edward Scott—“Death Valley Scotty,” http://www.inn-california.com/
articles/biographic/deathvalleyscotty.html (last visited February 27, 2012).
134. Michael Fechter, Ministries’ Top Pitchman Pleads Guilty, Tampa Trib., Decem-
ber 1, 2000, Florida/Metro, at 1 (“Greater created ‘the illusion’ that it engaged
in profit-making investment but employed ‘a classic Ponzi scheme’”); Jack
Hitt, The Billion-Dollar Shack, N.Y. Times, § 6, at 123 (December 10, 2000);
Lori Pugh, Heartland Case a Warning to Investors, Indianapolis Bus. J., at 23
(August 21, 2000) (offering of investments in offshore banks).
203
N OT E S TO PA G E S 4 5 – 5 1
135. Kate Nash, Up in Smoke, Advertiser (South Australia), April 22, 2002, at 61.
136. United States v. Hayes, Nos. 99-10405, 99-15502, 2000 U.S. App. LEXIS
27329 (9th Cir. filed November 2, 2000), aff ’d., 385 F.3d 1226 (9th Cir. 2004).
137. Augustyn v. Superior Court, 186 Cal. App. 3d 1221 (Ct. App. 1986).
138. See, e.g., SEC v. Fitzgerald, 135 F. Supp. 2d 992 (N.D. Cal. 2001); United States
v. Griffith, Nos. 89-50581, 89-50626, 89-50241, 1992 U.S. App. LEXIS 24314,
at *2 (9th Cir. filed September 18, 1992) (giving investors false financial infor-
mation and falsely asserting adequate collateral).
139. United States v. Londe, 449 F. Supp. 590 (E.D. Mo. 1978).
140. United States v. Munoz, 233 F.3d 1123 (9th Cir. 2000).
141. Connecticut Nat’l Bank v. Giacomi, Nos. 105860, 105861, 106520, 106992,
1993 Conn. Super. LEXIS 2508 (Super. Ct. September 28, 1993).
142. United States v. Bennett, 161 F.3d 171, 174–75 (3d Cir. 1998), cert. denied, 528
U.S. 819 (1999).
143. Investors Sue Marine Midland for Allegedly Lax Supervision, Bank & Lender
Liability Litig. Rep., February 4, 1998, at 8.
144. United States v. Goheen, No. 98-4033, 1999 U.S. App. LEXIS 4622 (4th Cir.
March 18, 1999).
145. Atty. Grievance Comm’n. v. Martin, 308 Md. 272, 279 (1987).
146. Transcript: The Madoff Affair, http://www.pbs.org/wgbh/pages/frontline/
madoff/etc/script.html.
147. Kreiger v. United States, 539 F.2d 317 (3d Cir. 1976).
148. Kleinfield, Unraveling Puzzle, at A26, at Ch. 1, n. 47.
149. United States v. Hein, No. 07-10718, 2010 U.S. App. LEXIS 19311 (11th Cir.
September 14, 2010), unpublished decision.
150. KT Group, LLC v. Christensen, Glaser, Fink, Jacobs, Weil & Shapiro, LLP, No.
2:07-CV-790, 2010 U.S. Dist. LEXIS 104166 (D. Utah September 29, 2010),
unpublished opinion.
151. Dan Seligman, The Mind of the Swindler, Forbes, June 12, 2000, at 425.
152. Kleinfield, Unraveling Puzzle, at A26, at Ch. 1, n. 47.
153. See generally 1 Tamar Frankel, Securitization, part I chap. 5, and especially
§ 5.8.9 (Ann Schwing ed., 2d ed. 2006).
154. Jim Henderson, Preacher Has Faith in Pitch, Houston Chron., May 26, 2002,
at 33.
155. United States v. Van Alstyne, 584 F.3d 803 (9th Cir. 2009).
156. In re Taubman, 160 B.R. 964, 973 (Bankr. S.D. Ohio 1993).
157. United States v. Munoz, 233 F.3d 1117 (9th Cir. 2000).
158. Id. at 1122–23.
159. Id. at 1123.
160. Ponzi, The Rise of Mr. Ponzi, at Ch. 1, n. 1.
161. Marion v. TDI Inc., 591 F.3d 137 (3d Cir. 2010), cert. denied, 131 S. Ct. 1479
(West 2011).
162. Id.
204
N OT E S TO PA G E S 5 2 – 5 9
163. U.S. Department of Justice Programs, Office for Victims of Crime, Providing Services
to Victims of Fraud: Resources for Victim/Witness Coordinators I-1 (July 1998); see
also Boiler Room (film, 2000) (describing techniques of fraudulent telephone sales).
164. Holly Howard Preston, The Sophisticated Investor’s Worst Nightmare; Investment
Fraud—A New Bumper Crop, Int’l Herald Trib., June 15, 2002, at 13.
165. Sanjida O’Connell, Mindreading: An Investigation into How We Learn to Love
and Lie 139 (1997).
166. The Producers (film, 1968); U.S. Department of Justice Programs, Providing
Services to Victims of Fraud (noting that many victims are home to receive
phone solicitations and remain on the phone longer to hear fraudulent sales
pitches, due to loneliness); see also Boiler Room (film, 2000) (describing tech-
niques of fraudulent telephone sales).
167. The Producers (film, 1968).
168. Tim Rutten, The Moral of Madoff ’s Tale, L.A. Times, December 17, 2008, pt. A,
at 27, LEXIS, News Library, Arcnws File.
169. Steven Wilmsen, Notorious Boston Con Man Back in Federal Prison, Boston
Globe, March 23, 2002, at B1, B12.
170. Chad Bray, Global Finance: Prosecutors Want 19 Years or More for Nadel’s Fraud,
Wall St. J., October 15, 2010, at C3, LEXIS, News Library, Wsj File.
171. “Yellow Kid” Weil and W. T. Brannon, “Yellow Kid” Weil: The Autobiography of
America’s Master Swindler 282 (1948, 2010).
Chapter 2
1. Charles Ponzi, The Rise of Mr. Ponzi (1935), at http://www.pnzi.com (last visited
February 29, 2012).
2. Topics: Bernard Madoff, Wall St. J., http://topics.wsj.com/person/m/bernard-
madoff/1077 (last visited February 29, 2012).
3. Greg Allen, Florida’s Palm Beach Rocked by Madoff Scandal, NPR, December
16, 2008, http://www.npr.org/templates/story/story.php?storyId=98317793
(last visited February 29, 2012).
4. Topics: Bernard Madoff, Wall St. J., http://topics.wsj.com/person/m/ber-
nard-madoff/1077 (last visited February 29, 2012).
5. The Owner’s Name Is on the Door, http://en.calameo.com/read/
000000007302d949078d1 (last visited February 29, 2012) (mission statement
of Madoff firm).
6. Robert Chew, How I Got Screwed by Bernie Madoff, Time, December 15, 2008,
http://www.time.com/time/business/article/0,8599,1866398,00.html (last
visited February 29, 2011).
7. Dan Reed, SEC Accuses Fort Worth Pair of Securities Fraud: Suit Alleges Couple
Raised $16.5 Million from Investors, Fort-Worth Star Telegram, November
25, 1999, Business, at 1.
205
N OT E S TO PA G E S 5 9 – 6 4
8. United States v. Bennett, 161 F.3d 171, 178 (3d Cir. 1998), cert. denied, 528
U.S. 819 (1999).
9. N. R. Kleinfield, Unraveling Puzzle of L. I. Car Dealer Reveals Layers of Per-
sonal Mystery, N.Y. Times, April 19, 1992, Section 1, at 26 (“Yet the plan was
approved after Mr. McNamara agreed to donate a golf course to the governing
town of Brookhaven”).
10. Smith v. Young (In re Young), 208 B.R. 189 (Bankr. S.D. Cal. 1997).
11. Michael Perlstein, Accountant Suspect in Fraud Probe: Ex-Boss Says Ponzi Suspect
Bilked Firm of $150,000, Times-Picayune (New Orleans), October 23, 2000,
National, at 1.
12. Id.
13. Alan Feuer and Christine Haughney, Standing Accused: A Pillar of Finance and
Charity, N.Y. Times, December 13, 2008, at B1, LEXIS, News Library, Arcnws
File.
14. Katherine Verdery, “Caritas” and the Reconceptualization of Money in Romania,
Anthropology Today, February 1995, at 3 (and authorities cited there).
15. Id.
16. Malin Akerstrom, Crooks and Squares 146 (1985), quoting Peter Letkemann,
Crime as Work 45 (1973).
17. Id. at 147 (quoting Gerald D. Suttles, The Social Order of the Slum 129, 1968).
18. R. J. Brown, P. T. Barnum Never Did Say “There’s a Sucker Born Every Minute,”
historybuff.com, http://www.historybuff.com/library/refbarnum.html (last
visited March 1, 2012); M. R. Werner, Barnum 56–64 (1923).
19. Prepared statement of Debra A. Valentine, general counsel for the U.S. Fed-
eral Trade Commission on “Pyramid Schemes,” presented at the International
Monetary Fund Seminar on Current Legal Issues Affecting Central Banks,
at http://www.ftc.gov/speeches/other/dvimf16.shtm (last visited March 1,
2012); James Walsh, How Ponzi Schemes, Pyramid Frauds Work, Consumers’
Research Mag., June 1, 1999.
20. Jim Henderson, Preacher Has Faith in Pitch, Houston Chron., May 26, 2002,
at 33.
21. Ponzi, The Rise of Mr. Ponzi, at Ch. 2, n. 1.
22. Jennifer Arend, Slamming Scams, Dallas Morning News, July 12, 1999,
Business, at 1D.
23. Ponzi, The Rise of Mr. Ponzi, at Ch. 2, n. 1. See also the stories of the insider
trader group revealed in court in the case of Galleon Group; they disparaged
others but connected among themselves. Michael Rothfeld and Susan Pull-
man, Calling Miss Manners: Tapes in Galleon Case Show Some Snark, Wall
St. J., March 17, 2011, at A1, A16.
24. Ritchie Special Credit Investments, Ltd. v. United States Tr., 620 F.3d 847 (8th
Cir. 2010).
25. United States v. Mathison, 157 F.3d 541 (8th Cir. 1998).
26. United States v. Loayza, 107 F.3d 257 (4th Cir. 1996).
206
N OT E S TO PA G E S 6 4 – 7 0
27. Mystery Outlives ‘Sicilian Gatsby,’ L.A. Times, November 30, 2000, at A1,
LEXIS, News Library, Arcnws File.
28. United States v. Weiner, 988 F.2d 629, 632 (6th Cir. 1993).
29. Lisa Singh, Fool’s Gold, Dallas Obs., November 16, 2000, Features, at 1.
30. United States v. O’Toole, No. 99-6072, 1999 U.S. App. LEXIS 18192 (10th Cir.
filed August 3, 1999).
31. Clifton Leaf, Enough Is Enough; White-Collar Criminals: They Lie They Cheat
They Steal and They’ve Been Getting Away with It for Too Long, Fortune, March
18, 2002, at 60 (citing the relatively small number of prison sentences for large
corporations’ white-collar criminals).
32. United States v. Midkiff, 614 F.3d 431 (8th Cir. 2010).
33. Id.
34. Id.
35. Id.
36. Id.
37. United States v. Kirschner, No. 09-15785 Non-Argument Calendar, 2010 U.S.
Dist. LEXIS 18823 (11th Cir. September 8, 2010); unpublished decision.
38. CFTC v. M25 Investments, Inc., No. 3-09-cv-1831-M, 2010 U.S. Dist. LEXIS
118823 (N.D. Tex. October 25, 2010); unpublished opinion.
39. Id.
40. United States v. Treadwell, 593 F.3d 990, 993 (9th Cir. 2010). See also Steve
Weisman, The Truth About Avoiding Scams 195 (2008).
41. United States v. Ferguson, No. 07-50437, 2011 U.S. App. LEXIS 1908 (9th Cir.
January 27, 2011); unpublished opinion.
42. Perlman v. Delisfort-Theodule, No. 09-80480-Civ-Hurley/Hopkins, 2010 U.S.
Dist. LEXIS 116510, at *3 (S.D. Fla. November 1, 2010) (memorandum opin-
ion) (unpublished opinion).
43. It may well be that Ponzi’s troubles started relatively early because his invest-
ment story involved the U.S. Post Office and government investigators visited
him frequently. Ponzi, The Rise of Mr. Ponzi, at Ch. 2, n. 1.
44. Michael Fechter, 2nd Ministry Called Ponzi Scheme, Tampa Trib., April 13,
1998, Florida/Metro, at 1.
45. Paul Whittaker, Police “Put Millions” into Failed Loans Plan, Advertiser (South
Australia), May 8, 1998, LEXIS, News Library, Arcnws File.
46. State v. Blair, 579 P.2d 1133 (Colo. 1978).
47. Terry Greene Sterling, The Moneychangers; A New Times Investigation; First in
a Series, Phoenix New Times, April 16, 1998, LEXIS, News Library, Arcnws
File.
48. Kuran and Sunstein suggest two types of herding, which they name “cascades.”
One is an informational cascade, in which people follow what other people do
even if it conflicts with information they themselves have. This is the herding
referred to in the text. Informational cascade is usually the province of the in-
vestors; they buy and sell on the assumption that the aggregate information
207
N OT E S TO PA G E S 7 0 – 7 4
is better than their own. The other type is “reputational cascade.” In this case,
people conform to the behavior of others as well, but for different reasons. The
followers do not necessarily rely on the information of the groups they emu-
late. Rather, they follow others in order to maintain their own reputation, or
to curry favor with these groups because they live in the same communities
or depend on them. These followers may say in private what they would not
utter in public or would avoid repeating in front of the group members. That
is one way in which social culture is fashioned. In both cases people follow the
crowd and forgo their own convictions. Both con artists and their victims may
follow a reputational cascade. Timur Kuran and Cass R. Sunstein, Availability
Cascades and Risk Regulation, 51 Stan. L. Rev. 683 (1999).
49. Robert H. Frank, Passions Within Reason 155–56 (1988).
50. See, e.g., Lisa M. Fairfax, “With Friends Like These . . .”: Toward a More Efficacious
Response to Affinity-based Securities and Investment Fraud, 36 Ga. L. Rev. 63 (2001).
51. Id.
52. See, e.g., Fox Butterfield, This Way Madness Lies: A Fall from Grace to Prison,
N.Y. Times, April 21, 1996, § 1, at 14 (Ms. Redd hosted many fundraisers for
the church).
53. United States v. Luca, 183 F.3d 1018, 1027 (9th Cir. 1999).
54. Id. at 1027.
55. Id.
56. Id.
57. Id.
58. Sterling, The Moneychangers, at Ch. 2, n. 47.
59. Chuck Fager, Federal Authorities Collar Greater Ministry Leaders, Christian-
ity Today, April 26, 1999, at 22.
60. Id.
61. Jim Henderson, Preacher Has Faith in Pitch, Houston Chronicle, May 26, 2002,
at 33.
62. Id.
63. Video: Madoff Victims Speak Out, Rabbi Gellman, Vanity Fair , March 4, 2009,
http://www.vanityfair.com/politics/features/2009/04/madoff-victims-
speak-video200904 (last visited March 2, 2012).
64. Investors’ Stories: The Madoff Affair, Frontline, http://www.pbs.org/wgbh/
pages/frontline/madoff/investors/ (last visited March 2, 2012).
65. See, e.g., Fairfax, “With Friends Like These. . . .” at Ch. 2, n. 50.
66. See, e.g., Gary L. Tidwell, Anatomy of a Fraud 3 (1993), describing the venture
of Jim and Tammy Bakker, a television evangelist couple who raised more than
$66 million to build lifetime shared vacation and religious activities. Only 52
percent of this amount was used for that purpose. The rest of the money was
used for operating expenses and a lavish style of living for the Bakkers and
their entourage. United States v. Bakker, 925 F.2d 728 (4th Cir. 1991), noting
that the Bakkers were indicted on December 5, 1988, describing the Jim and
208
N OT E S TO PA G E S 7 4 – 7 7
209
N OT E S TO PA G E S 7 8 – 8 2
86. Don Jacobs, Telemarketing Con Artists Do Not See Selves as Criminals: 47 Con-
victed of Fraud Subject of UT Study, Knoxville News-Sentinel, December
10, 2001, at A1.
87. The Scam That Fell to Earth, Australian, July 18, 2001, Finance Section, at
30, LEXIS, News Library, Arcnws File. See also Former Alta Businessman Pleads
Guilty to Bilking 15,000 People out of $60 M, Canadian Press Newswire,
May 6, 2003, LEXIS, News Library, Arcnws File.
88. Matthew Gifford, Pyramid Scheme, http://www.matthewgifford.com/2002/
08/23/PyramidScheme/ (last visited March 4, 2012).
89. See, e.g., Kathleen Lynn, 15-Year-Old Settles Stock Fraud Charges, Record
(Bergen County, N.J.), September 21, 2001, at A1.
90. See Tamar Frankel, Trusting and Non-Trusting on the Internet, 81 B.U. L. Rev.
457, 469 (2001).
91. Martha Graybow and Grant McCool, UPDATE 1-SEC Charges Madoff
Recruiter with Fraud, Reuters, June 22, 2009, http://www.reuters.com/arti-
cle/2009/06/22/madoff-sec-idUSN2250993920090622 (last visited March
5, 2012).
92. Iain Pears, An Instance of the Fingerpost 309 (1998).
93. United States v. Kirschner, No. 09-15785 Non-Argument Calendar, 2010 U.S.
Dist. LEXIS 18823 (11th Cir. September 8, 2010); unpublished decision.
94. Brian Trumbore, Charles Ponzi, at http://www.buyandhold.com/bh/en/educa-
tion/history/2000/ponzi.html (last visited March 5, 2012), citing Robert Sobel,
The Great Bull Market: Wall Street in the 1920s; Stockschlaeder & McDonald, Esqs.
v. Kittay (In re Stockbridge Funding Co.), 145 B.R. 797 (Bankr. S.D.N.Y. 1992).
95. Man Pleads Guilty to Federal Charges After Swindling More than $24 Million
from Local Victims, US Fed News, November 16, 2005, LEXIS, News Library,
Arcnws File. “Aware he was under suspicion, Edmundo fled the United States.”
“The investors [in the “Knight Express” program], who were told their funds
would be used to purchase and resell Federal Reserve notes, were promised a
six percent monthly return.”
96. People v. Luongo, 47 N.Y.2d 418, 425 (1979).
97. Nash, Up in Smoke, at 61, at Ch. 2, n. 84.
98. Frankel, Trusting and Non-Trusting on the Internet, at Ch. 2, n. 90.
99. See Ponzi, The Rise of Mr. Ponzi, at Ch. 2, n. 1.
100. Transcript: The Madoff Affair, Frontline, http://www.pbs.org/wgbh/pages/
frontline/madoff/etc/script.html (last visited March 5, 2012).
101. United States v. Van Alstyne, 584 F.3d 803 (9th Cir. 2009).
102. Jack Sirard, Promissory Note Scheme Spreading Fast in State, Scripps Howard
News Service, June 4, 2000, available at LEXIS, News Library, Curnws File;
Singletary, Con Artists Target Retirees with Promissory Note Scam, at 2, at Ch. 2, n. 102.
103. Singletary, Con Artists Target Retirees with Promissory Note Scam, at 2, at Ch. 2,
n. 102.
104. Perlstein, Accountant Suspect in Fraud Probe, at 1.
210
N OT E S TO PA G E S 8 2 – 8 8
105. United States v. Gold Unlimited, 177 F.3d 472, 478 (6th Cir. 1999).
106. See, e.g., SEC v. Blackwell, 211 F.3d 602 (4th Cir. 2000).
107. Henderson, Preacher Has Faith in Pitch, at 33, at Ch. 2, n. 61.
108. See Pyramid Schemes, http://www.crimes-of-persuasion.com/Crimes/Deliv-
ered/pyramids.htm (last visited March 5, 2012).
109. Douglas Rushkoff, Coercion: Why We Listen To What “They” Say 215–55
(1999). See also Carmelina Prete, Women Let off Hook in Pyramid Schemes,
Hamilton Spectator , April 16, 1998, at N1, LEXIS, News Library, Arcnws
File.
110. See Pyramid Scheme, at http://www.skepdic.com/pyramid.html (last modified
December 9, 2010).
111. See Pyramid Schemes, http://www.crimes-of-persuasion.com/Crimes/Deliv-
ered/pyramids.htm (last visited March 5, 2012).
112. Id. http://www.crimes-of-persuasion.com/Crimes/Delivered/pyramids.htm.
A pyramid scheme can also be distinguished from a legal distribution system
as a system “which pays override commissions on more than five levels of par-
ticipation. Even the largest corporation cannot stretch the markups on prod-
ucts beyond the hierarchy of sales person, branch manager, district manager,
regional manager and national manager without becoming uncompetitive with
standard retail outlets.”).
Chapter 3
211
N OT E S TO PA G E S 8 9 – 9 9
212
N OT E S TO PA G E S 9 9 – 1 0 8
30. Avner Offer, “The Mask of Intimacy: Advertising and the Quality of Life,” in In
Pursuit of the Quality of Life 211, 225 (Avner Offer ed., 1996) (“A gift is an exchange
in which a transfer is not mediated by price, but is rather reciprocated at the discre-
tion of the receiver”); id. at 226 (“Reciprocal giving gives rise to obligation . . .”).
31. Douglas Rushkoff, Coercion: Why We Listen To What “They” Say 33–35 (1999).
32. Eugene Linden, The Parrot’s Lament 50–51 (1999).
33. Id. at 70–72.
34. Avishalom Tor, The Fable of Entry: Bounded Rationality and the Efficacy of Com-
petition (unpublished manuscript, Harvard Law School, September 2001); on
file with author.
35. Id. part III.
36. Charles Ponzi, The Rise of Mr. Ponzi (1935), at http://www.pnzi.com (last
visited March 6, 2012). As he himself attested, Ponzi was called “a dreamer, a
visionary, and everything else, including a crook, probably on account of the
fact that I didn’t get away with it, like many of the bankers I know of and like
some of the big corporations I know of. If I had, they would have called me a
genius; a wizard, without the quotation marks.”
37. United States v. Spirk, 503 F.3d 619 (7th Cir. 2007).
38. Armstrong v. Guccione, 470 F.3d 89 (2d Cir. 2006).
39. Gary Johns, A Multi-Level Theory of Self-Serving Behavior in and by Organiza-
tions, 21 Res. in Organizational Behavior 1, 22 (1999).
40. Ponzi, The Rise of Mr. Ponzi, at Ch. 3, n. 36.
41. Id.
42. Id. Describing his failed promotion of a large water and light project Charles
Ponzi wrote: “Even at those days I was no slouch at promoting. For the very
good reason that money with me is always the last consideration instead of be-
ing the first. The money is always around to be had. The main thing is to have
an idea. A plausible idea which can be dressed up and sold.”
43. See Daniel Kahnman and Amos Tversky, On the Psychology of Prediction, 80 Psych.
Rev. 237, 238, 241 (1973) (“[I]ntuitive predictions are dominated by [the repre-
sentation of certain select facts] and are relatively insensitive to prior probabilities.”
Such decisions "violate the statistical rules of prediction in systematic and funda-
mental ways.”); David Hirshleifer, Investor Psychology and Asset Pricing, 56 J. Fin.
1533, 1545 (2001) (“[U]se of the representativeness heuristic can cause trend chas-
ing, because people are too ready to believe that trends have systematic causes.”).
44. Ponzi, at http://www.crimes-of-persuasion.com/Crimes/InPerson/Major-
Person/ponzi.htm (last visited March 6, 2012).
45. Lisa Singh, Fool’s Gold, Dallas Obs., November 16, 2000, Features, at 1.
46. Id.
47. Id.
48. Ponzi, The Rise of Mr. Ponzi, at Ch. 3, n. 36.
49. Id.
50. Michael Bacharach and Diego Gambetta, “Trust in Signs,” in 2 Trust and Society
148, 153 (Karen S. Cook ed., 2001).
213
N OT E S TO PA G E S 1 0 8 – 1 1 8
51. Aaron Richardson, Ponzi Schemer’s Exotic Car Collection Being Auctioned
by Feds on Tuesday, Autoblog, February 28, 2011, http://www.autoblog.
com/2011/02/28/ponzi-schemers-exotic-car-collection-being-auctioned-by-
feds-on/ (last visited March 6, 2012).
52. Bacharach and Gambetta, “Trust in Signs,” 148, 155, at Ch. 3, n. 50.
Chapter 4
1. Deborah and Gerald Strober, Catastrophe: The Story of Bernard L. Madoff, the
Man Who Swindled the World 83 (2009).
2. Elan Golomb, Trapped in the Mirror 18–19 (1992).
3. Id. at 17–18.
4. This definition of a disorder is due for elimination in the 2013 edition of DSM.
The change has raised a controversy among psychiatrists; http://well.blogs.ny-
times.com/2010/11/29/narcissism-no-longer-a-psychiatric-disorder/.
5. Golomb, Trapped in the Mirror, at 21, at Ch. 4, n. 2.
6. Id. at 21.
7. Id. at 22.
8. Id. at 23.
9. Paul Legall, Croft Has “Psychopath” Written All over Him: Psychologist, Hamil-
ton Spectator, June 24, 1997, at N4.
10. Keith Nuthall, Making a Killing; To Those Who Met Him, Albert Walker Seemed
Such a Nice Man. How Wrong They Were . . ., Independent (London), July 12,
1998, at 20, LEXIS, News Library, Arcnws File.
11. Id., at 20.
12. Id.
13. Id.
14. Id.
15. Nick Brown, Alleged Ponzi Schemer Ducks Murder Plot Charges, Law 360,
March 17, 2011, http://www.law360.com/topnews/articles/232977 (last vis-
ited May 2, 2011). The agreement with the prosecutors included repayment to
the victims.
16. Eslaminia v. White, 136 F.3d 1234 (9th Cir. 1998).
17. Sanjida O’Connell, Mindreading: An Investigation into How We Learn to Love
and Lie 138–39 (1998); see also Tamar Frankel, Trust and Honesty: America’s
Business Culture at a Crossroad 111–33 (2006).
18. Martin L. Hoffman, Empathy and Moral Development 54 (2000).
19. Id. at 222, 228–29.
20. Id. at 222–23.
21. Ezra Stotland, White Collar Criminals, 33 J. Social Issues 179, 188–89 (1977).
22. Laura Reider, Comment, Toward a New Test for the Insanity Defense: Incorpo-
rating the Discoveries of Neuroscience into Moral and Legal Theories, 46 UCLA L.
Rev. 289, 322–24 (1998).
214
N OT E S TO PA G E S 1 1 8 – 1 2 3
23. State v. Sarchman, 34 P.3d 1107 (Ct. App. Idaho 2001); Ayers v. Doth, 58
F. Supp. 2d 1028 (D.C. Minn. 1999), lack of control demonstrating a danger of
repeat offense combined with “the lack of any victim empathy or belief that his
actions were wrong”; see also Thorgaard v. State, 876 P.2d 599 (Ct. App. Idaho
1994).
24. Kimberlin v. Dewalt, 12 F. Supp. 2d 487 (D. Md. 1998).
25. United States v. Raymond Thomas No. 10-4277 (6th Cir. 11a0667n.06; 437
Fed. Appx. 456; 2011 U.S. App. LEXIS 18847; 2011 FED App. 0667N (6th
Cir.); 108 A.F.T.R.2d (RIA) 6254.
26. United States v. Gordon B. Grigg 11a0670n.06; 434 Fed. Appx. 530; 2011 U.S.
App. LEXIS 19019; 2011 FED App. 0670N (6th Cir.).
27. United States v. Shawn Richard Merriman (10-1439 10th Cir)) 647 F.3d 1002;
2011 U.S. App. LEXIS 15403 July 27, 2011, Filed.
28. Peter Fimrite, Did He Have a Deal for You, S. F. Chron., February 15, 1998, at
1/Z1.
29. Reider, Comment, 322–24, at Ch. 4, n. 22.
30. Lewis Beale, An Heir-Raising Enterprise, L.A. TimeL.A. Times, November 18,
1992, at E1.
31. See Frankel, Trust and Honesty 111, at Ch. 4, n. 17.
32. Reider, Comment, 322–24, at Ch. 4, n. 22. In one case, “The State’s expert con-
cluded that [the offender’s] condition, in combination with the personality dis-
order, the span of time during which [he] committed his crimes, his recidivism,
his persistent denial, and his lack of empathy or remorse, made it more likely than
not that he would commit further sexually violent acts.” Seling v. Young, 531
U.S. 250 (2001).
33. Don Jacobs, Telemarketing Con Artists Do Not See Selves as Criminals: 47 Con-
victed of Fraud Subject of UT Study, Knoxville News-Sentinel, December
10, 2001, at A1.
34. Id.
35. Golomb, Trapped in the Mirror, at 12–13, at Ch. 4, n. 2.
36. See, e.g., Lisa Davis, Jamba Liar, SF Wkly., October 27, 1999, LEXIS, News
Library, Arcnws File; Peter Byrne, Double Injustice, SF Wkly., July 12, 2000,
LEXIS, News Library, Arcnws File.
37. Andrew McIntyre, Ponzi Schemes Flourish During Tough Times, Post & Cou-
rier (Charleston, SC), April 20, 2009, http://www.postandcourier.com/
news/2009/apr/20/ponzi_schemes_flourish_during_tough_time79229/?wap
(last visited March 18, 2011).
38. Michael Benson and Francis T. Cullen, The Special Sensitivity of White-Collar
Offenders to Prison: A Critique and Research Agenda, 16 J. Crim. Justice 207,
211–12 (1988).
39. Gary Johns, A Multi-Level Theory of Self-Serving Behavior in and by Organiza-
tions, 21 Res. in Organizational Behavior 1, 10–11 (1999).
40. Jim Henderson, Preacher Has Faith in Pitch, Houston Chron., May 26, 2002,
at 33.
215
N OT E S TO PA G E S 1 2 3 – 1 2 9
41. Mystery Outlives “Sicilian Gatsby,” L.A. Times, November 30, 2000, at A1,
LEXIS, News Library, Arcnws File.
42. Id.
43. Id.
44. Malin Akerstrom, Crooks and Squares 176 (1985).
45. Charles Ponzi, The Rise of Mr. Ponzi 96, 99 (1935), at http://www.pnzi.com
(last visited March 6, 2012).
46. Benson and Cullen, The Special Sensitivity of White-Collar Offenders to Prison, at
Ch. 4, n. 38.
47. Akerstrom, Crooks and Squares 156–57, at Ch. 4, n. 44. (quoting William H.
Whyte, The Organization Man 1956).
48. Id. at 157.
49. Id. at 168.
50. Henderson, Preacher Has Faith in Pitch, at 33, at Ch. 4, n. 40.
51. Benson and Cullen, The Special Sensitivity of White-Collar Offenders to Prison, 4,
at Ch. 4, n. 46.
52. Jacobs, Telemarketing Con Artists Do Not See Selves as Criminals at A1, at Ch. 4,
n. 33.
53. Id. at A1; Frankel, Trust and Honesty, 111–33, at Ch. 4, n. 17.
54. Joe Clements, Kaan, “Condo King” Lilly Float Message: We Won, Banker &
Tradesman, September 13, 2004, at 1, 11.
55. Benson and Cullen, The Special Sensitivity of White-Collar Offenders to Prison,
207, 211, at Ch. 4, n. 46.
56. Johns, A Multi-Level Theory of Self-Serving Behavior in and by Organizations, 22,
at Ch. 4, n. 39.
57. Robert H. Frank, Passions Within Reason 159 (1988).
58. Jennifer Wells, The Small Price of Big-Time Fraud, Toronto Star, May 22,
2002, at A03, LEXIS, News Library, Arcnws File.
59. Lisa Singh, Fool’s Gold, Dallas Observer , November 16, 2000, at 1. See
also generally Gillian Tett, Fool’s Gold: How the Bold Dream of a Small Tribe at
J. P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe
(2009).
60. P. Whittaker, Investors Knew Risks, Says Loans Scheme Creator, Courier-Mail
(Queensland, Australia), May 8, 1998, at 2, LEXIS, News Library, Arcnws File.
61. SEC v Economou, 830 F.2d 431, 435 (2d Cir. 1987).
62. Singh, Fool’s Gold, at 1, at Ch. 4, n. 59.
63. Donn B. Parker, Fighting Computer Crime 124 (1983) describing the fall of
Charles Brown.
64. Marshall B. Clinard and Peter C. Yeager, Corporate Crime 67–73 (1980).
65. United States v. Masten, 170 F.3d 790, 794 (7th Cir. 1999).
66. The World’s Greatest Con Artists, http://greatestconartists.webs.com/josephweil.
htm (last visited March 13, 2012).
216
N OT E S TO PA G E S 1 2 9 – 1 3 7
67. Jake Bernstein, Madoff Calls Big Investors ‘Complicit’ in Jailhouse Interview, Pro-
Publica, April 8, 2011, http://www.propublica.org/article/madoff-calls-big-
investors-complicit-in-jailhouse-interview-110408 (last visited May 2, 2011).
68. Whittaker, Investors Knew Risks, at 2, at Ch. 4, n. 60.
69. Jacobs, Telemarketing Con Artists Do Not See Selves as Criminals, at A1, at Ch. 4, n. 33.
70. Akerstrom, Crooks and Squares 16, 20–25, at Ch. 4, n. 47.
71. Id. at 71–99.
72. Johns, A Multi-Level Theory of Self-Serving Behavior in and by Organizations, 14,
at Ch. 4, n. 39; see also Iain Pears, An Instance of the Fingerpost 253 (1998).
73. Pears, An Instance of the Fingerpost, at Ch. 4, n. 72.
74. See Marshall B. Clinard and Peter C. Yeager, Corporate Crime 67 (1980); Fran-
kel, Trust and Honesty, 31.
75. Parker, Fighting Computer Crime 124, at Ch. 4, n. 63.
76. Whittaker, Investors Knew Risks, at 2, LEXIS, News Library, Arcnws File, at Ch.
4, n. 60.
77. Patrick J. Kiger, In Enron’s Wake, Time for a Review of Nonqualified Plans, Work-
force Mgmt., March 2004, at 70, http://www.workforce.com/section/benefits-
compensation/feature-enrons-wake-time-review-nonqualified-plans/index.
html; “In the Enron case, shortly before the Houston-based energy giant went
bankrupt in December 2001, the corporate nonqualified benefits plan was used
to illegally funnel $53 million in early distributions to a handful of executives,
according to a February 2003 report by the staff of the congressional Joint
Committee on Taxation.”
78. Diana B. Henriques, Madoff Suits Add Details About Fraud, N.Y. Times, June 23,
2009, sec. B, at 1, LEXIS, News Library, Curnws File.
79. Id.
80. Joe Nocera, Was LinkedIn Scammed? N.Y. Times, May 20, 2011, at A19.
81. Bayou Superfund, LLC v. WAM Long/Short Fund II, L.P. (In re Bayou Group,
LLC), 362 B.R. 624 (Bankr. S.D.N.Y. 2007).
82. Frankel, Trust and Honesty, 91–94, at Ch. 4, n. 31.
83. Ezra Stotland, White Collar Criminals, 33 J. Social Issues 179, 186 (1977).
84. David Tennant, Why Do People Risk Exposure to Ponzi Schemes? Econometric
Evidence from Jamaica, 21 Journal of International Financial Markets, Institutions,
and Money (July 2011).
85. NASD Investor Fraud Study, May 12, 2006, at 5. “Additionally a subgroup
of ‘likely active investors’ was created within the larger group of non-victims to
determine if the difference in financial literacy score had to do with the number
of active investors in the non-active group. The investment victims outscored
even this subgroup of likely active investors on the financial literacy questions.”
Id. at 5–6.
86. Michèle Belot et al., Can Observers Predict Trustworthiness? (January 26, 2010), ab-
stract, http://www.econ.au.dk/fileadmin/site_files/filer_oekonomi/seminarer/
217
N OT E S TO PA G E S 1 3 7 – 1 4 4
218
N OT E S TO PA G E S 1 4 4 – 1 4 8
determine if the difference in financial literacy score had to do with the number
of active investors in the non-active group. The investment victims outscored
even this subgroup of likely active investors on the financial literacy questions.”
Id. at 5–6.
110. See Deanna M. Barch et al., Anterior Cingulate and the Monitoring of Response
Conflict: Evidence from an fMRI Study of Overt Verb Generation, 12 J. Cogni-
tive Neuroscience 298, 298 (2000), abstract, http://www.mitpressjour-
nals.org/doi/abs/10.1162/089892900562110 (last visited March 18, 2011);
“Studies of a range of higher cognitive functions consistently activate a region
of [the brain]” when the subjects had to be engaged in choices. See also Nofs-
inger, The Psychology of Investing 11–22.
111. Adam Smith, Wealth of Nations, book 1, chap. X, at 107 (1776).
112. NASD Investor Fraud Study, May 12, 2006, at 6.
113. Robert Prentice, Whither Securities Regulation? Some Behavioral Observations
Regarding Proposals for Its Future, 51 Duke L.J. 1397 (2002).
114. Video: Madoff Victims Speak Out, Irwin and Steven Salbe, Vanity Fair , March 4,
2009, http://www.vanityfair.com/politics/features/2009/04/madoff-victims-
speak-video200904 (last visited July 26, 2009).
115. Id.
116. The World’s Greatest Con Artists, http://greatestconartists.webs.com/josephweil.
htm (last visited March 13, 2012).
117. Video: Madoff Victims Speak Out, at Ch. 4, n. 114.
118. Kate Nash, Up in Smoke, Advertiser (South Australia), April 22, 2002, at 61
(describing the same attitude in Australia).
119. Joanne McCulloch, Cash Plan Director Faces Jail, Perth Sunday Times, May
26, 2002, LEXIS, News Library, Curnws File.
120. Adair v. Lease Partners, Inc., 587 F.3d 238 (5th Cir. 2010).
121. I am indebted to Peter Tufano of the Saïd Business School at Oxford University
for this comment.
122. Id.
123. Dodds v. Cigna Sec., Inc., 12 F.3d 346, 350 (2d Cir. 1993).
124. Cohain v. Klimley, Nos. 08 Civ. 5047 (PGG), 09 Civ. 4527 (PGG), 09 Civ.
10584 (PGG) 2010 U.S. Dist. LEXIS 98870 (S.D.N.Y. September 20, 2010),
unpublished decision, violations of Section 10(b) of the Securities Exchange
Act of 1934 and Section 12 of the Securities Act of 1933; see, e.g., In re Nova-
Gold Res. Inc. Sec. Litig., 629 F. Supp. 2d 272 (S.D.N.Y. 2009), applying the
storm warnings doctrine in dismissing Securities Act claims, including those
asserted under Section 12, as time-barred.
125. Michael Perlstein, Accountant Suspect in Fraud Probe: Ex-Boss Says Ponzi Suspect
Bilked Firm of $150,000, Times-Picayune (New Orleans), October 23, 2000,
National, at 1.
126. Fimrite, Did He Have a Deal for You, at 1/Z1, at Ch. 4, n. 28.
127. See, e.g., Sherm Robbins, What Is a Ponzi, at http://adv-marketing.com/
business/008-a.htm (last visited March 18, 2011).
219
N OT E S TO PA G E S 1 4 8 – 1 5 3
128. Terry Greene Sterling, The Moneychangers; A New Times Investigation; First in a
Series, Phoenix New Times, April 16, 1998, LEXIS, News Library, Arcnws File.
129. See, e.g., Judge Freezes Assets of Securities Firm Accused of Scheme, Dallas
Morning News, November 25, 1999, at 51A.
130. Bob Cox, Worried Cornerstone Investors Await Receiver’s Report, Fort Worth
Star-Telegram, February 13, 2000, Business, at 1.
131. The Scam That Fell to Earth, at 30, at Ch. 4, n. 91.
132. David Baines, The Little Bank That Isn’t, Canadian Bus., June 24, 2002,
Money, at 36.
133. United States v. Gragg, No. 96-5586, 1998 U.S. App. LEXIS 9577 (6th Cir. May
7, 1998).
134. Charles A. Jaffe, Risky Business, Chi. Trib., December 30, 1999, Zone C, at 1.
135. “Compulsive gamblers live in a fantasy world and deny reality. . . .” The problem
of gambling is similar to drug addiction. John G. Edwards, Former Broker Warns
About the Dangers of Gambling Addiction, Las Vegas Rev. J., November 9, 1999,
at 3D (listing the results of investor addiction, including attempted suicides dou-
ble those of drug addicts, and resort to crime, including violent crime).
136. Jim Kelly, Gambling’s Social Costs Are Not Being Addressed, Morning Call
(Allentown, PA), March 17, 1997, at B2. See also Getting Hooked: Rationality
and Addiction ( Jon Elster and Ole Jørgen-Skog eds., 1999).
137. James Daw, Sinner Sent to Prison for Swindle, Toronto Star, February 6, 2001,
LEXIS, News Library, Arcnws File.
138. Brendan Moynihan, Knowing When to Hold . . . and Fold; Advice for Traders,
Future, September 1995, at 34.
139. Ken Kurson, Las Vegas Rules: Sports Betting Isn’t Like the Market. It Is the Mar-
ket, Esquire, April 1998, at 138.
140. Moynihan, Knowing When to Hold, at 34, at Ch. 4, n. 138.
141. Liss v. Al Manuel, 296 N.Y.S.2d 627 (Misc. Civ. Ct. 1968).
142. See N.Y. Const. art. 1 § 9 (prohibiting gambling; authorizing legislatures to pass
laws prohibiting gambling); N.Y. Penal Law §§ 225.00–30 (McKinney 2008 &
Supp. 2011), making it a crime to promote gambling or to possess gambling
records and devices. It is not a crime just to participate in the game). N.Y. Gen-
eral Obligations Law § 5–401 (McKinney 2001), providing that wagers made
to depend on gambling are unlawful); id. § 5–411, providing that contracts for
such wagers are void.
143. Merriam-Webster’s Collegiate Dictionary 689 (10th ed. 1999).
144. Id. at 478. Another part of the definition is “to play a game for money or prop-
erty.”
145. David M. Halbfinger and Daniel Golden, The Lottery’s Poor Choice of Locations;
Boom in Instant Games, Keno Widens Sales Gap Between White and Blue Collar;
The Lottery at 25; Last of Four Parts, Boston Globe, February 12, 1997, at A1.
146. Pythia Peay, Uncontrolled Gambling Is Poor Bet, Stuart News (Stuart, FL),
July 20, 1996, at D4.
220
N OT E S TO PA G E S 1 5 4 – 1 6 3
147. Charles Osgood, Easy Money, CBS News Transcripts, March 7, 1999, LEXIS,
News Library, Arcnws File.
148. Liz Pulliam Weston, Talk Is Vital in Planning Family Finances, L.A. Times, April
28, 2000, pt. C, at 1.
149. Ron Ziegler, Net Trading Catches Fire: Don’t Get Burned by Easy-to-Execute,
Technology-Driven Transactions, Nat’l Post, May 22, 1999, at 4.
150. See John Seigenthaler, Some Stock Market Investors Are Gambling Addicts, NBC
Nightly News, LEXIS, News Library, Arcnws File, December 24, 2000; Tom
Rhodes, Inside New York, Sunday Times (London), February 20, 2000 LEXIS,
News Library, Arcnws File.
151. Paul Sloan, Can’t Stop Checking Your Stock Quote? U. S. News & World Rep.,
July 10, 2000, at 40; David Ferrell, Going for Broke, L.A. Times, December 13,
1998, part A, at 28, noting that “a small but significant” percentage of investors,
between 1 and 4 percent, are addicted to trading.
152. See Ponzi, The Rise of Mr. Ponzi 107, at Ch. 4, n. 45.
153. Id. at 107, 110–11.
154. Id. at 114–15.
155. Akerstrom, Crooks and Squares 156–57, at Ch. 4, n. 47.
156. Jacobs, Telemarketing Con Artists Do Not See Selves as Criminals, at A1.
157. Joe Dejka, Thieves to Learn a Lesson; Sarpy County Tries Shoplifting School;
Court Cases Diverted; Shoplifting Facts, Omaha World-Herald, June 17,
2002, at 1b.
158. http://www.answers.com/topic/calculating.
159. David Weisburd et al., White-Collar Crime and Criminal Careers: Some Preliminary
Findings, 36 Crime & Delinquency 342, 349 (1990).
160. Id. at 347.
161. Robbie Whelan, Guilty Plea Ends Tale of Redemption, Wall St. J., April 5, 2011,
at C1, LEXIS, News Library, WSJ File.
162. United States v. Gold Unlimited, 177 F.3d 472, 478 (6th Cir. 1999).
163. Henderson, Preacher Has Faith in Pitch, at 33.
164. Peter Gosnell, Fraudster Winged off with $2m, Daily Telegraph (Sydney),
April 25, 2002, at 41, LEXIS, News Library, Arcnws File.
165. See Marianne Lavelle et al., Payback Time? U.S. News & World Rep., March
11, 2002, at 36.
Chapter 5
1. Crigger v. Fahnestock & Co., 443 F.3d 230 (2d Cir. 2006).
2. Marshall B. Clinard and Peter C. Yeager, Corporate Crime 21 (1980).
3. On this subject, see Paul W. Bonapfel et al., The Business Bankruptcy Panel:
Ponzi Schemes—Bankruptcy Court v. Federal Court Equity Receivership, 26
Emory Bankr. Dev. J. 207 (2010); Mark D. Sherrill, Limitations of Market
221
N OT E S TO PA G E S 1 6 3 – 1 6 7
222
N OT E S TO PA G E S 1 6 7 – 1 7 7
Chapter 6
1. Merrill v. Abbott (In re Independent Clearing House Co.), 41 B.R. 985, 995
(Bankr. D. Utah 1984), subsequent history omitted; Susan Spencer-Wendel,
Madoff Victims Doubt Payouts, Palm Beach Post, July 18, 2011, at 1B, LEXIS,
News Library, Curnws File (noting that critic of Madoff trustee “believes 80
percent of the money will be paid out to the wealthiest 20 percent of investors”).
2. 28 U.S.C. § 157(a) (2006), saying district courts may refer Bankruptcy Code
cases and proceedings to bankruptcy judges; 28 U.S.C. § 157(b)(1) (2006),
providing that bankruptcy courts may hear Title 11 cases and “core proceed-
ings”; 28 U.S.C. § 157(b)(2)(A), (B) (2006), providing that “core proceedings”
include matters concerning administration of estate, allowance or disallowance
223
N OT E S TO PA G E S 1 7 7 – 1 8 0
224
N OT E S TO PA G E S 1 8 1 – 1 8 9
15. Melanie Waddell, Madoff “Feeder Fund” Settlement Reached, AdvisorOne, July
28, 2011, http://www.advisorone.com/2011/07/28/madoff-feeder-fund-set-
tlement-reached (last visited November 18, 2011).
16. Tom Hays, $7.2b Settlement OK’d by Judge in Madoff Case, Boston Globe,
January 14, 2011, at 7, LEXIS, News Library, Curnws File.
17. Picard v. Katz. 11 Civ. 3605 ( JSR) [Adv. Pro. No. 10-05287], 2011 U.S. Dist.
LEXIS 109595 (S.D.N.Y. September 27, 2011).
18. Tally M. Wiener, Essay, On the Clawbacks in the Madoff Liquidation Proceeding,
15 Fordham J. Corp. & Fin. L. 221 (2009).
19. Cunningham v. Brown, 265 U.S. 1 (1924). The court reasoned that the lenders
were creditors because their money could not be traced in the bank accounts.
The court noted that an unlawful payment to a minor constituted a preference.
20. Christian Bros. High Sch. Endowment v. Bayou No Leverage Fund, LLC (In re
Bayou Group, LLC), 2010 U.S. Dist. LEXIS 99590 (S.D.N.Y., September 17,
2010).
21. The relationship between net losers and net winners in a Ponzi scheme is very
complicated and involves both interpretation of statutes and judicial decisions.
For a great detailed legal analysis of the issues, see Andrew Kull, “Common
Law Restitution and the Madoff Litigation” (unpublished manuscript, on file
with author).
22. Sec. Inv. Protection Corp. v. Old Naples Sec., Inc. (In re Old Naples Sec., Inc.),
343 B.R. 310 (M.D. Fla. 2006).
23. Harold R. Weinberg, Markets Overt, Voidable Titles, and Feckless Agents: Judges
and Efficiency in the Antebellum Doctrine of Good Faith Purchase, 56 Tul. L. Rev.
1 (1981).
24. Id., 10 n. 38 (1981), quoting Hosack v. Weaver, 1 Yeates 478, 479 (Pa. 1795),
quoting J. Kelyng, A Report of Divers Cases in Pleas of the Crown 48 (1708).
25. United States v. $7,206,157,717 on Deposit at JP Morgan Chase Bank, N.A.,
274 F.R.D. 125 (S.D.N.Y. 2011).
26. Tanvir Alam, Fraudulent Advisors Exploit Confusion in the Bankruptcy Code:
How In Pari Delicto Has Been Perverted to Prevent Recovery for Innocent Creditors,
77 Am. Bankr. L.J. 305 (2003).
27. United States v. Frykholm, 362 F.3d 413 (7th Cir. 2004).
28. Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008).
Epilogue
1. Humberto Cruz and Diane Lade, Don’t Lose to Investing Scams—Watch for
Signs, Sun-Sentinel (Fort Lauderdale, FL), September 18, 2000, at 21.
2. Id.
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INDEX
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