The Ponzi Scheme Puzzle

THE PONZI SCHEME PUZZLE
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THE PONZI SCHE ME PUZZLE
A History and Analysis of Con Artists and Victims
Tamar Frankel
1
Oxford University Press
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Library of Congress Cataloging-in-Publication Data

Frankel, Tamar.
The Ponzi scheme puzzle: a history and analysis of con artists and victims/Tamar Frankel.
p. cm.
Includes index.
ISBN 978-0-19-992661-9 (cloth: alk. paper) 1. Swindlers and swindling. 2. Investment
advisors—Corrupt practices. 3. Corruption—Prevention. 4. Self-consciousness (Awareness) I. Title.
HV6691.F73 2012
364.16′3—dc23 2011051887
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
CONTENTS
Preface xv
Acknowledgments xvii
Introduction 3
1. Con Artists At Work 15

A. Three Stories of Ponzi Schemers 15
1. Charles Ponzi 15
2. Bernard Madoff 18
3. Gregory Bell 20
B. The Basic Design 22
1. Drawing Attention to the Offer 22
a. High Returns at No Risk 22
b. Stories to Satisfy Investors’ Curiosity 25
c. Con Artists’ Stories Are Exceptional
and Creative 28
C. Gaining Trust and Concealing the Truth 29
1. Words Can Be Used to Signal Trust 29
a. Words Can Denote Trustworthiness 29
vii
CONTENTS
b. Signals to Raise Trustworthiness 32

c. It Depends on How You Say False Things:
Specific Promises with Vague Roles 34
d. How a Story Is Told Can Signal Truthfulness 35
e. Refusing to Provide the Details of a Scheme
Need Not Undermine Trust 36
2. Familiar Transaction Businesses and Forms
Seem to Make Verification Superfluous 38
3. Hiding Fraud by Actions: Prompt Payments
That Spell Trustworthiness, Low Risk,
and Much More 39
D. Hiding the Vulnerable Part of the Story:
Secrecy and Costly Verification 41
1. Concealing the True Nature of the
Ponzi Business 41
2. Use of Justified Secrecy 42
3. Stories That Are Costly to Verify 44
4. Details That Hide the Truth by Drowning It 48
a. Details Can Hide the Truth 48
b. Complexity Helps Hide the Truth as Well 49
E. Con Artists’ Deceptive Friendship
and Seeming Vulnerability by Age and Naïvety 52
1. Deceptive Friendship and Love 52
2. Deceptive Weakness of Age and
Seeming Naïvety 55
a. Old Age Can Deceive 55
b. Naïvety Can Deceive 56
2. Selling The Stories 57

A. Advertising 57
1. The Importance of Advertising 57
viii
CONTENTS
2. Where to Operate and How to Build a

Reputation 58
3. Showing Generosity 59
4. Entertaining 61
5. Attracting Attention by Engaging
in Attention-Drawing Conflicts 62
B. Recruiting Helpers 63
1. Cooperation, Competition, and
Congregation Among Con Artists 63
2. Birds of a Feather Flock Together 65
C. How Do Con Artists Approach Their Victims? 67
1. From Family and Friends to Institutions
and Affinity Groups 67
a. Introduction 67
b. Ethnic and Religious Affinity Groups 70
c. Religious Institutions 74
d. Hybrid Institutions and Overtones 75
2. Technology Has a Growing Impact
on the Growth of Ponzi Schemes 77
D. The Sales Force 79
1. Collecting and Distributing Information 79
2. Paid Sales Force 80
3. A Pure Sales Structure: Pyramid Schemes 82
3. Con Artists’ Behavior Seems a “Normal

Usual Behavior” 85
A. Humans Have a Natural Ability to Pretend,
Lie, and Influence Others 85
1. Humans—and Even Primates—Have
the Innate Ability to Lie Convincingly 86
2. Signs of Misleading Signals 87
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
4. A Profile of The Con Artists

and Their Victims 110
A. The Dark Side of Con Artists (and Some
of Their Investors) 111
1. Con Artists Are Different from Most People 111
2. On Very Rare Occasions a Con Artist
Might Resort to Murder 114
3. On Very Rare Occasions a Group of
Con Artists Can Be Deadly as Well 116
4. Con Artists Lack Empathy 117
a. What Does Empathy Mean? 117
b. Lacking Empathy Can Bring Repeat Frauds 118
c. Lacking Empathy Can Render Con Artists
Effective 120
5. How Do Con Artists Present Themselves? 121
a. Protecting the Weak Ego: We Are Special! 121
x
CONTENTS
6. Con Artists’ Mechanisms of Ego Protection

and Justification 125
a. Denial 125
b. Blaming the Government 127
c. Blaming the Laws 128
d. Blaming the Victims 129
e. Blaming Others, but Avoiding a Show
of Weakness 131
f. Our Actions Are Justified as Protection
Against Others Who Are Fraudsters 131
g. Our Good Works Testify to the Legitimacy
of Our Actions 132
B. The Profile of the Victims: What Kind of
People Are the Sophisticated Victims? What
Makes Some More Vulnerable to Ponzi
Schemes Than Others? 133
1. The Dark Side of Some Investors: Lacking
Empathy Toward Other Investors
and Shared Greed 133
2. Investors in Ponzi Schemes Who Suspect
or Know the Nature of the “Investment”
Yet Invest 134
3. The Element of Greed 135
4. What Drives the Victims? 136
a. Gullibility 138
b. Tolerance to the Risk of Being Caught
for Illegal Activities 140
c. An Optimistic Nature and Outlook
on Life Affects Risk Tolerance 141
d. Social Status 142
e. The Role of Education in Risk Tolerance
Is Unclear 143
xi
CONTENTS
f. A Reminder of the Stories in Chapter 1:

The Ways Con Artists Make Their Offers 145
g. How Do Sophisticated Victims of Ponzi
Schemes View Themselves? 146
5. How Do Some Victims React to the
Discovery of Con Artists by the Government? 148
a. The Victims’ Attitude Toward
the Government 148
b. The Nature of a Ponzi Scheme Justifies
This View of Some Investors 150
C. The Issue of Addiction 151
1. What Is Addiction? 151
2. What Causes an Insatiable Craving
for More and Loss of Self-Control? 153
3. What Are Con Artists (and Perhaps
Their Victims) Usually Addicted To? 155
4. Con Artists Are Repeat Offenders 156
5. How Does the Public View the Con Artists

and the Victims? 160
A. America Is Ambivalent About Its Con Artists 160
1. Con Artists Who Defrauded Small Investors
Are Viewed Somewhat Differently 162
2. When Con Artists Mimic the Wealthy Power
Elite, They Live Like the Wealthy Power Elite 163
3. The “Barren and Destructive Creators”:
The Benefits of Creative Harm 164
4. Con Artists Can Be Corrupting Teachers 165
B. How Does the Public View the Victims? 167
1. With Few Exceptions, People View the Victims
of Con Artists Differently Than They View
the Victims of Violent Crimes 167
xii
CONTENTS
2. A Related Reason for Condemning the Victims

Is That They Did Not Do Their Homework 168
C. Is There Protection Available for Sophisticated
Potential Victims? 170
1. Red Flag: A Very High Return at Low Risk 171
2. Red Flag: The Mystery Source of the Higher
Returns 172
3. Red Flag: Continuous Offerings
of Obligations 172
4. Red Flag: Con Artists’ Activities Outside
the Legal Protections 173
5. Other Red Flag Signals 173
6. Separating Business, Emotion, and Faith 174
7. Advice to Investors as Protection Against
Affinity Scams Is Similar 174
6. The Legal Aftermath 176

A. Collecting the Assets and Mediating Among
the Victims 176
B. The Issues 177
C. Who Collects the Remaining Assets? 177
D. Who, Among the “Helpers” of Con Artists,
Must Pay? 178
1. Who Helps the Con Artists? 178
2. What About Suspecting Helpers? 179
E. How to Divide the Remaining Assets? 181
Epilogue 188
Notes 193
Index 227
xiii
PREFACE
In 2001, I had the good fortune to meet Professor Diego Gambetta of

Nuffield College at Oxford University. Having heard of my interest in
and work on trust in the financial area, he suggested that I study the
mimics of trustworthiness: con artists. I did, and entered the world of
the cons and their victims. The journey was fascinating, as I discov-
ered the intricate relationship between con artists and their “marks,”
and uncovered the games they play and the price they pay. On the
way, puzzles piled up. How can con artists be so successful? How are
their marks so blind? Why is this type of fraud so prevalent around
the globe?
I sought the answers to these questions by drawing on the facts as
the courts described them, and sometimes as the parties alleged
them. There have been hundreds of U.S. court cases over the years. In
addition, there is The Rise of Mr. Ponzi, the autobiography of Charles
Ponzi, which tells us much about him and about con artists in gen-
eral. There are studies about the unique characteristics of con artists,
how they cooperate, and what underlies their true nature. These ma-
terials helped uncover patterns of facts and behaviors. As varied as
the stories of con artists are, and as diverse as the victims’ behavior
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
I owe a debt of gratitude to Professor Diego Gambetta, Professor

Avner Offer, and Professor Joshua Getzler of Oxford University for
their ideas, comments, and support. Much of the factual material for
this book was derived from court cases and news articles. I thank
William Hecker, Esq., Valentina Elson, and Leanne Chaves for their
valuable research and the many Boston University School of Law stu-
dents who assisted in this project throughout the years. My thanks to
Connie Taylor, publisher and friend of many years, for her patience
and suggestions. Energy and inspiration have always come from
family: my husband, Ray; my children, Michael and Anat. They have
given me the gift of love and joy, which feeds my work.
xvii
Introduction
The American public is better educated and better informed than

ever. But here’s a paradox: The more people know, the dumber and
more careless they seem to get about their investments.
—Richard L. Stern and Lisa Gubernick, “The Smarter They Are, the Harder
They Fall,” Forbes, May 20, 1985, at 38
[Scientists] are absorbed by teasing out the secrets of nature. . . . But

how wonderful it is also to penetrate the secrets of men’s minds, to
turn the chaos of human endeavor into order and bring the darkest
deeds from night into daylight.
—Iain Pears, An Instance of the Fingerpost 404 (1998)
It takes brains to be a swindler.

—Dan Seligman, “The Mind of the Swindler,” Forbes, June 12, 2000, at 426
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
named after Charles Ponzi, who perpetrated such a scheme in the

early 1920s. A Ponzi scheme defrauds investors as follows. The con
artist offers investors investments that carry extraordinary returns
and promise no risk or low risk. The profits are presumed to derive
from some business, or product, or financial arrangement. In fact,
however, there is no business or product or financial arrangement.
The money to pay the investors’ profits and sometimes the invest-
ments themselves is raised from new investors who are made similar
promises.
Do all investors lose under the scheme? Not necessarily. Some
investors gain, together with the con artist. But most investors lose
heavily. Here is how one bankruptcy court decision shows the
distribution of the losses and gains in a Ponzi scheme: about “924
investors, who deposited more than four million dollars with the
debtors [the con artist] after June 12, 1981, received no returns and
lost all of their original investments.”1 The group of first investors is
likely to receive their capital and a profit of 200 percent. Somewhat
later, a second group of investors is likely to receive their capital and
150 percent profits. And a third their capital and 100 percent profits,
and so on, until the investors in the last group in line are likely to
receive 0 capital and 0 percent return. These calculations are similar
to those that predict the behavior of “herding,” or a “run” in the mar-
ket. Like market investors,2 investors in Ponzi schemes follow each
other, especially if they are connected in an affinity group, or if they
are influenced by the growing reputation of the con artists, or by the
con artists’ salesmanship and that of their sales force.
Who are the victims of these schemes? Many are wealthy, well-
informed, and famous individuals.3 As one court noted: “Lest one
think Ponzi schemes are too simple and obvious to bamboozle the
financially savvy, an oil-drilling swindle in the 1970s duped top exec-
utives at Pepsico, Time, and General Electric, as well as the chairman
of U.S. Trust, the president of First Boston Corp., and an author of
4
INTRODUCTION
several books on Wall Street finance.”4 News in May 2002 revealed

that a few banks lost close to $1 billion in a classic, run-of-the-mill
scheme.5 In another case, BankAtlantic was caught in a Ponzi scheme
when fraudulent loan applications were offered to the bank, and the
con artists continued to make payments on the loans in order to hide
the borrowers’ delinquencies.6
In 2010, a hedge fund manager was found to have “conned some of
Denver’s wealthiest people.”7 His scheme lasted more than ten years;
according to a report of a court-appointed receiver, this manager col-
lected more than $71 million from about sixty-five people. He left his
firm with $9.5 million in assets and $140 million in liabilities.8 In the
1980s, a Ponzi scheme was exposed at J. David Dominelli’s currency
trading firm, much to the shock of San Diego’s elite. About a thousand
investors lost a total of $80 million in Dominelli’s fraud, which prom-
ised returns on the order of 40 percent. In 1985, he was sent to prison
for twenty years.9 In Australia, the victims of another scheme included
former famous football and soccer players.10 Large institutional inves-
tors,11 religious organizations, and their members were not spared
either.12 On December 11, 2008, Bernard Madoff, a well-known bro-
ker dealer and a former chair of NASDAQ (National Association of
Securities Dealers’ Automated Quotations), confessed to having
defrauded his investors. The list of his investors included investment
management firms, foreign banks, hedge funds, wealthy individual in-
vestors, brokerage firms, pension funds, companies, charities, univer-
sities, and insurance companies. His scheme lasted at least twenty
years. The precise amount of the fraud is not yet established, but it is
in the billions. He was sentenced to 150 years in prison.13
Thus Ponzi schemes catch in their net highly sophisticated indi-
viduals and institutions as well as low-income and middle-income
investors. In New Mexico, with a population of about two million, a
Ponzi case or two appear almost every year. Although New Mexico
may have a distinctive character, perhaps as a place where investors
5
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
share when Dona Branca operated a scheme, paying 10 percent

monthly interest, from 1970 to 1984.19
Similar stories appear with monotonous regularity. In Costa Rica,
two brothers, Luis Enrique and Osvaldo Villalobos, operated a Ponzi
scheme—the Brothers Fund—for twenty years. Investors, among
them sixty-four hundred American retirees, invested $10,000 each
and received up to 3.5 percent interest per month in cash. Costa
Rican officials began to investigate the organization and discovered a
“giant Ponzi scheme.” When the brothers’ bank accounts were frozen,
it was estimated that $300 to $600 million was missing, and possibly
as much as $3 billion. Osvaldo Villalobos is serving a jail sentence;
Luis Enrique is a fugitive.20 In a Haitian operation in 2001, it is esti-
mated that more than $240 million was swindled from investors,
equivalent to 60 percent of the country’s GDP.21
On February 18, 2011, the Securities and Exchange Commission
filed an emergency action against Secure Capital Funding Corpora-
tion and certain individuals to freeze their multimillion-dollar inter-
national investment scheme, which allegedly offered risk-free Swiss
debentures earning from 10 to 100 percent a month. According to
the commission, “[t]hese securities were fictitious and nearly $3 mil-
lion of investor funds were quickly wired out of the country to
accounts in Latvia and Jamaica.”22
Do Ponzi schemes have an impact on the financial system and
society? They do. The dollars that investors lose in Ponzi schemes are
not trivial. In the United States, the annual losses from the schemes
vary; in 2000 it was reported that American investors were losing
more than $10 billion a year to investment frauds.23 According to
court cases, the year 2002 showed losses of more than $9.6 billion.24
Each of the years 1995 and 1997 showed losses of more than $1.6
billion. The years 1996, 1990, and 1976 showed annual losses of
more than $1 billion as well. But these numbers are drawn only from
court cases.
7
Some numbers speak for themselves. “Larry Reynolds assisted

Tom Petters in routing $12 billion of investor funds through Reyn-
olds’s company’s California bank account. Petters had told investors
that their funds were used to purchase consumer electronics, when in
fact Reynolds directed that the funds be sent to Petters’s company.
Petters then used the funds to perpetrate a massive Ponzi scheme.”
Reynolds’s conviction was affirmed in 2011.25 In 2010, Randall
Treadwell, Ricky Sluder, and Larry Saturday were convicted for oper-
ating “a massive four-year Ponzi scheme in which more than 1,700
investors across the United States lost over $40 million.”26
Do these swindles die out? Not at all. After the conviction of
Treadwell and his two partners, the court commented: “Despite the
apparent notoriety of Ponzi schemes, they continue to dupe inves-
tors.”27 As was noted in the New York Times on May 2, 2011, “This
kind of swindle thrived well into the 20th century.”28 But as the cited
case will show, the twenty-first century is not lagging behind.
Losses from Ponzi schemes in the United States are equal to the
losses from shoplifting, which is considered a vast and costly crim-
inal behavior. According to one study, about twenty-three million
Americans try to steal at shops annually.29 Ponzi schemes cannot
boast such a large number of criminals, but the schemes do compete
with shoplifting on the cost side. The aggregate cost of shoplifting in
2001 to U.S. retailers was $10.23 billion,30 compared to investment
frauds (involving far fewer con artists) amounting to approximately
the same sum—$10 billion.31 One case alone resulted in losses of $9
billion.32
In addition, losses from Ponzi thefts are more “concentrated”
than the losses of shoplifting, which are spread throughout the re-
tailing business. In 2000, the average dollar loss per shoplifting inci-
dent was $195.73.33 But Ponzi schemes cost each investor much
more. In 2002, PinnFund defrauded 159 sophisticated high-income
investors of $330 million, or more than $2 million each on average.
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
9
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
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
side of con artists—their narcissistic character disorder, lack of

empathy. We examine the character traits and behavior of their vic-
tims as well: a large dose of gullibility, an inclination to risk taking,
and the need for feeling special and exclusive.
Chapter 5 deals with the aftermath of a Ponzi scheme mess. We
learn about the varying reactions of victims when they discover they
have been defrauded. We look at how some continue to follow the
defrauders, some wish to forget it ever happened, and some carry out
the sad spectacle of victims fighting victims, and the attempts of the
courts and the law to find the right balance among the victims’ claims.
This chapter ends with the public’s views of the diversity of con artists
and types of victims.
Chapter 6 brings us to the courts. It deals with the closure of
Ponzi schemes, clearing the shambles in the relationships among the
victims and reaching to the helpers of the con artists. Difficult issues
arise as the trustee in the bankruptcy court and other claimants seek
to collect as much money as possible to be divided equitably among
the victims. Not all victims bear the same burden. Early investors
may have managed to collect their investments and high returns as
well. Later investors may have lost all or some of their investments.
Should those who collected all repay some of the money they
received, to share with those who lost all? What if the fortunate inves-
tors lost or spent their money years ago? What is the legal status of
“feeders” that helped the con artists recruit new investors? These
questions are clearer than the answers. Yet the discussion highlights
the difficulties of dividing the assets fairly among the victims.
What lessons can we learn from these stories and analysis? The
Epilogue offers a number of observations. Our attitude toward con
artists is ambivalent, perhaps because their behavior is so close to
that of honest people and businesses. Or perhaps because con artists
act like the social leaders with whom they are likely to mingle. Or
perhaps because their actions are necessary in shaking up a complacent
13
society. Therefore, self-protection from charming and dangerous con

artists must involve self-examination. The more captivating the con
artists seem, the more tempting their stories and their promises are,
the more vulnerable we may be to their lethal offerings. The law may
help protect us. Our logic may help protect us. The warnings we hear
from others may help protect us. But the most powerful protection
against these enticing people, their stories, and their promises is
self-awareness. It is finding out the extent to which we might be
drawn to such schemes and to their attractive schemers. Once we rec-
ognize our own tendencies, we can better protect ourselves from
their toxic attraction.
14
Chapter 1
Con Artists At Work
A . THREE STORIES OF PONZI SCHEMERS

1. Charles Ponzi
In a constant search for ideas that would appeal to investors, Charles
Ponzi read in 1919 about postal stamps, redeemable by the issuing
governments in their own currencies. He calculated that trading on
the difference between the value of the currencies in which these
stamps were issued could bring enormous profits. For example, he
would buy 100 stamps for 100 Italian lire, which are worth, say, $20.
If the price of the lire rose and their value increased to $30, he would
surrender the stamps for the 100 lire and buy dollars with the lire, at
a profit of $10—or a 50 percent return.
These calculations may have looked convincing on paper, pro-
vided the scheme was carried out with respect to a few stamps, and
only some of the time; and provided, of course, the currency price
differences rose in the right direction, and provided as well that the
governments continued to redeem the stamps. The calculations were
not correct with respect to bagsful of stamps to be carried across the
ocean from Italy, and the long-term plan of collecting millions of
dollars, especially if the Italian government ceased to redeem its
stamps and stopped paying cash for surrendered stamps.
Nonetheless, Ponzi launched his project without hesitation and
with the greatest enthusiasm, though with little long-term planning.
15
In business, he showed poetic tendencies. As he wrote in his autobi-

ography: “A new rainbow had come within my range of vision. The
most spectacular I ever saw. With renewed energy and enthusiasm,
I chased after it. I caught up with it. When I did, I found fifteen
millions of dollars at the end of it. I should have called it a day.
And quitted [sic] while the quitting was good. I didn’t. Hence, this
story.”1 Describing how he conceived of the idea and verified it, he
wrote: “In all, it had cost me less than four dollars to lay the founda-
tion for a venture which nine months thence, had an outstanding
indebtedness of $15,000,000.”2
Ponzi convinced relatives and friends to invest in his personal
notes. He promised a return of 10 percent a month, when banks were
paying about 5 percent a year. As he began to pay this incredible
return, other investors knocked on his door, bringing millions.
The stamp currency arbitrage could not materialize on such a
scale, if it could materialize at all. It is not clear how much Ponzi
invested in the venture, although one publication suggested that
his investment amounted to about $30.3 In any event, the stamp
investment did not come close to the $15 million that investors
had entrusted to him. The investment produced a minuscule frac-
tion of the returns that Ponzi had promised. Revenue dried up soon
after he started the venture, as governments ceased to pay cash for
surrendered stamps.4 The governments’ payback in their currencies
was, after all, the foundation of the proposed business.
Even though he was an incorrigible optimist, once Ponzi was
holding about $5 million of investors’ money, he recognized that the
investment could not possibly bring the promised profits. As he
explained in his book, “[My] predicament was relatively critical.
With four or five million dollars in cash and every opportunity to beat
it for parts not reached by extradition treaties, it could not be called
critical. It was ideal. But for a stubborn cuss like me, determined to
stick it out to the end, it was more than critical. It was hopeless.”5 And
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:
17
not merely a rational investment, but something that they could be

proud of, an inventive investment by one of their kind—an Italian
immigrant! As we shall see, the victims of Ponzi schemes are often
drawn to invest by something other than rational, calculating busi-
ness evaluations.
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.
18
Moreover, investors forgot the indispensable golden rule of invest-

ment, diversification: “Don’t put all your eggs in one basket.” Many
invested their entire life savings with Madoff.14
Bernard L. Madoff Investment Securities LLC, a securities trading
firm founded by the father and managed by his sons and brother, per-
petrated his fraud as a trader who purportedly uses a split-strike con-
version strategy.15 This is a legitimate investment strategy combining
the purchase of stocks with the use of options to hedge against the
risk that the price of the stocks will decline. Madoff claimed to have
used this strategy to achieve uniform and higher returns for many
consecutive years. He promised “11 percent annual return over the
last 15 years, with only 13 losing months,” losses that one “feeder
fund” paid out.16 However, the split-strike strategy is not loss-proof.
For sophisticated investors, Madoff ’s promised returns should have
raised a red flag about his operations not because the returns were
very high but because they were consistently higher than the market.
There were other indicators that something was awry. Madoff
was secretive about information that other investment managers
did not consider proprietary. His secretive attitude violated the pol-
icies of certain endowments and institutional investors, policies
requiring them to ask and receive this information before making
any investments.17 In addition, Madoff did not charge the usual man-
agers’ performance fees of 2 percent of assets under management and
20 percent of profits. He claimed to collect sufficient returns from
trading commissions that he received,18 and whereas fund managers
capitalize on their names Madoff suspiciously prohibited his feeder
funds—the ones investing their clients’ money with Madoff—from
disclosing his name on their prospectus.19 He desired to remain a
broker, having custody of the clients’ assets, rather than an adviser-
fund manager (which is more strictly regulated in some respects). By
avoiding receipt of advisory fees, he seems to have escaped regulation
as adviser for many years (until 2006).
19
So why were sophisticated investors drawn to Madoff ? One

explanation is that they were drawn to the privilege of investing with
him. Investors begged their “connected” friends to pull strings and
persuade Madoff to accept their money. Madoff ’s secrecy played well
into this image. Few wanted to rock the boat and be forced out of
the closed circle.20 Further, few investors were willing to admit their
ignorance by asking questions about how the split-strike conversion
strategy actually worked. Indeed, Madoff ’s posture of secrecy strength-
ened his image as a genius.
Madoff had the endorsement of the Jewish community. Being a
Jew, he had a stamp of approval from institutions supported by many
of his direct investors, such as synagogues, members of Jewish con-
gregations, prominent figures in Jewish communities, and founda-
tions. Madoff “was God” to the investors, explained Elie Wiesel; “it
was a myth that he created around him . . . the myth of exclusivity. . . .
He gave the impression that maybe a hundred people belonged to his
club.”21
By the 1990s, Madoff had been introduced to a large and impor-
tant investment advisory institution. This institution helped spread
the Ponzi scheme to investors in Europe, and to banks and feeder
funds around the world.22 Records show that Madoff defrauded more
than ten thousand investors worldwide in a scheme that is estimated
to have involved between $40 and $65 billion.23 Although Madoff ’s
was the largest Ponzi scheme to date, it ended just as all the schemes
before it had done: when investors’ requests for repayment exceeded
new investments.
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
20
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.
Funds provided potential investors with a Confidential Informa-

tion Memorandum . . . describing the Funds’ investment strategy,
including the terms and protections as described here. Between
2002 and 2008, the Funds raised over $2.5 billion from individ-
uals, retirement plans, individual retirement accounts, trusts,
corporations, partnerships, and other hedge funds.
But in September of 2008, it was revealed that Funds’ invest-
ments were a total sham.
There were no goods, no true purchase orders, and no real in-

voices of goods that were purchased by retailers. Enchanted Family
Buying and Nationwide Resources International did not operate real
businesses. They were shell companies—empty vessels: “Early inves-
tors in the Funds were paid not out of any money raised from the sale
of consumer goods but from funds invested by subsequent lenders.”24
Later investors lost. It was a classic Ponzi scheme. The context of
this scheme was quite sophisticated and complex; nonetheless, and
perhaps because it was complex, investors relied on the con artists’
21
salespersons rather than on what they offered in deciding to partici-

pate. Not surprisingly, complexity and secrecy have the same effect:
they make it difficult to understand and check the investment.
These three stories seem very different and deal with a variety of
businesses and business structures, involving several types of actors
and approaches. Yet fundamentally, they are all the same. As we shall
see, surprisingly, con artists and their victims are more similar than
meets the eye.
B. THE BASIC DESIGN

1. Drawing Attention to the Offer
In this chapter, we learn about the drawing power of Ponzi schemers’
offerings. One aspect of their attraction is a promise of high return
coupled with low risk (or seemingly none). A second aspect of the
drawing power is the exceptional and creative stories and explana-
tions for the offering, devised to satisfy the curiosity of potential in-
vestors. A third aspect is that the offerings are unique and scarce.
A. HIGH RETURNS AT NO RISK

Con artists, like salespersons in general, draw the victims’ attention
by means of enticing offers. The first two components of such offers
are very high returns and no risk. All Ponzi schemes share this very
effective draw of an unusually high promised return. An offer of
paying, for example, 10 percent a month (paid sometimes every
month, or not later than every quarter) persisting even when general
lending rates are 5–10 percent a year makes people stop in their
tracks. These fabulous promised returns vary. In one case the con
artist offered 40 percent within six to eight weeks, $9,000 on $23,000
in thirty days, $15,000 on $23,000 in four months, and 75 percent on
$40,000 within nine months.25 On February 24, 2011, a man who
22
seems to have been implicated in a $326 million Ponzi scheme in

Jamaica (appropriately called “Cash Plus”) was accused in the United
States of orchestrating another scheme that offered returns of up to
100 percent a month.26 As the court in still another case noted, the
promised return was “astronomical.”27
Extremely high interest or profit is a hallmark of Ponzi schemes
around the world. The Romanian scheme Caritas offered a return of
eight times the amount invested, within three months. Even in a
country beset by inflation, this was an unbelievable return.28
An Australian con artist offered up to 200 percent from a nonex-
istent commercial business in carpet contracts.29 In yet another case,
a con artist who “pretended to sell lucrative interests in oil and gas
leases . . . in one case promised the investor a guaranteed monthly pay-
ment of $934 for every $25,000 invested.”30
Interest can be tweaked when the promised returns vary and is
reported in monthly statements, for example, showing 7 percent to
17.6 percent per month,31 or 15 to 20 percent every ninety days, all
with “little or no risk.”32 Such variations draw attention and create
expectations, and more likely, excitement: “What will this month’s
return be?”
The stock markets, lotteries, and fabulous payments on the part of
famous people make high returns believable. When markets “bubble,”
investors hear and read much about enormous profits made in hours
or even seconds. When lotteries abound, investors may eagerly read
about millions of dollars won by the lucky holders of the right lottery
ticket. When sports stars, actors, corporate management, and invest-
ment bankers earn fabulous amounts, so much more than by a life-
time of hard work, investors may ask themselves, “Why not me?”
Businesspeople may even be tempted to involve their own enter-
prise in what turns out later to be a Ponzi scheme. A significant dis-
count on the price of commodities that their business needs can
tempt them to prepay for the commodities, but in fact end up paying
23
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
24
notes based on currency trading that guaranteed interest payments of

2 percent per month was also sufficiently enticing, along with the
con artist’s presentation.37 The title of another con artist’s instru-
ment (an International Certificate of Deposit) seems to have proved
convincing.38 Similarly, the stories of con artists may include explicit
assurance of low risk. For example, the story about oil fields and the
like is not about searching for the riches, but about having found them.
Old mines have already been discovered. The government surplus
that can be bought for close to nothing is already known to the con
artist. No need to search, and no risk of failing; one need merely col-
lect the rich resource.39
Short-term obligations are viewed as low-risk investments. They
reduce the anxiety of parting with one’s money. It makes sense to
assume that short-term obligations are less risky, but not entirely risk-
free. In one case, the victim was aware that the con artist had been
served with a court cease-and-desist order. The investor understood
the implications of such an order, which prohibited the con artist
from raising and receiving additional investments. Nonetheless, the
con artist represented that the investment would pay 15 percent
interest in a very short period and was secured by the U.S. Government.
This assurance must have tempted the victim, who invested $113,000
with the con artist.40
B. STORIES TO SATISFY INVESTORS’ CURIOSITY

An important element of the Ponzi design is the need to satisfy the
investors’ curiosity. A promise of unbelievably high profits does not
necessarily induce all investors to hand over their money, but it makes
them stop and listen attentively. Potential investors may be skeptical;
they may ask questions. They may want to know, Where does all this
money come from?
Con artists’ stories explain the sources of the high returns that
they promise. Although the schemes share the same basic structure,
25
they come wrapped in a rich variety of investment stories. Barbara

R. Rowe noted that the “range of Ponzi-type offerings is a tribute to the
imagination and ingenuity of the promoters of these swindles.” The
offerings can describe “just about any kind of deal you might imagine,
from . . . synthetic rubies to hydroponic farming, windmills, tropical
islands and equipment used in outer space,”41 constructing ambu-
lances from automotive coachwork “shells”,42 buying and leasing bus
stop shelters,43 buying mortgages and promissory notes secured by
them,44 buying and restoring historic buildings,45 investing in leases
of telephone numbers in Canada,46 in gold mines,47 in oil,48 in pre-
cious stones,49 in telecommunication systems,50 in Internet kiosks,51
in an investment company,52 in tax lien certificates,53 in legal settle-
ments,54 and in a payroll services business.55 There are investments in
leasing electronic advertising banners,56 lease of pay telephones (back
in 2000),57 a Malaysian latex glove manufacturing company,58 and
building a large processing plant,59 as well as a grocery distribution
business,60 electronics,61 and radio stations.62 A proven attractive
investment is a food products business that made monthly payments
without sending tax forms, thus allowing investors to avoid tax pay-
ments.63 There are also offers of investments in commodity futures,64
and purchase of foreclosed properties that were sold at a profit.65
Then there are investments many people do not understand and
know nothing about. “In a fast-changing financial marketplace,”
declares one financial fitness fact sheet, “Ponzi promoters have an
increasing number of ways to dress up their schemes and shield
them from ready detection.”66 These include insurance,67 “certificates
of deposit evidencing billions of dollars,”68 foreign currency,69 real
estate investments,70 loans “created, packaged, marketed, and sold”
as a series of real estate-backed investments,”71 bridge loans, and
court settlement funds.72 There are also offers of investments with a
“trusted financial advisory firm with agents and representatives who
can be trusted to give advice on insurance and financial matters,” or
26
as reliable “feeders” to another investment manager,73 and to other

global financial services.74
A con artist named Motilall Sudeen offered “high yield invest-
ment programs,” including an arrangement in which the investors’
principal payment “would remain safely in banks [with] little or no
risk,” with “marquee banks, including the World Bank and the [Inter-
national Monetary Fund],” and “the trading programs were moni-
tored by the federal government.” Investors were periodically paid
“dividends” thereby “encouraging to roll over their investments
instead of seeking immediate returns.”75 Sudeen and his friends
“continued to maintain the appearance of safety by issuing investors
bogus ‘Private Placement Agreements’ and ‘Joint Venture Agreements.’”
He told investors that his personal wealth guaranteed their invest-
ment and that they should buy banks’ certificates of deposit so that
he could use the credit based on these certificates to borrow and
invest.76
These lists are in fact far longer. The investment stories are limited
only by imagination. One con artist can create more than one story.
Thus a con artist told various stories to suit his potential clients’ inter-
ests. His companies were investing in “the top three banks in the
United States,” or had “clients in twenty-nine countries,” or “made
investments guaranteed by the United States government,” or “had
invested $2 billion in a gold mine in Mexico,” or “were working on a
billion-dollar Columbus-era ‘find’ on the bottom of the ocean.” In an
October 2004 meeting with potential investors, he stated that his
“companies were directing investments towards ‘humanitarian’ pro-
jects, including projects benefitting ‘people that are hungry and . . . in
various needs throughout the world.’”77
Con artists’ stories can be designed to match the experiences
of the environment and understanding of potential victims. For
example, representatives of charitable institutions are more likely
to believe a story about a secret donor who would match their
27
investments. Charitable institutions frequently receive donations

from benefactors who wish to remain anonymous, perhaps to
avoid the pressure of requests for donations from others. Chari-
table institutions may also keep their donor lists secret, to avoid
competition from other charities. Matching donations is a common
practice in corporate charitable giving. So a story may be plau-
sible, but the familiar design is fraudulent. Using a fake organiza-
tion (the Foundation for New Era Philanthropy), John Bennett
raised hundreds of millions of dollars by promising the investing
institutions to double their money in six months.78 He explained
to them that the money would come from matching grants made
by anonymous benefactors.
C. CON ARTISTS’ STORIES ARE EXCEPTIONAL AND

CREATIVE
Despite their enormous variety, most of the con artists’ stories share
important characteristic features. They present exceptional situa-
tions; they are diverse, complex, and unique. Uniqueness commands
admiration. It is creative. It also breeds excitement; people admire
creators and get excited over novelty. Some of the con artists’ busi-
ness stories are truly exceptional; tropical islands, bus stop shelters,
and windmills are not run-of-the-mill investments. These con artists’
stories are about investments that show breadth and complexity. Gary
Dean benKeith, who operated a Ponzi scheme for a number of years,
was quoted as saying: “Gold? . . . That’s just a small part of it. You
know what gold is? It’s glitter. . . . It’s neon. It gets people excited.”79
The investment stories of con artists have the aura of a thrilling
treasure hunt. A treasure hunt promises a high reward, an adventure,
a risk-bound mystery. And because treasure hunting is based on per-
sonal ability, it differs from, and is more respectable than, many forms
of gambling, which are based mostly on luck. Thus, discovering a trea-
sure gives the finder a sense of personal achievement and gains the
28
admiration of others. Owning something unique has an emotional

attraction. It bestows on the owners a similar quality of uniqueness.
Just as importantly, the investment is the treasure, which the in-
vestors have discovered. But because the treasure is unlimited (the
con artist is always ready to issue his magic notes to new investors), it
is unnecessary to keep information about the treasure secret. Instead,
investors—the discoverers of the treasure—can enjoy the pride of
being the first to discover—the pride of owning the map to the trea-
sure. Investors can immediately offer friends and acquaintances a
gift—an investment that few have heard of. Besides, a gift may bring
other benefits. It bears an implicit hope of future reciprocity: “A gift is
an exchange in which a transfer is not mediated by price, but is rather
reciprocated at the discretion of the receiver.”80 Reciprocal giving can
rise to the level of an obligation. Obtaining another person’s obliga-
tion in this way is satisfying too.
C. GAINING TRUST AND CONCEALING THE

TRUTH
1. Words Can Be Used to Signal Trust
A. WORDS CAN DENOTE TRUSTWORTHINESS
As we rummage through the con artists’ toolbox of persuasions, we
find typical signals of trustworthiness. Some words reflect institu-
tions that signal reliability, such as bank and securities exchange. Look
at how Charles Ponzi’s personal notes signaled reliability and respect-
ability. How did they induce investors by the thousands to hand him
over about $15 million? Here is what they said:
The Securities Exchange Company, for and in consideration of

the sum of exactly $1000 of which receipt is hereby acknowl-
edged, agrees to pay to the order of ——, upon presentation of
29
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
These notes are interesting. First, Ponzi’s business at 27 School Street

was Securities Exchange Company, presumably a trust-building
name at that time.82 It reflected business expertise and commanded
respect. Second, the notes were fashioned after a usual bank note,
which signaled a solid, low-risk investment. Third, presentation was
required. Presentation for payment at a bank denotes sufficient funds
for immediate payment (rather than payment by a check, which
could delay the outlay of cash). It also denotes care on the part of the
con artist; presenters must identify themselves.
One difference between Ponzi’s notes and the text of a typical
banknote is the word voucher in connection with in-person presenta-
tion. A voucher usually relates to receipt of goods and brings to mind
a purchase rather than an obligation to pay. But the term vouch reflects
a promise, a guarantee, even an oath. I speculate that the mixed form
of purchase and obligation to pay may have strengthened the effect of
business respectability.
Notes issued by other Ponzi schemers may include the words
“certificates of deposit,” in the image of bank CDs, or a combination
of the con artist’s business with a bank note. One con artist distrib-
uted to investors a “Deposit Agreement (Capital Funding Program),”
which stated that investors’ money would be put into “project fund-
ing,” by investing in medium-term corporate notes.83 Con artists’
notes contained the word guaranteed and used phrases such as “You
cannot lose,” “You can only win.” In response to a reporter’s question,
one swindling organization wrote: “The full faith and credit of BFA
stands behind all investment products. This is clearly stated in all of-
fering documents.”84 The language is telling. “Full faith and credit” are
30
the words used in the federal government obligations. The words on

nongovernment obligations seem to give the impression that the
obligations are (or at least reflect the status of) government securities.
A con artist used a shell bank in Nassau, named Pacific Exchanger’s
Bank, Limited.85 The word bank is supported by the word exchange(r),
which triggers the image of a securities exchange or money exchange—
both respectable and profitable businesses. Certificates entitled
“partnership trust units” have little legal meaning but invoke feelings
of both closeness (partnership) and trust.86 Note obligations entitled
“gold-backed railroad bonds” have caught investors’ fancy,87 since gold
is the ever-enticing metal and railroad is associated with industry
and solidity. Bonds imply safety, compared to equities. The name for
this particular obligation thus combined the promise of liquidity and
some glamour: the bonds “would be traded in international markets
and would generate [astronomical] returns on investment.”88
A con artist issued notes “with recourse.”89 The words are mis-
leading, implying a promise to pay; yet legally, they are unnecessary.
“Recourse” would be available even if the words were not added.
However, the words without recourse have legal meaning: the holder
of the note cannot resort to the seller of the note. For nonlawyers, the
words “with recourse” seem to suggest an added obligor, but this is
not what they actually mean.
In June 2005, in Los Angeles, John C. Jeffers was sentenced to
fourteen years in federal prison and ordered to pay $26 million in
restitution to more than eighty victims. Jeffers and his confederate,
John Minderhout, ran what they described as a high-yield investment
program, “Short Term Financing Transaction.” From 1996 to 2000,
they collected money from investors around the world. “[L]etters to
some victims . . . falsely claimed the program had been licensed by the
Federal Reserve and . . . had a relationship with the International
Monetary Fund and the United States Treasury.”90 But it seems that
investors did not verify the claims. Instead, they believed.
31
“Mumbo jumbo” contract language can confuse and help conceal

the true nature of a transaction. Examples are abundant. In one real
estate deal, for example, investors paid for mortgage-type instruments
to finance the purchase of low-income residential property.91 Instead
of a mortgage or other security device on the property, the investors
received a “money assignment,” an “agreement assignment,” or a “trust
deed beneficial interest.” As one court explained: “None of these
terms had any specific meaning; and none were commonly used in
the real estate business. Although the terms used in the offers resem-
bled the terms for commonly used security devices, which do provide
the sellers with liens upon the property being sold, defendant’s use of
the terms was quite the opposite.”92 The money assignments, agreement
assignments, and trust deed beneficial interests were meaningless.
Because the language of the instruments was complex, investors did
not understand what they were signing or receiving.
“Units of indebtedness” sounded good for selling land in Florida
(some of which was underwater). The notes promised a return of 200
percent in sixty days, to be paid in cash or land. The obligations sent
meaningful signals; they seemed to imply profits from the sale of the
land. At the same time, the obligations signaled to investors that the
promisor was sure of this level of profit because he undertook to pay
cash. Perhaps the notes suggested he reserved for himself the right to
pay cash, in which case the choice signaled a belief that the land could
be sold at a profit higher than 200 percent, and if that opportunity
arose he would choose to pay cash.93 “The loans,” stated another orga-
nization, “are an absolute liability of [the organization].” As empty as
they are, the words (especially absolute) imply that the organization
cannot renege on its obligations.94
B. SIGNALS TO RAISE TRUSTWORTHINESS

Con artists use signals that encourage potential investors to identify
with them. One such signal is an assurance that the salespersons
have “skin in the game,” meaning they themselves bought the offered
32
investment for their own account. This assurance is followed by a

story of the successful investment. Thus, in one case a con artist drew
potential investors by assuring them that she doubled the money she
invested personally in the same investments.95
Another form of assurance is behavior rather than words. First,
the con artist appears to be as wealthy as the potential investors and
offers the victims advice and support. After all, wealthy persons
belong to the wealthy investors’ class. This in itself raises trust. More
importantly, the con artists masquerade as successful wealthy people,
showing no inclination or desire to advise on, let alone manage, their
friends’ assets. But sometimes they may be convinced to do so. Joel
Ross Goheen acted like a person who merely wished to do a favor for
his friends.96 Reed Slatkin went even further and served as manager
of his victims’ assets free of charge, behavior that showed friendship
and his not needing the money. Waiver of the fees diverted attention
from the risk of handing over to this charitable manager the far larger
amounts of the investments.97
Some con artists’ payments look like payments but are in fact
merely promises. For example, con artists may send their inves-
tors statements that look like bank statements instead of actually
paying investors the interest due. Because investors view bank
“statements” as proof that their money is safe in the bank, they
accept these statements as “money in the bank.” Legitimate bank
statements are evidence of safety and availability of the money on
demand. Frequent statements showing the amounts due reflect
the repeated assertion that “I have the money in a safe place, ready
for you whenever you demand it.” Madoff sent his victims prompt
periodic reports on their holdings. As one victim testified before a
congressional committee, he would check the reports listing “his
investments” against the stock prices published in the newspapers
and because the prices were identical he assumed that Madoff had
invested the money in these securities and so Madoff ’s reporting
was accurate.98
33
Enron Corporation adopted a similar technique.99 Like investors

who receive “statements” instead of money, Enron’s public investors
received “price statements” instead of cash. Unless they sold their
investment notes, however, the paper profits evaporated when the
Enron Ponzi scheme came to its inevitable end. In one case the con
artist sent the same message orally, telling an investor that the inves-
tors could have their money anytime. That was sufficient assurance
as well.100
C. IT DEPENDS ON HOW YOU SAY FALSE THINGS: SPECIFIC

PROMISES WITH VAGUE ROLES
If con artists play vague and conflicting roles, investors can be misled.
But because the different roles are not so clear, investors may simply
ignore the distinctions. For example, a con artist may play the role of
an agent and the role of an owner. He has the choice to appear in one
capacity as representative of a corporation, or its owner, or the seller
of securities to the corporation. Each role involves its own power and
responsibility. The ability to change the role can induce “self-serving
behavior,”101 that is, to mislead. For example, an owner may trade his
property as he wishes; an agent may trade the same property only as
the owner directs. If a broker masquerades as an owner of the prop-
erty, and especially if other parties seem to believe the broker is
indeed the owner, the broker may be tempted to act as an owner and
deal with the property in a way that benefits him (the broker) more
than according to the owner’s directives. He can then collect more
than was due to him. However, usually investors are not inclined to
ask, “Who are we dealing with? Who do you represent?” They focus
more on the promises of the con artist. On promises, investors would
usually concentrate on specifics.
Vague promises may be viewed differently. Investors may under-
stand that vague promises offer opportunities for justifying nonpay-
ment and are therefore more suspect than explicit ones. Specific
34
promises leave promisors little wiggle room and almost no pretext to

avoid payment. Specific promises are self-limiting; they show that
the promisors have voluntarily closed their routes of escaping pay-
ments and obligations. Therefore, the promisors are sure about their
ability to pay.
Specific promises signal both honesty and low risk. Even long-
term loans that are paid in small amounts monthly, as with most
mortgage loans, suggest reduced risk. Failure to make the monthly
payment signals to lenders possible financial problems and a higher
probability of default. These signals allow the creditors to take imme-
diate action to reduce their losses.
D. HOW A STORY IS TOLD CAN SIGNAL TRUTHFULNESS

Con artists’ stories can be quite detailed. Details increase people’s
trust. Like specific promises, details limit the speaker’s freedom to
change the story or reinterpret it, and so the greater the number of
details, the more costly it is to lie. In addition, it seems that it is more
difficult to remember lies than to remember the truth one has experi-
enced. Therefore, a liar is burdened with more details to memorize
and is more prone to forget them. Further, greater detail exposes a
person to the risk of verification and discovery. In An Instance of the
Fingerpost, Iain Pears described the use of details as a method of per-
suasion: “I told him again. Adding more details, then still more details
until the smirk faded from his face, and his hands began to tremble.”
The listener believed the speaker.102
One inconsistent detail can arouse mistrust in all parts of the
story, both true and false. It is not surprising that a Ponzi con artist
who told venture capitalists different stories in accordance with what
he believed they wanted to hear was caught earlier than usual.103
Another con artist attempted to convince a potential investor in a
real estate scam that the money earmarked for specified real estate
projects was segregated for the respective projects, and that the
35
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.
E. REFUSING TO PROVIDE THE DETAILS OF A SCHEME NEED

NOT UNDERMINE TRUST
When a con artist refuses to answer questions and disclose details
about his scheme, he does not hide his refusal. To the contrary: a
con artist may even note the details that he refuses to divulge and
explain the reasons for the refusal. This posture commands trust as
well, by demonstrating openness: “I have nothing to hide. If I refuse
to tell you something I will not lie but say so up front.” The speci-
ficity of the story is not blurred. The refusal is not ambiguous. And
if the listeners tend to believe the reason for the refusal, their trust is
strengthened.
When asked for details about the investments, some con artists
respond: “Do you think I’m going to advertise where this goose that
lays the golden egg is, so that everyone can go to it directly? And
besides, if more people approach the goose, it will stop laying the
golden eggs.” Underlying an argument for secrecy is the posture of
Ponzi con artists as inventors, similar to the justified claims of inves-
tors for patents and other intellectual property protections.108
36
This claim carries with it a tinge of moral justification. “I discov-

ered the tree that grows golden fruit, and am entitled to the benefits
of my discovery. I am willing to share with you these benefits, but not
to relinquish them to you altogether,” the con artist might say. “I may
trust you (and personally, I do), but can we trust all the other inves-
tors? Should I just give away the source of fabulous wealth to
‘strangers’ who are going to exploit it? That may be not only to my
disadvantage, but to yours as well.”
In one instance, an investor asked an employee of the con artist
for details of the many businesses that Gary, the employer and Ponzi
schemer, had been “nebulous” about. The employee replied, “Gary
keeps all that stuff really close to himself, because if he divulges it, he
would be afraid that he would get scooped on some of the deals.”109
Bernard Madoff responded to questions about his investment
strategy in precisely the same way.
[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
37
2. Familiar Transaction Businesses and Forms Seem to Make

Verification Superfluous
Some promises of quick and high returns may seem reasonable
because the stories are commonplace. In 2010 Michael Goldberg
pleaded guilty to operating a $100 million Ponzi scheme, by prom-
ising quick high returns on buying and reselling diamonds or buying
foreclosed assets from JPMorgan Bank. He swindled hundreds of
investors of more than $30 million during a twelve-year period.112 As
commonplace as this story is, without information and under-
standing the details it can be fraudulent.
In another case, according to court documents, “John A. Hickey
(‘Hickey’) and his business partner, Mamie Tang (‘Tang’), induced
over 700 individuals to invest approximately $20 million in two real
estate development funds. Their plan was to purchase land in North-
ern California, prepare the land for residential development, and
then resell the properties to developers at a profit.” The documents
relate the outcome: “As it turned out, however, the investors were
duped by false representations regarding land title, guarantees, and
securitization of the funds.”113 The couple used the investors’ money
to pay first investors, and by the time the fraud was discovered the
investors had lost about $18.5 million.114
Transaction forms that are familiar to investors serve con artists
well. Familiar, often-used forms assure investors of what they “know”
and thus reduce their level of care. These forms divert the investors’
attention from disturbing aspects of the transactions (“Oh, I’ve done
that lots of times”). When investors believe they understand the
transaction, they tend to pay less attention to verifying relevant facts
and inquiring about what they do not clearly understand.
In May 2002, the Boston Globe reported a scheme involving eight
banks that lost close to $1 billion.115 The scheme was designed as
lines of credit of short duration (180 days). The lines of credit were
backed by receivables due from merchants. This is a common bank
38
transaction in a very familiar form, and it evokes memories of many

low-risk transactions. The familiar form of the transaction must have
reduced the lenders’ attention to other defects and heightened their
trust in the promoters. The crucial fact, that the receivables were due
from merchants in India, may have faded in light of the familiar form
and circumstances. It was later discovered, however, that there were
no Indian merchants and no receivables.
The well-known form of “limited partnership participations” can
also cause alertness to fade. Such “participations” are the traditional
form of financing real estate, and oil and gas explorations. Both
the giant Enron and the small First Petroleum Inc. used this legal
financing form for these types of explorations.116 However, behind
the form could lurk fraudulent schemes.
3. Hiding Fraud by Actions: Prompt Payments That Spell

Trustworthiness, Low Risk, and Much More
Actual payments can speak louder than words and divert attention
from lack of disclosure. Lance Van Alstyne and his brokers induced
investors to buy risky securities. Then they offered prospectuses that
disclosed the true nature of the securities, but soon thereafter the
investors received checks. Thus the truth was sandwiched between
false assurances and receipt of money. The payment distracted inves-
tors from the true information. Needless to add, the checks were
largely funded by the investors’ own principal payments.117
Con artists always pay on time (until they stop paying alto-
gether). These payments speak louder than words, and their effects
feed Ponzi schemes. The payments diffuse doubts about the stories
con artists tell. Prompt repayment of the invested capital also signals
low risk. Like the persistent fulfillment of any promise, these pay-
ments induce trust. Timely payments at short intervals help establish
a reputation for trustworthiness. Each payment brings added proof
of the con artist’s credibility, strengthening the influence and weight
39
of the previous payments and allaying suspicions about the source

of the payments.
When the first question, “Will this person pay?” is answered posi-
tively by actual payment of the return, the second question, “Where
did he get the money to pay his obligations?” either is not asked
or becomes far less important. Payment to investors on demand
increases their trust. In one case, the court noted: “[I]n the initial stages
of the plan, those investors who wished to withdraw their investments
were promptly paid. The effect of such prompt payment, of course,
was to convert every investor into a missionary spreading the word of
the enormous profits which could be speedily attained with no dis-
cernible risk of loss.”118 In a recent case a con artist told one investor he
could receive his money back whenever he asked for it.119 This state-
ment seemed to demonstrate that the con artist had no liquidity prob-
lem and that the investment was safe, like a bank demand deposit.
Generous payments received on time help trigger a “herding”
effect, regardless of culture, country, or class. They worked their
magic in Romania’s Caritas. Katherine Verdery reported that those
she met in Romania described to her “[o]ver and over” their decision
to put money into Caritas. They said that even though, at the begin-
ning, they did not have faith in Caritas, when they saw “everyone else
getting money” they “decided to trust it too.”120
Consistent payments can blur for investors the distinction between
interest and capital. Taubman promised investors to return their capital
in monthly payments and add the profits of 100 percent of their invest-
ment after the last payment. He found investors that took the bait.121
Periodic repayment of their own investments seemed to have the same
effect on the investors as payment of interest in other schemes. It
appears that the promptness of the payments, and not what the pay-
ments consisted of, created trust in the con artist. He was true to his
word; that is what counted: “Any story will do, as long as payments are
regularly made to earlier investors to provide credibility.”122
40
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
D. HIDING THE VULNERABLE PART OF THE

STORY: SECRECY AND COSTLY VERIFICATION
1. Concealing the True Nature of the Ponzi Business
Even if it is believable and enticing, the investment story is the most
vulnerable part of the con artist’s scheme.124 For con artists, the dan-
ger is that the investors or government officials will attempt to verify
41
the investment story. Some incorrigible Ponzi schemers—those

known to the authorities, or those under current investigation—
must hide not only their schemes but also their very involvement.
Therefore, Ponzi investment stories and the structure of the enter-
prise contain a number of elements that can help convince those who
are inclined to be convinced of the stories’ truthfulness. They help
hide the information that would destroy the perception of truthful-
ness, and trust in the people behind the schemes.
Sometimes hiding the true identity of the actors behind the legal
entities through which they act can be crucial to the Ponzi schemer.
In a 2008 case, a court found that an offshore bank and other entities
through which the defendant operated “did not maintain any for-
mality or distinction between the assets that belonged to one or the
other because the bank was a mere pretense.” The bank was a conve-
nient entity in which to hold the defendant’s money.125 Therefore,
using these entities to conceal the true actors may not always be suc-
cessful when the matter comes to court. But for investors it may be
harder and more expensive to uncover the true ownership and con-
trol of these entities in order to reach the con artist.
2. Use of Justified Secrecy

Justified secrecy can become part of a Ponzi scheme’s attraction.
Secrecy can make the con artists’ stories more believable. Secrecy
about the scheme also helps the con artist conceal the truth about the
scheme, as illustrated in the case of Michael Calozza.126
Calozza was an agent for a mutual insurance company, Sons of
Norway. He made up a letter purporting to be written from the Sons
of Norway to himself and other members of its staff. In the letter
the company offered the staff a “tax-advantaged high-yield secure
investment.” It was unfair, Calozza told his clients, to deprive clients
of this opportunity. He suggested that the clients borrow against their
42
insurance policies and hand the borrowed money to him in exchange

for his personal high-interest promissory notes. He would then
invest the money in the investment offered to staff members only,
and pass the returns through to his investing clients. Because in the
fake letter the Sons of Norway seemed to be limiting the (nonexis-
tent) investment to its staff, an element of deception was involved in
offering the opportunity to the clients. However, the circumstances
suggested that deceiving the insurance company in this case was jus-
tifiable. Calozza advised his clients to keep secret this pass-through
scheme and their participation in it. They thankfully agreed.
In fact, Calozza was operating a Ponzi scheme. He used the cli-
ents’ money to pay off his gambling debts and build a $1.6 million
mansion. He paid off earlier clients with the later investors’ money.
The scheme cost unfortunate clients about $8.8 million and benefited
fortunate clients about $2.3 million. The secrecy that the investors
kept up delayed discovery of the fraud.
Secrecy has other connotations. A plan that involves hiding the
truth from a third party establishes a bond between the con artist and
his “marks,” as any sharing of secrets does. The “little wrong” that
both parties commit binds them into a delicious conspiracy for gain.
The arrangement also shows that the con artist trusts the marks—a
gesture that invites reciprocity. If I trust you, and trust you first, you
should trust me. In a scheme by Charles Braun, for example, investors
were divided into clubs and told to keep their membership secret or
they would be expelled and never readmitted.127 Secrecy was crucial
for Braun because in addition to fraud the clubs were unregistered
investment companies, in violation of the law. Ultimately, the scheme
was discovered by chance because one of the investors committed an
illegal act in another venture. The discovery of the scheme, however,
came too late for many investors, who lost heavily.128
Anyone who has received a “Nigerian letter” will recognize the
same ingredients. There is usually a declaration of trust in the receiver
43
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.
3. Stories That Are Costly to Verify

Con artists use techniques and features to protect their stories from
exposure. They choose investment stories that are quite costly to
verify. As Bradley Skolnik, Indiana’s securities commissioner and
president of the North American Securities Administrators Associa-
tion (NASAA), commented, “The amount of homework you have to
do to check one of these things out is too much.”131
One con artist searched for an old abandoned mine in the middle
of nowhere, unreachable by easy transportation. A reporter who
joined the con artist told this story:
[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
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
To be sure, a gold mine can be hard to discover. Walter Edward Scott

was a prominent public figure in the Old West. He convinced many
investors to back his gold mining operations. Investors eventually dis-
covered that the mines did not exist. Scott turned to selling stolen ore
instead of selling mine operations. He was sued by his creditors and
ended up in jail.133
Stories of Ponzi con artists point to a source of income in faraway
countries and places. In one scheme the profitable investment was
derived from a nonexistent bank in Nauru, entitled the Greater Interna-
tional Bank of Nauru.134 Enron’s trading was global and costly to trace and
verify, or even understand. It takes time to sort thousands of contracts,
read them carefully, and evaluate their impact once it is all put together.
There is nothing new in a company’s expansion abroad. A source
of revenues in a faraway land might be older than Ponzi’s schemes. An
Australian regulator explained that “[t]ypically, the scam involves
investment in the US via an English national operating out of Thailand
who invites Australian investors to send money to Hong Kong. . . .
[They] are complex and difficult to shut down.”135
However, a scheme’s source of income can be difficult to verify
even if it is not global. The United States is large enough to impose
high costs on anyone checking a con artist’s story. In United States v.
Hayes, the con artist “sold working interests in five oil and gas leases
located in Louisiana to residents of Hawaii.”136 In another case, Wayne
Burton, a real estate broker, managed eight offices all over California
and conducted a Ponzi scheme. He sold obligations purportedly col-
lateralized by mortgages in California.137 Few investors could afford
to verify the stories on site.
45
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
careful. For example, a con artist’s story that he was a software

designer, that his company was paying him $10,000 a month, and
that the clients had contracted with him to put a certain system in
place could be easily checked by asking for the documents, or just the
clients’ names.144 But for many reasons, investors do not typically ask
for proof. The personal relationships that con artists cultivate make it
uncomfortable to show mistrust by demanding documentation,
asking for details, and seeking other forms of evidence.
Investors might not insist on evidence, even if they do ask for it. In
one case, an investor asked to view the promised secured bond: “He
believed that the promised 30 percent in three months was unusual,
but he was familiar with similar returns on syndications for commer-
cial ‘bridge’ loans.”145 He never saw the bond. Either he forgot to insist
on production or the con artist found reasons to forget. Nonetheless
the inquirer invested. He was satisfied with “sketchy details.” Madoff
took a different approach. Unlike some con artists, who gave mis-
leading information, Madoff refused categorically to give any informa-
tion. If an investor complained or inquired about how Madoff did
business, Madoff would threaten: “If you don’t like what I do, we’ll
send your money back.” The investor did not receive an answer and yet
did not withdraw the money.146 Friendly investors may have said, “So
what if he didn’t give you an answer? What’s so terrible about that?”
A con artist may divert the investors’ attention to lower risks,
while hiding the greater investment risks. The diversion may also
serve to show the con artists’ trustworthiness when they themselves
point to risk, seemingly against their own interest. For example, a con
artist promised a return that at the time would be deemed usurious
(10–15 percent a year) in a state that prohibited such interest. Inves-
tors in that state felt justified in receiving a higher interest rate and
assumed that financing corporations would be represented as the
borrowers. The investors’ attention was diverted from the risk of the
con artist’s embezzlement to the risk posed by the law of usury.147
47
4. Details That Hide the Truth by Drowning It

A. DETAILS CAN HIDE THE TRUTH
Con artists’ businesses are often diverse and complex. The busi-
ness empire of one con artist “swelled to a network of dozens of
companies and partnerships, embracing a gold mine, an oil com-
pany, a commodities brokerage and a second car dealership.”148 In
the year 2000, as clients were beginning to use Internet-based tech-
nology around the world, a company named CitX partnered with
Professional Resource Systems International, Inc. (“PRSI”) to
market its software.149 Similarly, from 1990 through 2006, a com-
pany named Southwick used more than 150 companies to cover
costs and compensate prior investors.150 The sprawling empire
drew investors.151 The complex structure was assumed to signal
reliability and honesty. But examination and proof were costly and
not easily available.
Even though, as we noted previously, telling a story in detail
enhances trustworthiness and gives an impression of truth, details
can also hide the truth by burying it. For example, in 1992 a con art-
ist’s “business empire swelled to a network of dozens of companies
and partnerships, embracing a gold mine, an oil company, a com-
modities brokerage and a second car dealership.”152 It was difficult to
trace the receipts and expenses of the business. It was impossible to
determine its net worth and find out whether it could meet its obliga-
tions in the long run.
How the worm in the Ponzi scheme’s apple is hidden is well illus-
trated by the Enron debacle. Enron refined and modernized its Ponzi
scheme. The company used complexity to hide its true financial con-
dition and guaranteed the value of its securitized assets by using
its own shares, or the promise to use its shares. In sum, it guaranteed
one type of its own liabilities by another type of its own liabilities
(shares). Both the legal structure and the financial instruments of these
48
arrangements were complex and difficult to verify. Unless one viewed

the entire picture, one could not uncover, through the maze of limited
partnerships, the concealed losses that were masked as revenues.153
B. COMPLEXITY HELPS HIDE THE TRUTH AS WELL

Complexity can be used to deceive in a pyramid scheme as well. Jim
Henderson described a case in which the investors, including busi-
nesspeople familiar with numbers, tried hard to figure out how the
promised returns could be achieved. They were unsuccessful. The
con artist attempted to explain the intricacies of his mechanisms but
ended up saying: “I’m the only one who can understand it.”154 He did
not explain; it seems that there was no rational explanation or basis
for his claims.
There are scheme structures that make it difficult to uncover the
identity of the owners of purported assets. For example, Van Alstyne,
whom we met before in this chapter, created a number of companies
through which he defrauded approximately 450 victims. He started
in 1992 by building thirteen oil and gas limited partnerships, which
he controlled. Other companies, under his ownership or control,
served as the general partners for the limited partnerships. There
were two other companies this con artist owned as well. These com-
panies acted as agents with respect to oil and gas properties on behalf
of the limited partnerships.155 This structure and the division of func-
tions were difficult to follow.
In a case involving a tax consultant turned con artist, investors
not only did not understand the applicable tax laws but had reason to
rely on the con artist for tax matters. The court noted: “[I]nvestors
were encouraged to roll over their accounts, rather than receive tax-
able ‘interest’ at the end of the original term so that they could con-
tinue to receive ‘tax free’ monthly payments.”156 Focusing on the
results—avoidance of taxes—they did not seek to understand what
was actually done with their money. The details hid the true story.
49
Some investments are inherently hard to verify. It was difficult to

evaluate and verify the existence of all the several thousand bus stop
shelters in Metro Display Advertising, Inc. (MDA).157 It was also dif-
ficult to find out if the advertisements were placed on the bus shel-
ters. Yet these advertisements were to be the source of the profits
from the bus shelter investments which MDA sold. The promoters
sold to investors bus stop shelters for which investors paid a fee of
$10,000 each. Next the investors leased back to the promoters these
bus shelters for a fee of $200 per month, less a $30 maintenance fee.
According to the contracts between the investors and the promoters,
MDA would “repurchase the shelters from the investors after five
years for $10,000. MDA was to solicit advertisers to place ads on the
shelters in order to generate the necessary revenue to make the lease
payments.”158
However, bus stop shelters are unique investments for which
there was no market and not many competing manufacturers. These
facts rendered it hard to ascertain and compare the prices of
manufacturing the shelters. In addition, the inventory of bus shelters
was not easy to locate and inspect. As it turned out, during the five
years that MDA was in business “it sold approximately 4,600 bus stop
shelters to 1,442 investors, but installed no more than 2,600 shelters.
MDA’s advertising revenues were insufficient to cover the lease pay-
ments and overhead, so MDA used the capital investments from new
investors to cover those expenses. In short, the shelter investment
was a Ponzi scheme.”159
Charles Ponzi’s stamp arbitrage investment could not be evalu-
ated. There was no information about such an investment or similar
investments against which to compare it. Experienced skeptics view
“creative investments” with reservation. For them, lack of informa-
tion and experience spells risk. These were the people who examined
Ponzi’s scheme more closely and found it lacking.160 But for the
marks, ingenious investment stories are interesting and attractive.
50
They ignore the absence of information and inability to compare the

scheme with other schemes; instead they rely on the con artist’s
assurances about the low risk involved.
A version of financial frauds that is difficult to uncover is
trading in certificates of deposits that do not match, as this vignette
illustrates:
In 1986, Robert Bentley established Bentley Financial Services,

Inc. (“BFS”) to broker “bank-issued certificates of deposit (CDs).
In 1993, Bentley formed the Entrust Group (‘Entrust’) . . . to act
as custodian on BFS-brokered transactions. In the CD-selling
industry, the broker is responsible for connecting CDs available
for purchase from banks with particular investors. The custodian
then collects the money from each investor, wires it to the is-
suing bank and holds onto the CD, while issuing a “safekeeping
receipt” to the investor indicating that it has title to the CD held
by the custodian.161
The CD seller profits from the difference between the terms of

the CD purchased from the bank (e.g., 5 percent) and terms of the
CD sold to the investor (e.g., 4.5 percent). “A more complex, and
risky, way a CD broker can profit is by mismatching maturity dates. . . .
This form of mismatching is legal as long as the mismatch is disclosed
to the investor (including the fact that the investor may not be able to
reclaim its principal at the maturity date stated in the investment con-
tract).”162 However, he operated a Ponzi scheme with respect to part
of the returns on the investments. He received investors’ money and
bought CDs as promised. But because the CDs provided less than
the profits that he promised investors, he paid to existing investors
the difference between the returns on the CDs and the promised
profits with the money paid by new investors. Complexity disguised
this crucial fact.
51
E. CON ARTISTS’ DECEPTIVE FRIENDSHIP AND

SEEMING VULNERABILITY BY AGE AND NAÏVETY
1. Deceptive Friendship and Love
People believe in the friendship of their business partners or their
lawyers. Deep inside, they may suspect that these friendships are
linked to the lucrative business relationships. But they may refuse to
think about it this way, especially if they crave friendship. For some
victims, the con artist’s attention and conversation fill a crucial psy-
chological need. Lonely victims may intentionally stay home to
receive phone solicitations and remain on the phone longer to hear
fraudulent sales pitches. Some are homebound and need human con-
tact. Conversations with the con artists are more than mere recrea-
tion for them.163 Thus people who crave friendship are diverted from
the business aspects of the relationship and may deceive themselves
by denying the price tag, which this so-called friendship carries, in
order to convert it into a real friendship.
In addition to gratitude and pressure to reciprocate, personal
emotional relationships between con artists and their victims blur
the victims’ clear vision of the monetary aspect of the investment. As
one sophisticated businessman who became a victim to a Ponzi
scheme confessed, he was influenced to invest by a longtime friend
who was raising money for the scheme. Although this victim did not
believe that the friend intended to rob him, the victim “acknowledge[d]
that he let friendship cloud his judgment and undermine his instincts.
‘Had it not been a friend, I would have done more up-front fact
checking.’ . . . ‘I would have found out all this about ten times sooner
and probably would not have invested in this.’”164
Yet seeking friendship in a business relationship is not entirely
unreasonable. It seems that, in contrast to a business relationship,
personal friendship may offer better protection from lies.165 It has
been noted that people lie less to close friends than they do to others.
52
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
53
on the aggregate investments. Then Bialystock will produce a sure

“flop,” as he has done for many years. The investors will collect
nothing, as the show will close (hopefully) on the first day. The pro-
ducer and the accountant will pocket the excess amount that was
raised.
Bialystock tries hard to produce a terrible show—so much so that
it becomes a hit. The two con artists attempt to bomb the theater to
close the show down. They end up in court and are found “very
guilty” as the foreman of the jury declares.166 Before sentencing,
Bloom, the bookkeeper, has his say. Bialystock, he says, is a crook, a
swindler, a dishonest man who makes others do things they never
dreamt they could or would do. But, he says, Bialystock is a wonderful
man. He called Bloom by his first name (no one did that, even at
school). Bialystock made Bloom’s life exciting. He gave Bloom a new
personality, illusory as it might be. He made the little old ladies feel
young, beautiful, and desirable. Hearing this, the little old ladies wipe
their tears, stand up, and cheer!167
Bialystock, the con artist, gave his investor ladies and Bloom a
wonderful gift. He listened to them attentively, as no one did any-
more (or had done before). He gave them the feeling that they had a
true friend. He treated them with respect, cared for them, made
them happy. The ladies had money to pay a psychiatrist to listen
attentively, and to pay a gigolo to compliment them. But true friend-
ship and true compliments must be given voluntarily as gifts, not
enticed with monetary compensation. Friendship and love cannot
be acquired by exchanges. Payments destroy their very essence. To
be true, they must be gifts, not bargains. Bialystock gave the little old
ladies signals that his attention and his compliments were for free—
gifts, not bargains.
A similar sentiment was produced by Madoff in this advertise-
ment: “In an era of faceless organizations owned by other equally
faceless organizations, Bernard L. Madoff Investment Securities LLC
54
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
2. Deceptive Weakness of Age and Seeming Naïvety

A. OLD AGE CAN DECEIVE
Just as a friendly and loving attitude can be used to mislead and gain
investors’ trust, so can physical feebleness mislead and gain trust,
especially when the investors are physically stronger than the frail con
artist. A seventy-seven-year-old man misled investors by inducing
them to invest in six funds he managed over a ten-year period ending
in January 2009. Prosecutors alleged that this man, Arthur Nadel,
55
regularly lied to investors about “achieving ‘consistent, positive

annual returns.’”
“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
B. NAÏVETY CAN DECEIVE

A con artist can act as a vulnerable, naïve, unsophisticated person.
This impression can lower the victim’s protective caution and tempt a
victim to try to cheat the con artist by offering to sell property, such
as stock, for more than it is worth. Once the relationship is well estab-
lished, and the victim feels assured of the con artist’s naïvety, the con
artist makes an offer of worthless stock in which the victim becomes
interested. After the victim buys this stock at great loss, the con artist
disappears.171 Thus relationships, and signals of the seeming weak-
ness and naïvety of the con artist, can be misleading, to the advantage
of the con artist.
So we have learned what kind of offers and stories con artists tell
that draw their victims. Yet the puzzle remains. How do con artists
meet their victims? After all, they surely cannot just call strangers and
offer investments. How do con artists manage to contact the marks?
Chapter 2 tells us how they do it.
56
Chapter 2
Selling The Stories
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
57
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.
2. Where to Operate and How to Build a Reputation

Con artists may choose a town that is not too small (which would
attract only a few investors) and not too big (which would accommo-
date strong competition for reputation).1 A more important factor is
where con artists choose their homes. Living in the right neighbor-
hood makes a huge difference; it opens many doors. The Wall Street
Journal noted that Madoff and his family moved, in 1984, “into a
sprawling duplex on Manhattan’s Upper East Side.” “One former res-
ident was . . . a onetime U.S. ambassador to France. . . .”2 “Madoff ’s
clients had in common . . . membership at the Palm Beach Country
Club. It’s an exclusive club, with a beautiful golf course, ringed by
palms, overlooking the Atlantic Ocean. Madoff was a member, and
other members sought introductions in hopes of being allowed into
an even more exclusive investment club that brought steady, dou-
ble-digit returns even when the market was down.”3
Madoff “became more involved in [NASDAQ], serving as its
chairman in 1990, 1991 and 1993.”4 He became “a member of the
board of directors of the Securities Industry Association” and “a
founding member of the board of directors of the International Secu-
rities Clearing Corporation in London.”5 Networking and getting to
know wealthy people and managers of their wealth is important for
con artists in the Ponzi scheme business. Connecting to powerful
politicians helps, and so does a reputation as a wealthy individual,
which we noted in Chapter 1.
One of Madoff ’s victims described the flavor of reputation that is
carried by word of mouth:
58
SE L L I N G T H E STO R I E S
Of course, we never heard the name Madoff—which has a pecu-

liarly Dickensian ring now—and had no idea how he achieved
such fantastic returns over the past 40 years. All we knew was
that my wife’s entire family had been in the fund for decades and
lived well on the returns, which ranged from 15% to 22%. It was
all very secretive and tough to get into, which, looking back, was
a brilliant strategy to lure suckers. Unlike the usual Ponzi me-
chanics, the fund even stopped investments into accounts a few
years back, at least in our network.6
This victim was hooked.
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
59
“civic involvement in groups such as Boys to Men and the National

Association of Black Accountants.” Although this officer embezzled
his employer’s money, his position and actions did not fit the image
of a person with a criminal record.11 He could continue the fraudu-
lent operations far longer than he might otherwise, without raising
suspicion.
Charitable donations further benefit Ponzi schemers because
they bring about reciprocity. Gratitude, sympathy, and enjoyment of
hospitality attract civic leaders to con artists’ podiums and seminars.
Thus they add credibility to the con artists’ stories. The donations
offer opportunities for contacts with other wealthy donors and fund-
raisers, with their friends, business allies, and the most desirable
clubs in town, thereby broadening the con artists’ network. Dona-
tions can bring in the mayor on the con artists’ invitation, and people
who have served in official capacities, such as city treasurer, city
finance director, state representative, judge.12 Because Madoff seemed
to have enormous wealth, he became a “pillar of finance and charity.”
He joined the board of trustees of Yeshiva University and operated
with his wife the Madoff Family Foundation. In 2007, this $19
million operation contributed to “Kav Lachayim, a volunteer group
that works in Israeli schools and hospitals, and to the Public Theater
in New York.”13
In addition to charities and institutions of learning, con artists
donate to political parties and politicians. For example, in Romania
Caritas, a Ponzi scheme of enormous proportions for that country,
was supported by the Party of Romanian National Unity. Caritas ne-
gotiated to establish its headquarters in the Cluj city hall, with the
mayor’s consent. The location enhanced its exposure, reputation, and
credibility.14 Needless to say, the mayor of the city received Caritas
with open arms.15 Donations of Ponzi schemers oil their way into the
halls of power, facilitate networking with the rich and powerful, and
provide information, influence, and benefits. In the process, con
60
artists’ credibility deepens and draws more investors. Donations sig-

nal the presence of an altruistic person who cares about others. They
enhance an image and reputation of trustworthiness, and leadership
for the good of society.
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.
61
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.
5. Attracting Attention by Engaging in

Attention-Drawing Conflicts
It should be noted that creating conflict to draw attention is not nec-
essarily the exclusive province of con artists. During the mid-1880s,
P. T. Barnum, the creator of the “Greatest Show on Earth,” fought
with the editor of a large New York daily for years. The more offensive
his opponent was to Barnum, the more offensive the delighted Bar-
num became. This conflict amused readers, and Barnum recognized
the advertising and entertainment value of the conflict.18 The point
made here is that Ponzi con artists do not neglect this aspect of adver-
tising; they use it well.
Con artists can become real competitors in action, not only in
words. Melvin Ford, a promoter of a pyramid scheme, disparaged the
banking industry and highlighted his programs as a superior alterna-
tive to traditional banking and investment. Ford was one of the
defendants in the Securities and Exchange Commission’s case against
International Loan Network. He declared that his company’s bonus
program was “the most powerful financial system since banking.”19 A
62
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.
63
Con artists form alliances to participate in each other’s ventures.23

A 2010 case revealed a scheme in the form of a venture capital arm of
an enterprise that “utilized single purpose entities to obtain billions
of dollars of funding, purportedly to acquire merchandise for sale to
wholesalers and retailers nationwide.” The con artist had several busi-
ness associates “alleged to have generated more than $3 billion in
fraudulent proceeds.”24
A con artist established four fraudulent investment companies.
He managed three companies all alone, and the fourth one with his
colleagues.25 His associates were aware of his criminal record and
concealed his involvement in the scheme by acting as “front men.” In
another case, from 1996, two con artists co-owned and operated in-
vestment companies that defrauded investors.26 A group of con art-
ists who met in prison formed a successful scam for four years, until
it ended with the suicide of its leader.27
Trust among con artists can pose a riddle. After all, they, more
than anyone else, know that trust can be mimicked and faked. Per-
haps con artists, who view themselves as businesspersons, behave as
cooperating competitors would; they trust and cooperate to a limited
extent. Perhaps the desire to be liked and the need to belong to an
identifying group may drive con artists toward one another. Very few
predators act and live alone.
This does not mean that con artists are entirely trustworthy and
trusting toward each other. For example, one con artist argued that
his “investment scheme was ruined by the embezzlement of the
middlemen involved in the transactions.” His two friends collected
exorbitant commissions and spent money on personal items. In
court, the friends argued that they were the victims of this con
artist, and that they should not be joined with him as co-defen-
dants. They argued that they were “duped, like the other inves-
tors.”28 Con artists who partner may end up distrusting each other.
“‘I don’t need him,’” said a con artist of his partner, “the man
64
with the malevolent stare who has supposedly lined up concessions

to seven Mexican gold mines. ‘He needs me. He’s impossible.’” During
this conversation the con artist was planning his escape because he
no longer trusts his partner in this wild gold-mining scheme.”29
In some respects, con artists’ relationships among themselves are
similar to those of criminal fraternities. For example, con artists who
are defrauded by other con artists cannot seek police protection or
justice in the courts. They must take care of themselves in other ways,
and therefore resort to self-help. In United States v. O’Toole, the leader
of a scheme failed to pay one of the promoters the amounts due to
him.30 The promoter took revenge. Using the same scheme, he con-
tinued to sell the “gold-backed railroad bonds” that the scheme
involved. But rather than deposit investors’ money in a bank account,
presumably that of the group of con artists, he pocketed investors’
money to the tune of $163,284. That was safe to do; the leader of the
group could not complain to the police either.
A new breed of con artists who conduct fraudulent schemes in
the corporate context has its own group of friends. The members
exchange information and benefits and support each other. This
group’s members do not usually end up in prison, but if they are jailed
then they rarely fraternize with the other prisoners or maintain con-
tact with them after they complete their sentence.31 The fraternity of
these con artists, however, exists and functions like any other group
members who share interests. Those in prison are the members of the
family, black sheep that they are. The outside support is crucial to
them, as it is to all con artists.
2. Birds of a Feather Flock Together

A 2010 case demonstrates how birds of a feather flock together. Tra-
vis Correll founded a purported investment company (Horizon),
raising about $175,000 from friends and family. The money was to be
65
invested with a New Zealand businessman in “a high-yield interna-

tional banking program.”32 The New Zealand businessman absconded
with the money. Rather than report the theft, Correll began to oper-
ate a Ponzi scheme, paying dividends to current investors from the
money he raised from new investors, whom he enticed by promising
substantial returns.33
Then Correll found a partner, or, more accurately, a partner found
him. Midkiff, an insurance salesman and operator of the Shiloh
Church in Forest Lake, Minnesota, contacted Correll regarding his
offerings of a “high-yield international investment opportunity.”
Midkiff brought Correll members of the Shiloh Church’s investments
for significant compensation34 and recruited other investors for Cor-
rell’s enterprises as well as for his own.35 Then a theft occurred in
Midkiff ’s shop. True to form, he did not report it but contacted Cor-
rell instead. Correll invested $1 million on behalf of a new Midkiff
entity. When the authorities finally arrived and began an investiga-
tion, the parties agreed to cease operations in Minnesota but began
another enterprise in Nevada, which collapsed in December 2005.
“With the eighteen programs combined, 519 individuals invested
$30 million with” the companies, and “[o]n December 12, 2006,
Midkiff was indicted in the District of Minnesota on charges of mail
fraud, wire fraud, promotional money laundering, conspiracy to
commit mail fraud, and conspiracy to commit promotional money
laundering.”36
What is interesting and informing in this story is how the
con artists “flocked together” and networked. They also acted in a
similar manner. Both Correll and Midkiff were the victims of
people who absconded with their investors’ money, and rather
than seek the help of the authorities used their own self-help.
They grew the number of similar companies, and made similar
wild investments, and recruited investors until there were no more
to be found.
66
C. HOW DO CON ARTISTS APPROACH THEIR

VICTIMS?
1. From Family and Friends to Institutions
and Affinity Groups
A. INTRODUCTION
A direct approach to relatives and friends is the easiest way to start a
con artist venture. Thus Kirschner induced friends to invest their
money with him and operated a scheme from November 2006 to
May 2009.37 This approach is effective because the victims know and
trust the con artist. However, the number of family and friends and
the amounts they can invest may be relatively small. Besides, even
though the con artist can devote a limited time to this sales effort, the
approach may not leave time and resources for breaking new ground
and reaching new potential investors. After all, not all friends and rel-
atives continue to invest—and some may demand repayment.
Therefore, con artists use the legitimate technique of soliciting
groups and spreading their message by word of mouth, websites, pro-
motional materials, and representatives acquainted with the local res-
idents. In the case of M25 Investments, Inc., representatives “solicited
many customers after church services they attended, and at meetings
at the representatives’ or the customers’ homes.”38 Those who are
approached may spread the word about the attractive investment
program and offer contact information. One court noted that “[w]
hile soliciting potential customers in person, [the con artists] or their
representatives obtained telephone numbers of other potential
customers.” Then they solicited additional potential customers by
telephone.39
Group solicitation of potential investors is more efficient than
one-to-one, although it may involve higher costs. Both con artists
and legitimate sales organizations can pitch their investments to pro-
spective investors by offering free lunches and interesting seminars
67
in motel conference rooms.40 If investors are wealthy, then hosting

potential investors on a long trip is effective as well. Steven Ferguson
offered potential investors a fully paid trip to Hawaii. The group trav-
eled from Switzerland to Los Angeles and then to Hawaii. During this
period the travelers were induced to invest hundreds of thousands of
dollars in Ferguson’s Ponzi scheme.41 The wife of another con artist
held shorter meetings at home and created and managed an “invest-
ment club.”42 Both long-term trips and investment clubs demonstrate
methods of grouping potential investors for longer periods and more
effective sales.
The next most efficient contact would be through institutions.
Institutional investors provide a sales channel that is effective and less
expensive than selling to individuals and to groups. One sale to a
single institutional investor (a pension fund, a mutual fund, or an
insurance company) can equal sales to thousands of investors. Pooling
investors’ money, these institutions make very large investments, usu-
ally in securities and other financial assets. In addition, because such
institutions are sophisticated and regulated, their investments add
credibility to the con artists. However, institutional investors pose a
danger to con artists; the institution may be too close to regulators, or
more accurately, the regulators may be too close to these institutions.43
Therefore, the more attractive targets for con artists are charitable
and religious institutions, which are often one and the same. Chari-
table and religious institutions are not as strictly regulated, and their
managers are less supervised by their members or contributors. The
representatives of such institutions are often not as knowledgeable as
those of regulated institutions, and their representatives may be more
easily attracted by the con artists’ sales talk.
In addition to offering protection from close scrutiny on the part
of the authorities, religious and not-for-profit organizations can offer
the con artists relief from taxation and state regulation. State agencies
do not have detailed information about religious orders because they
68
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
69
A similar story involves the Baptist Foundation of Arizona, which

was established to support good works. When its founder died, his
son gained control of the foundation. He spent the foundation’s
income, assets, and contributions of affiliated churches for his per-
sonal use and that of his friends. He paid investors somewhat higher
interest than what was being paid on government securities, and of-
fered notes that were not secured. In 1996, for example, the founda-
tion spent half of its total $69 million spending in salaries and
administrative expenses. “In 1995 alone, [it] spent about $329,000
on staff automobiles. According to an investigation by a newspaper,
the foundation made personal loans to insiders to finance their real
estate deals. In contrast, the charities to which the payments should
have been made received little. Those who controlled the foundation
were not accountable to anyone. Government oversight was negli-
gible, supervision by the foundation’s directors was very lax, and the
donors did not control the foundation’s use of their contributions.47
B. ETHNIC AND RELIGIOUS AFFINITY GROUPS

Members of affinity groups may be bound by purpose and belief. The
members of these groups are more vulnerable to a herding effect,
tending to follow others even if the actions conflict with the mem-
bers’ personal information. Investors buy and sell securities on the
assumption that the aggregate of many people’s judgment is better
than their own.48 “The markets” speak.
Pyramid schemes suggest similar results. As more people engage
profitably in pyramid sales, more people will join, until the pool of
future salespersons dries up. In another type of herding people follow
others, driven by a desire to maintain or enhance their own reputa-
tion. Information plays a lesser role among such followers than does
perception. But belonging to the club or to the organization in which
other important people are members is the drawing card. The fol-
lowers strive to maintain their own reputation, or to curry favor with
70
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
71
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.
72
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.
73
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
Whether the admiration was related fully to religious affiliation is

unclear. However, it certainly seems that identity of religion made the
victim proud.65
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
74
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
D. HYBRID INSTITUTIONS AND OVERTONES

Some schemes enable charitable investors to have their cake and eat
it too. In the case of the Greater Ministries International Church, the
church offered “gifters” (that is, investors) a “double your money”
75
investment plan. The gifting ministry asserted the ability to double

the gifters’ investments in seventeen months. The source of the
profits was alleged to be gold and diamond mines in Liberia and in-
ternational trading in commodities.76 The word gifter reflects a feeling
of charity and benevolence. Doubling the money is satisfying as well.
Another scheme sliced the pie differently. It allowed the victims
to retain the principal but donate the excess profits they would
receive “to help build God’s kingdom.”77 Members were promised the
same rate of return that they were currently receiving: “A brochure
printed by the church invited parishioners to invest with [the con
artist], announcing that ‘in almost every case, our plan will be able to
at least match or out perform your current yields, and at the same
time earn dividends for our church and its future.’”78
Religious overtones help draw investors to an investment scheme,
even if the investment is not directly involved with any particular
church. On one website, a con artist raised money from investors for
the purpose of producing a motion picture called “Messiah, The
Coming.”79 Another schemer claimed to be a “Messianic Jew” by vir-
tue of his wife’s father, who was a Jew. This con artist sometimes used
a biblical sounding name, Gary Dean benKeith, who “had worn out
several bibles just by reading them so much” and declared that “his
business answers to a higher authority: God, not the SEC.”80 A
report in another case described how, after they bought into a pyr-
amid business, the “owners are encouraged to participate in con-
ference calls three nights a week—some lasting two or three
hours” to pray with the con artist who “reads Scriptures.” He told
investors “that the idea for the business was a gift from God and large
numbers of his network members came from fundamentalist church
environments.”81
One Arizona-based pyramid scheme, marketed on the Internet,
requested donations to charities and offered the contributors earn-
ings as well. Another called “GIFT” (given in freedom), sponsored
76
by humanitarian philanthropists, recruits recruiters. Anyone who

recruited three people was “gifted” tax-free returns that could amount
to $20,000 annually deposited in an offshore trust account.82 In fact,
this was a classic pyramid scheme.
The Romanian Ponzi scheme Caritas benefited from the support
of religion as well as patriotism. The leader of Caritas was described
as “a saint,” the “Pope,” “a messiah,” the “prophet.” Said one believer:
“God sent him to take care of us.” “Thus saturated with divine sym-
bolism, Stoica, the leader of Caritas, and Caritas became matters of
faith, of trust. . . . With faith came also hope. People referred to Caritas
money as their ‘hope money’ . . . without which they would have ab-
solutely nothing, and declared that their only hope was Caritas. . . .”
Faith did not require an explanation. Therefore “[a]nyone who could
not . . . explain how it [Caritas] worked could assign it to the sphere
of the divine.” “Some people were not sure whether Caritas gave
money from heaven or from hell. And some believed that the devil
was at play here.” “The money was no good.” “It came too easily.”83
2. Technology Has a Growing Impact

on the Growth of Ponzi Schemes
An Australian regulator remarked that “investment scams are not a
new phenomenon and will never disappear—they just re-emerge in
a different guise.” “However, investors today are more vulnerable,” he
said, in part “because technology has given scam artists a greater
range of vehicles and opportunities to perpetrate a scam, to add to
the traditional door-to-door method. ‘The telephone and Internet
have opened up whole new avenues for scamsters.’”84
Financial frauds have mushroomed in recent decades with the
high-technology revolution. As millions of baby boomers move
into retirement age, the problem could grow into an epidemic.85 It is
estimated that in 2000 telemarketers in the United States defrauded
77
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.
78
A story of a fifteen-year-old and his loving and supportive father

demonstrates this tendency. The father allowed the son to use his
brokerage account for stock trading. The son bought penny stocks
and used investment sites on the Internet to spread misleading infor-
mation about these penny stocks. As interest in the stocks rose, the
price of the stocks rose. The boy immediately sold the stocks at a
huge profit, while the investors lost as the price fell to its former level.
It may well be that this pair, the con artists, son and father, would
have found an outlet for their tendencies without technology. But
technology helped!89
D. THE SALES FORCE

1. Collecting and Distributing Information
Because Ponzi schemes require an ever-growing number of inves-
tors to survive, their longevity depends on an effective securities
distribution system. Investors can be recruited by advertising, mass
mailing, or in this new age through the Internet.90
Information is important to con artists, especially if they deal in
securities transactions. They are interested in investors’ moods, and
investment opportunities and new ways to reach more investors. Con
artists use information networks, including people with access to
information sources who can remain unnoticed.91.For example, mes-
sengers can access large firms and glean information, yet they rarely
draw any attention. These messengers are “so lowly and absurd in
their pretensions to gentility and education that few ever take them
seriously.”92
Investors can serve as a sales force. The first sales force for Charles
Ponzi consisted of his initial investors: family members, friends, long-
term acquaintances.93 This is still the case today, as low-income immi-
grants from the con artist’s country serve to spread the word.94 In
November 2005, Edmundo Rubi pleaded guilty to operating a “scam
79
that bilked hundreds of middle and low-income investors out of

more than $24 million” from 1999 to 2001. Most of his investors
were members of the Filipino community in the San Diego area.95
As noted, once a few are convinced, affinity group members are
prone to invest together. But they are also the “songbirds,” the ones to
publicize the offering of unique investments. After the first-tier inves-
tors are paid high returns, these investors are likely to roll over their
short-term investment, or increase it. When they are convinced, they
serve as an unpaid sales force, by helping to establish the con artist’s
trustworthiness with friends and friends’ friends. They spread the
word as a favor to their recruits—perhaps in the hope of reciprocal
treatment, and in order to demonstrate their own wisdom by showing
their find. As one court explained: “[I]n the initial stages of the plan,
those investors who wished to withdraw their investments were
promptly paid. The effect of such prompt payment, of course, was to
convert every investor into a missionary spreading the word of the
enormous profits which could be speedily attained with no discern-
ible risk of loss.”96 In Australia as anywhere else, “[a] scam is spread
through word-of-mouth and initial investors, enthused by their
returns, encourage others to join.”97 The “herding” phenomenon is
enhanced by the investors themselves, many of whom are the victims.
2. Paid Sales Force

Even though the original investors can serve as a sales force, in the
past the most effective form of distribution was by paid salesper-
sons.98 This conclusion may hold true today as well. In the 1920s
Ponzi used paid salespersons.99 Until 2008, Madoff used highly paid
“feeder organizations.” They were often the investment advisers and
money managers for investors.
Salespersons and feeder funds are attracted to Ponzi schemes by
the promise of generous commissions. In the case of Madoff, “Fund
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managers everywhere wanted in on it—Latin America, Asia and

Europe—and they went to major banks looking for clients. . . .” It is
rumored that even in Switzerland, which is known for a culture of
discretion and secrecy in finance, financial institutions accepted pay-
ments from Madoff for recruiting investors: “By 2008, one third of all
Geneva fund managers had invested with Madoff to the tune of $14
billion.”100
Van Alstyne operated a scheme “by selling interests in . . . limited
partnerships to elderly and retired investors.” He recruited broker-
dealers registered with the National Association of Securities Dealers
(NASD). Van Alstyne tightly controlled his sales force, requiring
“the brokers to adhere to a script that described a safe investment
with a more than ten percent annual return, backed by AAA-rated
government bonds” instead of the risky securities that they actually
were.101 Being paid well, some brokers became willing partners to this
con artist.
In addition, Ponzi schemers may recruit salespersons who have
clients of their own, such as insurance brokers. They may influence
their clients to borrow on the cash value of policies and invest the
cash in short-term promissory notes bearing a high interest rate.102
The notes might be issued by risky start-up companies, yet repre-
sented as safe investments. The clients know and trust their insurance
salespersons; after all, clients may have known the agents for some
time.103 Besides, the agents have offered policies from reliable insur-
ance companies, so clients are likely to assume that any other offering
from their agent should be just as reliable. Consequently, the agents
turned Ponzi schemers exert less effort in gaining the clients’ trust.
Usually, all distributors, be they investors, volunteers, or paid
salespeople, are effective in spreading the con artists’ reputation for
success and trustworthiness. Those who discover the scheme but do
not wish to get involved are likely to leave quietly without a fuss.
Their motivation for keeping quiet seems similar to the motivation
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of investors and professionals who discover the real schemes and

wish to disengage and forget they ever knew about it.104 Rarely does
anyone want to expose fraud within one’s own group or profession.
Nor would anyone wish to admit to friends and acquaintances or
clients who have suffered a loss that he or she was a participant in
such a fraud.
3. A Pure Sales Structure: Pyramid Schemes

Close cousins to Ponzi schemes are pyramid distribution schemes.
The basis of these schemes is sales of the right to sell a product that is
generally not sellable. One court defined a pyramid scheme as “any
plan, program, device, scheme, or other process characterized by the
payment by participants of money to the company in return for
which they receive the right to sell a product and the right to receive
in return for recruiting other participants into the program rewards
which are unrelated to the sale of the product to ultimate users.”105
A pyramid scheme combines two usual transactions to create an
unusual sales organization. For example, a familiar transaction is the
sale of gold and a down payment of part of the price. Paying commis-
sion is another ordinary form of compensating salespersons. In a pyr-
amid scheme, the two are combined. The buyers of the gold pay for it
partly in cash. The buyers pay the rest of the price by recruiting others
to sell the gold. The recruits pay those who recruited them part of the
money paid by their recruits, creating a hierarchical sales force with a
strong incentive to sell not the gold but the selling of the gold. No
wonder the scheme is named after this feature: “pyramid.”
The genius of this scheme is that the victims pay the con artists
for a story and for the privilege of selling a story to others, and pay
not once but continuously, so long as they are paid by their recruits.
The victims become to some extent con artists. This arrangement
looks like a franchise, but it is not. In a franchise arrangement,
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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
Con Artists’ Behavior Seems a

“Normal Usual Behavior”
This chapter demonstrates how difficult it is to distinguish most con

artists from truthful and trustworthy people, and most Ponzi schemes
from legitimate investment activities. The cons’ behavior and enter-
prises are often quite similar to reliable promises and real business. In
many respects, con artists’ behavior and their enterprises are like
those of everyone else, but in addition, we discover that con artists
actually view their activities as business. They believe in these busi-
nesses. Their belief can make them believable.
A . HUMANS HAVE A NATURAL ABILITY TO

PRETEND, LIE, AND INFLUENCE OTHERS
Con artists influence investors and induce them to invest by way of

both true and imaginary statements and made-up signals. So do many
people, in their everyday interactions. We send fake and false signals by
actions, words, and expressions in order to induce others to act or react
in a certain way. How many times have we given a fake compliment?
How often have we laughed at a joke that we did not find funny? How
frequently do we apologize for being late to a meeting by telling a story
that is not entirely true? To smooth relationships and cause desired
behavior, we often do not tell the entire truth or behave truthfully.
85
1. Humans—and Even Primates—Have the Innate

Ability to Lie Convincingly
It has been suggested by Sanjida O’Connell in Mindreading, that
“genes for lying play a crucial role in propagating this species.” The
ability to lie is embedded in our DNA, and some people are better at
lying than others. According to O’Connell, some people excel at
falsehood. These natural liars are usually quite aware of their talent,
since they have deluded parents and teachers to escape punishment
since early youth. They are confident and feel no fear or guilt about
getting caught. Yet they are not sociopaths; they don’t use their skills
to hurt other people. In fact, they score the same as other people on
psychological profiles. “But they seem to do better in certain careers,
like sales, diplomacy, politics, acting, and negotiating.”1
Pretending is a gift humans possess from a very early age. A child
may put a banana to her ear as a telephone, even before she under-
stands fully the falsity of the situation or distinguishes among mis-
takes, and separates pretense from false beliefs.2 We smile indulgently
when a toddler manipulates her parents into buying a toy. With his
limited experience, he instinctively knows how to do that.
Deception by manipulation is practiced not only by humans but
also by primates. Chimps and other animals are “artful liars.”3 A
gorilla hid fruit that she found and walked nonchalantly away only to
return three hours later to retrieve the fruit when no one was around.
A chimp whose mother rejected his attempt to suckle pestered a male
until the male hollered at the young chimp in exasperation; the infant
shrieked and the mother ran over and offered him her nipple. The
sign-language-using chimpanzee Lucy offered another chimp a plas-
tic flower, which he took to be a gesture of friendship, only to be
bitten by Lucy when he reached for the flower. A pair of baboons
acted precisely like con artists in cooperating to deceive a third
baboon. They watched that baboon hide the bananas he had found,
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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
2. Signs of Misleading Signals

It seems that along with the human ability to send misleading facial
signals there exist ways for uncovering such signals. The science of
discovering lies has been used for many years, especially in question-
ing criminals and suspicious persons. Methods of finding out inten-
tional lies have been developed to determine the trustworthiness of
money managers. The methods are not foolproof, but they help.5
Although it is not easy to expose the true underlying feelings and
intentions of other people, we do have some means of finding
them out.
Facial impressions tell us much. In his book The Face, Daniel
McNeill describes how facial expressions signal truth and hide lies.
He classifies facial deceit into three basic types. One is opacity—
revealing nothing, wearing a mask to hide thoughts and feelings.
Joseph Stalin’s stony face represented opacity. Successful poker
players know how to control their facial expressions to avoid sending
information about their reactions. Another form of facial deceit is
used to show something that may not be entirely true. For example,
the “Japanese smile” can be explained as a rule of etiquette designed
to show politeness. This smile is important and acceptable, even
when it does not express the feelings of the smiling person.6 Third,
facial expressions can signify active untrue messages, as with crying
sadly even though one does not feel sad, or happily laughing when
one does not feel happy.
A professional investigator can discern a lie by looking in the liar’s
eyes. A liar blinks more often, and his pupils are more dilated compared
to a person who tells the truth. His expressions are more asymmetrical
87
than that of a truth teller. Physical movements can provide signals as

well. When a liar is focused on the words he speaks, his legs may be
shaking; he might wring his hands or turn his feet inward. In addition,
truth is usually told directly and forcefully: “I didn’t do it”; a hidden lie
may be told with formal grammar: “I did not take the money.” Words
like “honest to God” or a resort to religion may also raise concern as to
veracity.7
Perhaps because the ability to manipulate is innate, humans have
acquired protective mechanisms against manipulation. It seems that
we are born with an ability to recognize other people’s emotions and
the nature of false signals and beliefs.8 Children younger than three
seem to “have an implicit understanding of false beliefs, even though
they cannot verbally answer questions about a person’s false beliefs
until they are nearly five.”9 They seem to understand that there is a dis-
tinction between something that is real and something that seems real.
Further, “‘[h]uman communication is not just a transfer of information
like two fax machines connected by a wire; it is a series of alternating
displays of behavior by sensitive, scheming, second-guessing social
animals.’ Genuine communication where symbols, words or vocaliza-
tions have a meaning only occurs when the speaker intends listeners to
understand the meaning of the word as the speaker understands it.”10
Yet even then, mistaken receptions may occur, especially when the
speaker intends the listeners to understand the meaning of the words
differently than he understands them.
The same techniques of fraudulent signals and the same protec-
tive responses are practiced all over the globe, regardless of race or
culture. One explanation for this phenomenon is that the ability to
manipulate and defraud, and the vulnerability to fall victim to such
manipulation, as well as the capacity to protect ourselves from
fraud, are all built into our experiences and brain. There is a certain
maturation that enables people to play both roles of fraudulent and
defrauded, relating to our retrieving mental images and comparing
88
them to the present. With experience we can make comparisons

and draw conclusions in an attempt to distinguish the real from the
manufactured.11
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
89
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
90
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.
4. Exploiting the Weakness of the Social System

Con artists may exploit not only the weakness of individuals but also
the weakness of a social system. In “Portrait of a Con Artist as a Soviet
Man,” Golfo Alexopoulos describes Vladimir Gromov, an impostor
who has taken on so many roles that it is hard to know who he really
is. An interesting aspect of the story, however, is that the man was a
product of the culture of communist Russia during the 1930s. He did
not succumb to the coercive system of the Soviet Union; instead, he
exploited its weaknesses. The system was clogged with requirements
for documentation, everywhere and for everything. Yet the system
had no mechanism for discovering forgery. Therefore Golfo accumu-
lated documents for every occasion and used them skillfully. This
Soviet man was amazingly similar to con artists described both in the
91
United States and in Sweden. Capable, intelligent, and a risk taker,

who knows how to manipulate not only people but the system, he
uses correct dress, and manner of speech to project, and emulate
Comrade Stalin and the power elite.15
The Soviet man recognized that the enforcers of the rules were
slow to discover fraud. He evaluated correctly the cost of imposing
the law that prohibited frauds and recognized the system’s inability to
enforce the prohibition on forgeries.
American con artists seem to manipulate the system in a similar
way. Just as the Soviet man emulated the glut of documentation in
Russia, American con artists emulate the powerful and identify the
system’s weakness in America.
The Soviet man was finally caught, one could argue, because of
his obsessive risk taking. Most American con artists meet the same
fate, except for one difference: they are treated far more leniently.
5. The Slippery Slope: From Honesty to Fraud

Honest people can succumb to temptation and secretly cross the fair-
ness line, if the payoff is high. For example, through the Internet con
artists may send an e-mail that seems to have been intended for some-
one else and sent in great confidence. The message contains a recom-
mendation of an investment, which the recipients are led to believe is
a real “tip.” Some recipients of the message will rush to buy the stock.
But after more and more recipients buy, and the price of the stock
rises, the con artist (who held the stock before sending the message)
sells the stock at a profit. The tempted investors lose.16 They used
information that was not addressed to them, and in fact they misap-
propriated it if they bought the securities on the assumption that no
one knew about this secret information.
Honest mechanisms can enhance the ability to cheat. Dale Carn-
egie’s book How to Win Friends and Influence People has spawned a
92
teaching center advertising the book as “the most influential business

book of the twentieth century.”17 The teaching at the Center is based
on the book’s principles. There is nothing wrong in attempting to in-
fluence and convince other people. The court system is based on
influencing judge and jury. Congressional arguments and presenta-
tions seek to convince the other parties and the voters. However, the
skills of influencing people may be used for teaching good arguments
or for evil, misleading cheating. Just as sales organizations can help
salespersons sell goods, fraudulent pyramid schemes can produce not
sales but salespersons. The form and teaching of both organizations
are similar.
How much can be gained by the wrongful act may make a differ-
ence. In one experiment, a bus driver gave passengers the “wrong
amount of change.” Most people returned the difference if the “mis-
taken” amount was small; fewer people returned the difference if the
amount was higher. There were always justifications to accept the
“mistake”; after all, the bus company is wealthy and the passenger
may be in need of money. Besides, the bus driver should be more
careful handling change, and it is his fault that the passenger received
more than was due. The circumstances corrupted fundamentally
honest people.
Ponzi schemes have many components that, standing alone,
reflect legitimate business practices. For example, although people
can have very good ideas, they may lack the persistence and ability to
put these ideas into practice, to plan their projects carefully, and bring
them to fruition. They may have little patience for tending to the
details and no endurance to wait for eventual rewards. Thus they lose
the opportunity to create a legitimate business, even when this
opportunity exists. Therefore when they launch their enterprise they
may be truthful, but as it develops and begins to falter, some business
operators turn to fraudulent solutions. Precisely where and when
they change course is sometimes hard to detect, except in retrospect.
93
To demonstrate the ineptitude of some con artists in their business

attempts, consider a businessperson named John Aptt, who operated
Financial Instruments Corporation from 1994 to 1997. The company
raised about $14 million from investors, promising high interest rates
and periodic “Double Your Money.” The payments to earlier investors
brought in new investors: ability of the company to pay these returns
was explained by the “exemplary” business acumen and technical
creativity of its founder. When in early 1995 Aptt’s promotional
materials were noticed by an attorney in the Enforcement Division of
the Securities and Exchange Commission, Aptt assured the attorney
(untruthfully) that he did not raise any money from investors and
was thinking of abandoning the project. Instead, Aptt continued to
solicit investments in an empty corporation.
Aptt and Douglas Murphy, whom he enlisted, concluded that
they had to go on or else default. They had to solicit additional invest-
ments, although this was not a permanent solution. Therefore, in
early 1996 Murphy and his brother Bruce, a disbarred attorney, trans-
ferred the current business to a new corporate shell and used it to
raise long-term low-interest debt. Using another lawyer, who was not
aware of the corporation’s problems, Murphy sought to make an
unregistered securities offering as the original company invested in
“promising investments” that failed. Then in early 1997, the Secu-
rities and Exchange Commission received an anonymous tip that the
company was operating a Ponzi scheme; the SEC brought an action
against the company. Of the $13.5 million due to investors, the com-
pany had $1.8 million. Aptt was sentenced to nine years in prison and
Murphy to about eight years.18
A con artist who offered enormous returns did not seem to
understand how his own Ponzi schemes worked. He wrote that the
“way it is set up is really cool and we will make plenty and pay every-
one, too.” But when asked how he would achieve this “cool way,” he
seemed to struggle for the next several minutes to understand how
94
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,
95
and their interest payments continued to arrive. In fact, the govern-

ment argued, the clients’ money was lent to the company so that it
could pay them the interest, and the maneuver failed. The manager
described the efforts differently: “We had legal opinions every which
way to make sure we did it right. It just amazes me it’s gotten so much
attention.” He continued to be optimistic and defend his efforts.21
Similarly, a hedge fund manager who controlled about $450 mil-
lion of investors’ money incurred significant losses and in attempt-
ing to recoup the losses he paid investors with the money of new
investors. Most of them were abroad and had little control over his
activities.22
In a 2009 case, an Ohio con artist controlled a number of entities
that purported to be in various business ventures. In reality, he oper-
ated, between November 1997 and December 2001 a Ponzi scheme
in which he solicited investments in businesses that were either

unprofitable or unable to pay interest on the promissory notes
[the con artist] gave to investors as security. Instead, [he] used
his investors’ money for other purposes and solicited additional
investments in order to pay interest to earlier investors and pro-
long the scheme. He also provided guarantees from a number of
entities claiming to be insurance companies. But . . . these insur-
ance companies did not have the capacity, ability, or intent to
repay the notes if the corporations defaulted.23
In this case, some of the businesses were failing enterprises that

slipped to a Ponzi scheme instead of declaring bankruptcy.
Another owner of three failing companies had his conviction
upheld in 2000 of embezzling from the employees’ profit sharing
plans, which the owner controlled. He used the money to pay oper-
ating expenses of the companies.24 In the last analysis, there is little
difference between these failing businesses and the beginning of
96
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.
6. Ponzi Scheme “Businesses” Mirror Respectability

A. LEGITIMATE BUSINESSES: BANKING AND FINANCIAL
INSTITUTIONS
The structure and image of many Ponzi schemes can be legitimate,
respectable, and familiar. Many Ponzi schemes mirror banking and
other financial institutions. The con artists receive money from inves-
tor-depositors and are expected to transfer the money to borrowers
who promise to repay the money with interest. Ponzi schemes are
very similar to refinancing, which is what many legally operating
enterprises do. That is, they borrow from Peter to pay Paul, for example
when interest rates fall and they can get financing cheaper elsewhere.
If the chances for a successful enterprise are low, and if the entrepre-
neurs recognize this fact but continue to borrow and repay former
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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.
B. STOCK MARKET TRADING: FOLLOWING THE TRENDS

To some extent, it is hard to distinguish the victims of Ponzi schemes
from stock market traders. Robert Shiller, a Yale economist, “has lik-
ened the entire stock market to a ‘naturally occurring Ponzi process,’
where the prosperity of later investors depends on the willingness of
the earlier generation to put its money down.”27 Most investors are
“free riders” following the herd. Free riders seek to benefit from the
research and information that others have accumulated; the free
riders wait to see how others act before they make their investment
decision. Their inclination to rely on others’ efforts is rational, and
not necessarily unfair. After all, others may rely on the traders’ actions
in the belief that they have done their homework.
But free riding does not work well in stock market trading. As the
herd of investors grows and more investors buy more shares, the price
of the shares rises. Therefore, slow, more cautious, or lazier investors
end up buying the same shares at a higher price. If some investors lead
the herd to sell, then the trend reverses. Investors who bought at a
high price are often reluctant to sell their shares; they are loath to
sustain losses. Again, they may be waiting to see what many other
investors will do. After these cautious investors finally sell their shares,
prices have plummeted and they suffer significant losses. Following
the herd, they pay attention to what other purchasers and sellers are
doing and less attention to rising and falling market prices and evalu-
ation of the securities. Therefore such free riders, as cautious or lazy
investors, lose the most.28
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Ponzi schemes produce a similar result, although the investors’

intentions do not enter the picture. Those who are first to invest in
the schemes seem to be taking the highest risk, but in fact they are
likely to be winners. Those who are more cautious and wait longer
before they invest are likely to be losers. In Ponzi schemes and in the
securities markets, investors who follow the actions of others and do
not rely on their own information or their own research and indepen-
dent decisions are likely to be losers.
To be sure, there are differences between Ponzi schemes and mar-
ket games. In the markets, early investors do not always gain at the
expense of later investors. The chances of gain are hard to calculate
because markets are mostly chaotic and unpredictable. In a Ponzi
scheme, earlier investors are far more likely to gain at the expense of
latecomers. The market system and the laws supporting it give every
player a similar chance of securing information, and no one is allowed
to rig the prices. In Ponzi schemes the rules are set in advance; the
game is not truthful and therefore is unfair to those who are in the
dark. The price is unreal, rigged. What seems fair and real is in truth
unfair and unreal.
C. SALESPERSONS AND TRADERS

It is difficult to distinguish con artists from legitimate salespersons
and traders. After all, con artists engage in selling, just as many honest
salespersons do. In fact, some con artists started their careers in
sales.29 Salespersons often talk customers into buying what they
would not otherwise buy.30 They may “puff ” and exaggerate the vir-
tues of the offered merchandise and services. They may use the pres-
sure of reciprocity by offering gifts such as free lunches. The gifts can
press buyers to reciprocate by buying, and in the process return the
value of the gifts manyfold.31 Reciprocity is sometimes effective even
after the sale. A small gift after a sale of a horrendously overpriced
item may reduce the probability of cancellation of the sale.32 Generally,
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salespeople attempt to forge friendships with customers and gain

their trust.
At the same time, salespersons can have a sense of entitlement,
driven by a strong desire for results. I remember one salesperson
telling me, “When I speak to a customer, I feel that part of the money
in his pocket belongs to me.” This statement, made in earnest by a
person who considers himself honest, is revealing. If some of the
money in a potential buyer’s pocket belongs to the salesperson, then
actions that might otherwise be questionable are permissible. The
sense of entitlement may be the reason salespeople offer information
that is not entirely accurate, and why in many cases they are allowed
to do so. The assumption is that the buyers understand the salesper-
sons’ state of mind, and therefore are more skeptical about persuasive
techniques. However, not all buyers are protected from the persua-
sive attractions. When this assumption is wrong, the buyers can be
defrauded.
Buyers can send sellers misleading signals as well. In the bazaar,
buyers often divert the seller’s attention from the buyer’s interest in a
particular object. When there are no fixed prices, the parties bargain.
In this environment, a shopper interested in a particular item will
show an interest in another item, and only casually ask for, or offer, a
price on the desired item, usually together with an item in which he
or she has no interest.
Animals can trade and bargain as well. They can evaluate the
“market demand” of an item. If an object falls into the chimpanzees’
cage and their keeper motions to have it returned, the chimpanzee
may demand (and receive) a reward of food. If the item is valuable (or
if it is an item that is dangerous to the animals, which the zoo keeper
wishes to retrieve quickly), the chimpanzees may demand not juice,
which is their commonplace drink, but grapes, which they receive
only seldom.33 They can tell the value of the service they are asked to
perform and the rewards that they can bargain for. Furthermore,
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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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health and travel programs for members. Because he found it more

difficult to recruit members to the new business, by 1996 the new
subsidiary could not stay in operation. To sustain the new business, he
drew financial assistance by “selling convertible notes in its profitable
sibling,” the insurance company. Investors in the notes were assured
that their investments were safe by pledging Spirk life insurance pol-
icies as additional security. The notes were not registered with state or
federal securities regulators. In 1998 the Illinois Securities Depart-
ment told Spirk to either register the notes or stop selling them. He
promised to comply but continued to sell unregistered notes, telling
investors that the state “had authorized the notes’ sale.” One might
speculate that optimism played a major role: tomorrow the problems
will “go away.” But when the insurance company’s problems grew
worse he resolved them by selling more notes faster and defrauding
more investors. The fact that “Spirk did not live the high life while the
money rolled in” seems to verify his optimism and belief that he could
revive his business. He plowed the cash he received back into the two
subsidiaries and reduced his own salary so that he could pay the staff ’s
wages.37 He seems to have truly wanted the real business to succeed.
But when it did not, he resorted to a Ponzi scheme. A similar process
and tenacity is demonstrated in the 1999 Ponzi scheme by Martin
Armstrong that allegedly cost investors approximately $3 billion.38
Like legitimate entrepreneurs, con artists take risks. If entrepre-
neurs fail, they usually try again. So do con artists. Entrepreneurs are
“project-oriented,” stimulated by starting something new. This may be
the reason failures daunt them less—beginnings excite them more. So
do beginnings for con artists. Most, if not all, entrepreneurs borrow.
In fact, even most legitimate businesses borrow. It makes economic
sense to borrow a percentage of the operating capital. Businesses pay
dividends while borrowing. Financial institutions such as mutual
funds redeem their securities with borrowed money, under certain
conditions. Individual investors buy securities on margin—borrow a
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portion of the price of securities in which they invest. Hedging is

legitimate, justifiable, and sometimes even encouraged by tax law.
Ponzi schemers operate the same way. Thus con artists are similar to
entrepreneurs.
However, there are two fundamental differences between legiti-
mate entrepreneurs and Ponzi schemes. First, legitimate businesses,
however risky, reward investors and benefit society by providing in-
centives to finance productive and creative efforts. Ponzi schemes do
not. They transfer money from one group of investors to another
group and to the con artists. No additional wealth is created from an
earmarked enterprise. Second, investors in legitimate schemes are
not deceived. They receive true information that allows them to make
informed investment decisions, and they take the risks they know
about. Investors in Ponzi schemes are not told the truth, even if some
may guess at the truth. They make an uninformed decision. Never-
theless, these two differences are hard to identify because the form
and many features of Ponzi schemes resemble and actually constitute
legitimate business practices.
E. CON ARTISTS ARE BELIEVABLE: THEY BELIEVE IN THEIR

ACTIVITIES AND VIEW THEM AS BUSINESSES
Con artists are believable perhaps because they view their activities
and present their activities as “businesses.” But so do many honest
people who start a business and seek financing. In bankruptcy cases,
many con artists argue that they are businesspersons who failed. Con
artists may have grandiose dreams of making a fortune, of gaining
recognition and respect, and they may act on their dreams. Dreams
may make their appearance real and their behavior natural and
believable. Grandiose dreams are not the exclusive province of Ponzi
con artists; people engaged in legitimate activities—business, aca-
demic, and military leaders—share such dreams and act them out. So
it is possible that con artists may be dreamers who could not rise to
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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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crime become so accustomed to the lifestyle it generates that they

themselves are in disbelief when it crumbles, convinced over time by
their own lies.”44
People may believe that their activities constitute their business,
while in reality their business differ from their activities. The Ponzi
business has two main components. One is producing a story about
a business. The other is selling the story together with worthless obli-
gations. That is, the con artist may think long and hard about a story
that would appeal to marks and then build a distribution system to
market the story. Nonetheless, the activities and the stories are very
similar to real activities and businesses.
A journalist’s description of a certain con man is revealing. The
con artist and a potential partner were traveling to a remote area to
examine an abandoned gold mine, to which access was very difficult.
The con artist kept repeating that he was looking, so far in vain, for
“added value” in the mine.45 Other investments, he said, offered
added value. This term is puzzling—that is, if we focus on the mine as
an investment. To the con man, however, the mine must produce
another kind of added value, that is, added to the story that he
intended to market. Now we understand: if his business was simply
selling a story, then the existence of the mine could not attract inves-
tors, or could be too easily discovered for what it was.46
This con artist refused to give the journalist details about the
mine. The journalist retorted that this refusal made the con artist
look suspicious. “‘Suspicious?’ [the con artist countered.] ‘I have pro-
jects to protect. I have no use to publicize a project that’s in develop-
ment.’”47 The con artist viewed the mine as a “project in development”
that could not be publicized until he was ready to sell the story about
the mine, and so he had to make sure that the location of the project
would remain difficult to reach.
We have noted that during the life span of a Ponzi scheme, con art-
ists rarely let their investors become unsatisfied. Dissatisfied investors,
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wrote Charles Ponzi, “might have wrecked the whole structure.”48

What structure was he writing about? A plausible answer is that he was
referring to the structure on which his business was founded, that is,
paying prior investors with the money paid by later investors. He consid-
ered himself a successful businessman and a financier, drawing evidence
from how adoring investors treated him.
Con artists attempt to draw out their projects as long as possible.
But they are not discouraged by the ultimate and inevitable failure of
a project. When one project terminates, they start another. As a
scheme comes to an end in one place, they move the scheme to an-
other place. Stories do not require a manufacturing facility; they cost
little and are easily transported. The investment is in finding marks.49
Thus their persistence and their innovative new businesses are sim-
ilar to those of entrepreneurs.
F. LONGEVITY OF THE BUSINESSES BREEDS

RESPECTABILITY
One reason for the difficulty in distinguishing Ponzi schemes from
legitimate business is that the schemes can last for a number of years
and generally played with the same marks. Ponzi schemes last far
longer than crooked poker games, for example. In cards the marks
can be hit only a few times until they figure out the game. In addition,
they quickly lose all the money they put at risk and the con artist
must disappear. But rarely do Ponzi schemers embezzle and escape
with all the money that the first “marks” entrusted to them.
Long-term businesses seem, and are often assumed to be, more
reliable than beginning businesses and point to the businesses’ future
prosperity. After all, their lasting existence could demonstrate a solid
market for their products, their ability to adjust to changes, and per-
haps the leadership of innovative and reliable management. These
assumptions are generally accepted even though there is evidence to
the contrary that casts doubt about their conclusions. Needless to
106
say, belief in the reliability of long-term businesses supports and feeds

the longevity of con artists’ imaginary “businesses.”
Con artists do not abscond with the money they are handed at
first, for both personal and business reasons. At the outset, investors
do not rush to offer their money to con artists; they must be persuaded
to do so. To induce investors to hand over their money, Ponzi con art-
ists must gain investors’ trust. To gain their trust, these con artists must
exert far more effort than con artists require in, say, enticing marks to
join a rigged poker game. At the same time, the nature of the con art-
ists’ efforts in sending these signals differs from seeking financing by
real businesses. To start their token business, con artists do not need
capital, of which they have little; nor do they need to produce prod-
ucts, of which they have none. They need to produce more investors.
For this production, they need an idea and their own labor, of which
they have a lot. Con artists do not always succeed on the first try and
must try again using other ideas in other places. All these efforts must
be performed before the investors hand over their money.
A one-shot deal is not likely to cover the con artists’ initial invest-
ment. Even if it does, an investment that is successful could produce
more than the money embezzled from the first group of investors.
A growing reputation could bring more profits. Besides, like any
“herding” phenomenon, the first pressure, the first movement of the
herd, is the hardest to achieve. Once investors have become enthusi-
astic about the investment, they bring more marks to the game and
offer more money of their own.
The con artists’ costs of producing trust fall in proportion to
increasing success. To gain investors’ trust and create a reputation,
con artists invest in costly signals. The more costly the signals are to
the con artists, the more genuine and trustworthy they appear. The
more trustworthy the con artists appear, the less attention is paid to
the scheme that they offer, the harder it is to uncover the true nature
of their scheme, and the longer the scheme will last.
107
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.
109
Chapter 4
A Profile of The Con Artists and

Their Victims
In Chapter 3, we examined the con artists’ activities and behavior,

which seem “normal,” reflecting the way many people behave. This
chapter analyzes the unique character features of con artists and their
victims. These features are different from those of many other people
and can explain some of the causes of deviant behavior. We start by
observing the tendency of con artists and some of their victims to
become addicted to the game. We view the slippery slope from spec-
ulation to addictive investments, both legal and illegal. This charac-
teristic, which both con artists and some of their victims may share,
can help explain the survival of Ponzi schemes around the globe over
so many years.
Following that, we highlight and explore the dark side of con art-
ists—their narcissistic character (which some psychiatrists consider
a disorder), their lack of empathy, their “barren creativity,” and the
way they protect their ego. We then move on to examine the charac-
ter traits and behavior of the con artists’ victims—their tendency
toward gullibility (irrational trusting), “risk tolerance,” a strong need
to feel exclusive and special, and their predictable reactions upon
discovering they have been had.
110
A P R O F I L E O F T H E C O N A RT I S T S A N D T H E I R V I C T I M S
A . THE DARK SIDE OF CON ARTISTS (AND SOME

OF THEIR INVESTORS)
1. Con Artists Are Different from Most People
The story of the con artist’s personality includes not only charm,
ability, and similarity to honest persons. It includes addiction to
unrealistic dreams and overwhelming ambitions. Behind the façade
of Dr. Jekyll (the benign physician and healer) lies a psychological
makeup of Mr. Hyde (the killer). Con artists are likely to have a nar-
cissistic character. Such people are consumed by an insatiable appe-
tite for money, prestige, and the need for other people’s attention and
adoration. With this disorder comes lack of empathy for others, in-
cluding the people they have ruined. They may not be able to feel
anyone else’s pain. Perhaps they are unable to experience any deep
feelings at all.
The word narcissism is derived from Greek mythology. Narcissus
was a handsome lad who paid no attention to a nymph that was in
love with him. For this attitude, which the gods considered a wrong,
they punished Narcissus by making him fall in love with his own re-
flection. It was an appropriate and very painful punishment, indeed,
because he could never grasp or reach and touch his image as it was
reflected in the waters of a pool. His prize was himself, but his image
dissolves on touch.
Andrew Twardon, the director of New York’s St. Luke’s-Roosevelt
Hospital’s Center for Intensive Treatment of Personality Disorders,
noted “that [Bernard] Madoff may be a narcissist, a personality disor-
der that differs significantly from the antisocial pattern. ‘Whereas in
the antisocial personality, the primary problem is disregard for norms
and laws and the need to inflict suffering on others for personal satis-
faction, the narcissistic personality is about self-aggrandizement—
what you would call, in popular psychology, denial.’”1 Although few
people are entirely free of all narcissistic traits, if a number of these
111
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
an inflated sense of self-importance; fantasies of unlimited suc-

cess, fame, power, beauty, and perfect love (uncritical adora-
tion); exhibitionism (a need to be looked at and admired); a
tendency to feel rage with little objective cause; a readiness to
treat people with cool indifference as punishment for hurtful
treatment, or as an indication of the fact they have no current
use for the person; a tendency toward severe feelings of inferi-
ority, shame, and emptiness; a sense of entitlement accompa-
nied by the tendency to exploit; a tendency to over-idealize or
112
devalue people based largely on a narrow focus; an inability to

empathize.4
Disorder or not, the description seems to fit a certain personality. In

this book the discussion is entirely descriptive rather than prescrip-
tive. There is no suggestion on whether or how narcissists’ tendencies
should be, or are, cured.
Elan Golomb explained: a narcissist withdraws from other
people in order to protect himself from feeling inferior. He feeds
on, and needs, continuous admiration and assurance. Yet he cannot
admit the need. Therefore, he lives in a “one-person world.” Either
he exists and others do not or others exist, but then he does not.
To continue to exist, he views others as shadows or things that
help feed him; “He remains aloof from people in his automat
world.”5
Narcissists can be charming and show gratitude for gifts even
while not feeling gratitude.6 Yet they are easily offended.7 Whether nar-
cissism should be considered a serious illness depends on the degree
to which the narcissists can imagine other people’s feelings, that is,
empathize, and be “truly productive and loving.”8 Thus, con artists do
not necessarily have a character disorder. But many of them do.
Con artists may include psychopaths of various other types. Per-
haps they act the character they have long been dreaming of, such
that the character comes naturally to them. As noted, they may not be
able to act any other part except this one: the rich, powerful and
famous that they crave and dream to be. But some con artists can
pose as different people. In Toronto, for example, George Croft, a con
artist, entered prison as a corporate executive and emerged as a law
professor. He managed to convince at least some people of his new
role, until it was uncovered. A psychologist described Croft as a psy-
chopath9; nonprofessionals might not detect this trait. He certainly
was convincing.
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2. On Very Rare Occasions a Con Artist Might

Resort to Murder
Under pressure, a con artist may be driven to murder. Here is a chill-
ing example.10 In July 1998 a body was discovered on a trawler; “All
traces of identification had been removed from the body—except the
victim’s Rolex watch.”11 The registration number of the watch led to
the identity of the dead man and the story of his murder. “The victim
had sold his identity to his killer—a Canadian who had been on the
run for five years from charges in Ontario of stealing millions of
Canadian dollars from the clients of his financial services company.
At one time, he was number four on Interpol’s list of the world’s most
wanted men.”12
The truth about this Canadian con man began to emerge. A son of
a truck driver with six children, he was considered dumb. Having
failed his basic exams he left school at sixteen and attended college
for six years without graduating. Yet even in the 1960s he looked and
dressed conservatively, and he dreamed of retiring to Scotland as a
gentleman. In college he met and married the daughter of well-to-do
parents in a small, wealthy, and close-knit society. With the help of his
wife and family, he developed a financial services business. He
became a Sunday school teacher and a chruch elder and was consid-
ered respectable, stylish, and dynamic—a happy-go-lucky guy, a
pleasant, easygoing, and well-liked man. His advisory investment
company did well. However, his success was based on “creative ac-
counting.” Though investors paid large sums for the promissory notes
he issued and the insurance policies he offered for a term of five years
(with an option to recall the principal), he often banked the inves-
tors’ money through a Cayman Islands company and conducted a
classic Ponzi scheme.
Members of the community bought the con man’s personal
notes because he was a member of a prominent family, charming
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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
3. On Very Rare Occasions a Group of Con Artists

Can Be Deadly as Well
A deadly group of con artists is described by a court as a “group of
young men known as the ‘BBC,’ which has been popularized in the
media and in film as the ‘Billionaire Boys Club.’ The group was
formed in Los Angeles in 1982 by a youthful and charismatic ac-
countant and commodities trader named Joe Hunt and several of
his friends. . . . BBC was bound together by a theory of Hunt’s
known as the ‘paradox philosophy,’ which sanctioned lying, cheat-
ing and stealing as necessary and acceptable means to achieve per-
sonal and professional goals. Acting on that philosophy, BBC set
out to generate income through various business ventures and in-
vestments. Start-up funding was obtained by soliciting the mem-
bers’ various wealthy friends and relatives, and a portion was used to
obtain elegant townhomes and imported cars for members’ use. An
early BBC investor was Ron Levin, a southern California resident,
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who promised in July 1983 to advance several million dollars, to be

invested by Hunt. However, a few months later, Levin admitted that
his business dealings with BBC were fraudulent and the millions il-
lusory. Hunt reacted to this news by devising an elaborate scheme to
extort money from and kill Levin. In June, 1984, Hunt and another
BBC member . . . killed Levin and disposed of his body in a remote
area north of Los Angeles. [Another member] was aware of the plot
to kill Levin, and provided Hunt with an alibi for the night of the
murder.”16
Thus a slippery slope may start with the philosophy of “a little
bit of ” fraud and end with desperate or philosophically justified
murder.
4. Con Artists Lack Empathy

A. WHAT DOES EMPATHY MEAN?
One explanation of con artists’ behavior and internal driving forces is
that they feel no compassion or emotional sympathy for anyone.17
That is, they lack the tendency or ability to identify with others.
Other people then become objects. On the other hand, “When
people observe someone in distress they imagine how they would
feel in the same situation. If they can do this vividly enough, they may
experience some of the same affect experienced by the victim.”18 The
power to imagine that we are someone else does not necessarily relate
to suffering. We can empathize with someone who is happy, and that
may make us feel happy too. Nor is empathy exercised to the same
degree with respect to all people under all circumstances.19 During
the 1940s, the commandants of extermination camps sent millions of
people to the gas chambers and threw children into fires. Yet at the
same time they could be loving fathers and devoted husbands. They
could act this way because they “dehumanized” the victims and erased
any empathy for them.
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Empathy has been linked to moral principles of caring for those

with whom one empathizes; it is related to principles of justice.20
When people can imagine themselves as victims, their empathy with
victims triggers their demand for justice, to right a wrong. Empathy
induces people to contribute to just solutions. Empathic persons not
only feel others’ pangs of hunger but also indignation for injustice
toward the hungry.
Con artists cannot identify with, or view, their marks as human
beings like themselves. This does not mean most con artists cannot
feel deeply for some people or animals. But in the context of their
“business,” such empathy seems to be lacking. The focus of many con
artists is not on how their victims feel but on how they behave, watch-
ing carefully for actions that signal weakness or vulnerability. Then
con artists zero in on the points of exposure, like predators aiming at
the least protected spot in the body of the prey.21
B. LACKING EMPATHY CAN BRING REPEAT FRAUDS

Experience has shown that those who lack empathy and commit
antisocial acts, whether criminal or not, are likely to repeat these acts.
Therefore, lack of empathy for victims, especially victims of rape or
violent crime, is considered a deviation, signaling repeat offenders.22
The law in the United States considers empathy important for a civil
society. Criminals’ empathy for their victims is considered in sen-
tencing offenders.23 A convict’s parole was revoked because he took
great pains to avoid paying a judgment compensating one of the vic-
tims of his crime; he did not “indicate any concern or empathy for the
victim.”24 Thus the law condemns lack of empathy, especially for the
people whom one harms. The law condemns the inability to exercise
self-control over the desire to harm others, and a drive to repeatedly
injure others. People who lack such empathy present a danger to so-
ciety. For example, in upholding the sentencing decision of the Dis-
trict Court the Court of Appeals noted:
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The district court considered defendant’s conduct to be more

reprehensible than the typical fraud scheme because of whom
defendant chose to defraud (his family and friends), not merely
because the resulting losses were extensive. Also, the fact that the
district court weighed defendant’s "history and characteristics"
against him rather than for him was no reason to overturn the
district court’s sentence. Additionally, the district court did not
abuse its discretion in concluding that the likelihood of someone
with defendant’s employment history actually paying back a
million dollars was negligible.25
In considering the sentencing of another con artist, the court noted

that this man “preyed on vulnerable individuals, people in crisis, in
difficult spots in their lives; the victims’ statements indicated that
defendant preyed on those who were disabled and in physical pain,
or were emotionally vulnerable due to a child’s hospitalization.” The
court may consider the fact of the defendant’s use of religion to lure
investors into his Ponzi scheme; the crime reflected a moral failure,
not a spiritual failure, and that sort of inquiry into the degree of
defendant’s blameworthiness was appropriate to the court’s selection
of a sentence.26
In contrast, repentance or fear may bring a voluntary confession.
For example:
[I]n early 2009, Shawn Merriman approached an otherwise

unsuspecting U.S. Attorney’s Office and disclosed he had engaged
in a long-running Ponzi scheme that defrauded investors of over
twenty-million dollars. . . . [He] offered several million dollars of
assets to the government so that it could liquidate the assets and
eventually remit the proceeds to Mr. Merriman’s victims. He
cooperated with authorities throughout the proceedings and ulti-
mately pled guilty to one count each of mail fraud and forfeiture.27
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C. LACKING EMPATHY CAN RENDER CON ARTISTS

EFFECTIVE
Lack of feelings for the victims makes con artists effective in hiding
their fraud. A researcher of nonviolent psychopaths noted that con
artists who do not or cannot empathize are “intelligent psychopaths.”
In his opinion, most high-functioning psychopaths are not mur-
derers: “‘Many of them are quite charming and appear to be extremely
sincere, which may account for their success. . . . A good part of charm
is an absence of social anxiety, and because psychopaths do not feel
guilt, anxiety or empathy, they can look someone straight in the eye
and tell the most egregious lie.”28 Jane Kusic, “a victims’ advocate and
expert on the psychology of the con artist,” described con artists as
“manipulative predators who practice mind control over victims and
derive a sadistic pleasure out of ‘psychological rape.’”29
Usually people empathize more strongly with those they know,
such as family and friends, less with people they do not know, and
even less with people they cannot see or hear. Most con artists,
however, lack empathy with the victims they know and befriend.
Absence of empathy toward dependents who are not family and
friends can be just as heartless, for example, in the case of trustees
who control beneficiaries’ money. (A newspaper reported the story
of a widow who was a beneficiary of a trust fund established by her
husband. She needed $20,000 for dental work. Since the income
from the trust fund was insufficient, she asked the bank trustee to
“invade the capital” for that sum. After the bank trustee told her to
have her teeth pulled, the court refused her request to remove the
trustee.30 As a business matter, the trustee may have made a defen-
sible judgment, but it seems that empathy was entirely lacking. It is
doubtful whether the deceased husband expected the trustee to
treat his widow this way in such a case.) Corporate con artists can
be devoid of empathy toward shareholders whom they do not
know.31 Thus, regardless of intelligence, people might be unable to
120
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.
5. How Do Con Artists Present Themselves?

A. PROTECTING THE WEAK EGO: WE ARE SPECIAL!
How do narcissists protect their ego? Con artists act with tremendous
self-confidence, while their inner self is too weak for them to acknowl-
edge any weakness. They cannot help but deny categorically that they
have done anything wrong. They justify their behavior by blaming the
law, the government, and the victims. Some con artists argue that
their deception was necessary as “self-defense”; their victims would
have deceived them—the con artists. Therefore, the con artists had
the right to protect themselves by deceiving their victims first. Hence,
con artists are unrepentant offenders. Let us explore these traits.
To survive, narcissists’ egos use defensive mechanisms that require
self-deception and feed on deception of others. The narcissist’s “life is
organized to deny negative feelings about himself and to maintain an
illusion of superiority.”35 Narcissists use their superior view of them-
selves as a defense. They imagine themselves to be larger than life.
They “construct an elaborate persona (a social mask which is pre-
sented to the world). This persona needs an appreciative audience to
applaud it. If enough people do so, the narcissist is relieved; no one
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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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his identity.39 Paradoxically, because their ego is so frail, con artists

cannot afford to act but with a high level of self-esteem. They some-
times cannot live having lost self-esteem. For example, one con artist
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.’
123
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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6. Con Artists’ Mechanisms of Ego Protection and

Justification
A. DENIAL
Denial is an ego-supporting tool. Typically, white-collar criminals
continuously deny having done anything wrong.50 These criminals
share a “strong culture of denial,” and this culture persists—even in
prison. They have “imagined superiority over other inmates,” an atti-
tude that also helps them maintain their dignity and their coping
with prison life.51
A study of forty-seven fraudulent telemarketers conducted by
University of Tennessee researchers who interviewed their subjects
at various locations across the United States found symptoms iden-
tical to the con artists of Ponzi schemes. These telemarketers refused
to admit they were criminals even though they were convicted. “Five
of the 47 convicted telemarketers admitted they knew they were
involved in criminal activity. But the rest,” like many other white
collar criminals, “rejected the words ‘criminal’ and ‘crime’ as being
applicable to them and their activities.”52 Con artists act the same
way. In addition, the telemarketers “had absolutely no sympathy for
their victims, many of whom were elderly.”53 It is not their fault that
the victims were hurt, they argue. It is someone else’s fault—the vic-
tims, the police, the government, the law. Armed with this deep con-
viction, they avoid the internal conflicts and feelings of guilt and
shame that would accompany recognition of their actions as wrong.
They convince others all the more easily because they show little hes-
itation and much assurance.
A recent example of ego protection through proclaiming superi-
ority is the case of William W. Lilly, nicknamed “Condo King.” The
King was convicted of real estate and banking crimes and spent almost
five years in a federal prison. During these years he seems to have cre-
ated a “real estate empire” acquiring “hundreds of condominiums,
125
commercial buildings and raw land from Massachusetts to Florida.”

Joe Clements reported in Banker & Tradesman that “the prosecutor
has wrested approximately half of the $5.1 million restitution order
imparted upon Lilly for these frauds.” Lilly was required to pay the $5
million, or his assets would be seized. But when Lilly lost the legal
battle he did not concede. On the contrary. He parked a large yacht at
Rowes Wharf in Boston, about 100 yards from the U.S. attorney’s
courthouse office. Painted in large letters on the yacht were the words
“We Won.” As an anonymous official has remarked, “The audacity is
astounding.”54 More impressively: Lilly refused to recognize reality.
Probably, his ego could not withstand and survive such recognition.
Ponzi con artists and white-collar con artists deny that they
have done anything wrong. A study conducted in 1988 found that
white-collar offenders are “highly resistant to negative interpretation
of their actions, [and] they rationalize their crimes even after convic-
tion and display a remarkable inability to accept the moral implica-
tions of their conviction. . . . In rejecting negative labeling [sic], they
also reject or manage the accompanying emotions.” Shame and guilt
depend on whether an individual accepts how others define a situa-
tion. White-collar offenders reject the definitions constructed by
others.55
Beliefs, signals, and following a losing route are not unique to con
artists. Leaders might strongly believe in their message, mission, and
destiny. When success seems to fade, refusal to admit possible failure
may lead to a slippery slope of fraud, from which there is no return.
One psychological explanation for such behavior is the “need to jus-
tify previous investments and reduce the dissonance provoked by
high investments and little or no returns.”56 The cons, their victims,
and many honest people might share the same psychological drive.
Natural moral behavior requires the capacity for self-condemna-
tion, and mature moral behavior requires cognitive capabilities, that
is, responsibility, which makes one feel guilty. The standard evokes an
126
emotional response. It is different from a convention, for example, of

driving on one side of the road. Rational analysis is not without value,
but those who believe in rational behavior do not give enough weight
to the emotional aspect of behavior.57 It seems that con artists lack
the capacity for self-condemnation or feelings of guilt.
The similarities and the differences between two groups of
white-collar criminals are interesting. One group consists of the con
artists who seek the luxurious lifestyle and success of the rich and
powerful, and achieves it only by fraud. These are the mimics. The
other group consists of those who have achieved the desired status
but resorted to fraud mostly in order to increase or to maintain what
has been achieved. These are the elite. Both have strong egos, high
self-esteem, and less sensitivity to the law. Both are likely to be little
affected by empathy for the victims or self-condemnation. Con art-
ists may have vitality and sustenance even after serving a prison sen-
tence. A Canadian who defrauded a number of banks and perhaps
other sophisticated individuals in a Ponzi scheme involving leases
was sentenced to fourteen months in prison. What is interesting is his
view of the future: “When I walk out of here I’ll probably be seen as
the biggest son of a bitch,” he said. As to his long-term future he said:
“I’m going to start all over again. I’ve got all the energy in the world.”
In addition: “I’m going to play golf four months out of every 12.”58
Perhaps this was the view he wanted to present himself. Perhaps this
was how he truly felt. The words, however, are true to character.
B. BLAMING THE GOVERNMENT

One of the arguments made by many con artists is that, given more
time, their enterprises would have become successful legitimate busi-
nesses. Therefore, when their scheme is terminated by government
actions, many con artists blame the government for its failure.59 If
they had been given just a little more time, everything would have
turned out fine. As one of the Australian con artists said: “The ASC’s
127
[Australian Securities Commission] press release said they shut us

down because we were destined to fail. Well, they ensured we failed.
They wouldn’t have a commercial bone in their bodies.”60
In bankruptcy court, Ponzi con artists often pose as businessmen
who failed. They failed, their arguments go, like other businessmen
and entrepreneurs whose vision was too creative and too great for
reality. The government is one of the reasons for their failure. When
caught, a con artist argued that the government framed him. He said
in his bulletin: “The SEC over the past three years had deliberately
contrived and implemented a violently hostile, Mafia-oriented type
of combative posture versus the ABT exchange and marketplace and
against me [Arthur N. Economou], personally.”61
Another con artist who insisted that he had done no wrong62
blamed the government for the victim’s plight: “The twenty-one
executives in the Equity Funding insurance fraud, the largest business
crime in history, even while sitting in their prison cells . . . rationalized
that if the government had held off in the prosecution and let them
continue a short while longer, they would have solved their compa-
ny’s financial problems, ended their illicit activities, and saved the
thousands of stockholders from financial ruin.”63 In some respects,
the con artists are right. Had the government not interfered, the
scheme could have continued longer. In one respect, they are defi-
nitely wrong. A longer period would not have helped convert their
scheme into a legitimate business. In such an event, the legitimated
scheme would lose its attraction and would have to compete with
other lawful businesses. On this level playing field, con artists may
not have the upper hand.
C. BLAMING THE LAWS

Con artists justify their actions by attacking the legitimacy of the laws
and the regulators. The regulators are responsible for the losses of the
con artists’ investors. Laws hinder legitimate business, undermine
128
free enterprise, and hurt the shareholder-owners of the corporations.

These laws are unnecessary, deal in trivia, and are unjust. They are,
costly, complex, and implemented by a slow-moving bureaucracy.
Government enforcement is ineffective, anyway. And there are many
good business reasons to violate particular laws.64
These arguments are supported by theoretical studies and logical
arguments based on the belief that the markets will take care of most
problems that may arise. Although the year 2008 raised doubts about
the ability of the markets to control serious dangers to the financial
system, regulation can indeed stifle creative businesses. The line
between law that prohibits fraud and law that inhibits legitimate busi-
ness is sometimes hard to draw. Thus when con artists berate the gov-
ernment, and when the victims—especially those who benefit from
the scheme—parade in protest of government interference, in sup-
port of the con artists, their words and actions resonate, mimic legit-
imacy, and sustain their denial of having done anything wrong.
D. BLAMING THE VICTIMS

To add insult to injury, con artists sometimes blame the victims. These
people are not merely stupid; they are greedy. Otherwise they would
not fall for the scheme (“How could they believe a scam like mine?”).
One con artist said he felt innocent because the scheme would not
have “defrauded a reasonable investor.”65 It seems that most con artists
do not feel remorse at the losses they cause. For them this view is
important in supporting their own ego and the conviction that they
are superior to their marks. Joseph “Yellow Kid” Weil was a prominent
con man in his time, the late 1800s. He worked with other con men to
swindle his victims and was quoted as saying, “Each of my victims had
larceny in his heart.”66 Madoff joined the same crowd from jail. He
blamed large investors for having been complicit in his scheme.67
In addition, some con artists note that the victims were warned!
One person with a bankruptcy and a prison record claimed that
129
he cautioned potential investors about the risks involved in his in-

vestments: “I and the people who worked for me asked two simple
questions of investors: (a) can you afford to lose this money and; (b)
if you do lose it, will it affect your lifestyle? If the answer was yes to
either of those questions, we didn’t want their money.” He knew how
to send legal warnings to investors and use these warnings well as
protection. The problem, however, was not the warning, but the fact
that behind these warnings there was no business at all, neither risky
nor safe. Behind it was a Ponzi scheme. Denying this, he said: “Ponzi
or pyramid schemes are based on a non-accumulation of assets. We
have bought businesses and entered into joint ventures. Due to cash-
flow problems, we sometimes used money from new investors to pay
interest owing to existing ones but there is no law against that.”68 Yet,
these justifications are manipulative in and of themselves. “Cash flow
problems” are in fact a description of the scheme. They highlight the
similarity to legal businesses: the legal language of risk warning and
the form of refinancing. Cash flow was not a problem. Absence of any
true, potentially profitable business was the problem.
Besides, the victims have agreed. After all, no one forced them to
part with their money. One person convicted of fraudulent telemar-
keting said: “They know what they’re doing. They’re bargaining for
something, and when they lose, they realize that they were at fault.”
Yet another said: “They’re dumb enough not to read, dumb enough
to send me the money. I really don’t care, you know. And, you know
what I used to say: ‘They’re gonna blow their money in Vegas. They’re
gonna spend it somewhere. I want to be the one to get it.’”69
Con artists view their victims with contempt. White-collar
criminals, as well as thieves, view themselves as hard-working:
“Earning one’s income by illegal means demands a lot of individual
initiative and creativity. . . . The skills and time used in making
necessary connections and so on can be seen as an investment by
the criminals as in any other types of work.” You need skills, ability
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to make connections, and nerve to keep cool in the face of danger

and difficulties.70 Their disdain of the victims is based on a compar-
ison. Even the victims who are public shareholders can be viewed as
parasites who do not deserve the money they claim from hard-
working white-collar criminals.
E. BLAMING OTHERS, BUT AVOIDING A SHOW

OF WEAKNESS
In interviews with Swedish thieves and burglars, researchers found
that these criminals took full responsibility for their choice of life-
style and their imprisonment. In their view, blaming others for their
problems was a sign of weakness, a sign of “not being a man.”71 It is
unclear whether these studies are applicable to con artists in the
United States. In addition, perhaps the culture of thieves and burglars
does not correspond to the culture of Ponzi con artists. Yet members
of both groups aim at enhancing their prestige and reputation. Con
artists and the Swedish thieves adopt similar attitudes, for example,
spending money to show off. Therefore, perhaps the “manliness” of
taking responsibility rather than blaming others is just one deviation
between the two groups. Or perhaps the deviation from this posture
occurs only in the courts, where it might be more useful.
F. OUR ACTIONS ARE JUSTIFIED AS PROTECTION

AGAINST OTHERS WHO ARE FRAUDSTERS
Besides, everyone does it. A related form of justification that con art-
ists use attributes wrongful and bad intentions to their opponents
and accusers. These bad intentions justify unethical behavior as a
defensive measure. The attitude fits research results reporting that
when negotiators were encouraged to act unethically, they tended to
view their opponents as less ethical. Untrustworthy people some-
times view others as untrustworthy and thereby justify their own
behavior.72
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Iain Pears wrote a perceptive description of this feeling: “I walked

away slightly discomforted, which now I understand. I was deceiving
her, and she gave kindness in return. It made me very confused, until
I later learned how much greater her trickery was than mine.”73
Deceiving can make a person feel uncomfortable. But believing that
the others are deceitful, even more so than the person who has
deceived, helps overcome the discomfort and justifies unethical
actions as a defense. Defensive action can be taken before the harm is
inflicted. If a treacherous act is initiated before the other party has
done anything, the act can be justified by the assumption that the
other party would be faithless. Then taking a faithless act first is a jus-
tified defense against anticipated harm.
A similar protective justification is the argument that “everyone
does it.” If everyone does it, then one must protect oneself by doing it
too—and doing it first. Otherwise, the competitors will win.74 If the
con artist associates with others of the same view, then in their world
everybody indeed does it. Subordinates, who do not usually disagree,
also follow along doing it.
G. OUR GOOD WORKS TESTIFY TO THE LEGITIMACY

OF OUR ACTIONS
Con artists base the legitimacy of their actions on good works in sup-
porting their communities and donations to charities. Even Al Capone
used this approach. To gain support, affection, and respectability, he
distributed money among the needy and acquired a strong and loyal
following. The head of the huge Romanian Ponzi scheme Caritas was
called by some victims “Jesus,” for he lavished money on those who
sought his help, and like Capone he gave tenfold the amount requested.
Some con artists believe they were acting for the benefit of
others. For example, the executives and many employees of Equity
Funding were engaged in mass production of forged insurance cer-
tificates. At that time, Equity Funding was the darling of Wall Street.
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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
B. THE PROFILE OF THE VICTIMS: WHAT KIND

OF PEOPLE ARE THE SOPHISTICATED VICTIMS?
WHAT MAKES SOME MORE VULNERABLE TO
PONZI SCHEMES THAN OTHERS?
1. The Dark Side of Some Investors: Lacking Empathy
Toward Other Investors and Shared Greed
There are allegations that some of the money managers who invested
their clients’ money with Madoff may have realized that something
was amiss. Yet so long as they were paid, they did not inquire about or
examine the secretive Madoff, notwithstanding some red flag. In fact,
one money manager requested Madoff to make sure that none of the
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manager’s clients’ accounts would report even a single losing trade.78

What does this request imply? How could the manager make such a
request without suspecting that the investment results depended on
Madoff ’s decisions and reporting and did not reflect real invest-
ments? In another case, the SEC alleged that three senior executives
at a small brokerage firm, co-founded with Madoff, “knowingly
helped finance the Ponzi scheme and conceal it from regulators for
years.”79 Therefore, these trusted representatives of some investors
cared little about other investors from whom the money was derived.
2. Investors in Ponzi Schemes Who Suspect or Know

the Nature of the “Investment” Yet Invest
Investors who sense a Ponzi scheme but hope to gain from other
people’s investments may even recruit more investors, suspecting or
knowing that the new recruits’ money will flow to the current inves-
tors. Unless they do not suspect that their recruits are more likely to
be the losers, these investors mimic the con artists. To gain other
people’s money, they exercise persuasive techniques, learned or
innate. If the recruits are family, friends, or acquaintances, these
investors’ lack of empathy is even more pronounced.
Similarly, when initial public offerings (IPOs) are in great demand,
investors stand to gain much if they receive such IPO shares at the
initial offering price and sell them within a few days—“flip” them
over, as it is called—for a far higher price. Within these few days, the
price of the shares could rocket, and then they can “download” the
shares on other investors, who would hope to do the same to still
others. Investors anticipate that the price of the shares will fall within
a short period but they expect to sell the shares before that occurs.
For example, the first major American social media company to go
public had profits of about $16 million in 2011, and its shares were
offered at $45 a share. The share price rose very quickly to $94.25. Yet
134
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.
3. The Element of Greed

It seems that con artists, and perhaps some of their victims, are beset
by greed.82 They are driven by a desire that is never satisfied. In fact,
greedy people seek to obtain for themselves more than what is good
for them and more than is their due. They desire to take without
boundaries and without giving. They violate the social rule of reci-
procity, take more than is due to them, and do not give back anything
(or do not give back enough).
What makes people so constantly hungry? One explanation for
greed is envy and low self-esteem. Some people need to get what
others have just because the others have it. The greedy believe that by
having these things they will become different people, like those they
135
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.
4. What Drives the Victims?

Victims are victims, even if they are at fault. They all deserve deeply
felt sympathy. Yet in order to understand and learn from experience,
painful and horrendous as it is, a review of some of the studies that
136
were conducted in this area may be useful. The discussion here

draws on two comprehensive studies, performed in somewhat dif-
ferent ways, and on a few added sources. The first is a recent 2010
survey, of 402 investors in Jamaican Ponzi schemes, that produced
a model of investor types and their circumstances. Researchers
built a profile of persons most likely to be drawn to Ponzi schemes,
and they listed the factors that explained the popularity of these
schemes.84 The second is a 2006 study, far broader, that was com-
missioned by the National Association of Securities Dealers re-
garding consumer securities fraud, and other sources of research.85
The “raw materials” in this book closely support the conclusions of
both studies.
Who can predict the reliability of others? How difficult is it to
detect fraud?86 Researchers have analyzed “experimental evidence on
whether untrained subjects can predict how trustworthy an individual
is.” The 2010 researchers concluded that “naive subjects are able to
distinguish” between trustworthy and not-trustworthy persons.
You need not be an expert or well educated to sense whether
someone else is trustworthy. The ability depends on other attributes,
as the examples described in this book suggest as well. This research
on the attitudes of Ponzi scheme victims suggests that they are driven
by two strong tendencies, which render them more vulnerable to the
lure of the schemes.87 One powerful tendency is the drive to trust; it
is a tendency that borders on gullibility. The other tendency is
“heightened risk tolerance.” Additional factors may increase the
weight of these basic tendencies, among them irrational exuberance,
social pressures, and education. Each of these factors is discussed
below.
The 2006 NASD study found that, compared to nonvictims, vic-
tims are more likely to listen to a sales talk and to have experienced
more “difficulties from negative life events.” The study also found that
men victims constitute a larger group than women victims (although
137
this difference may be due to cultural conditions whereby men deal

with financial matters). Both studies found that victims tend to be
optimistic and rely on their own experience and knowledge. One
study noted that in the aggregate these victims underreport the
frauds. Additionally, both studies found that compared to nonvictims
these victims are more educated. The NASD study also compared
the victims of lottery frauds to nonvictims and found the two groups
very different. It is interesting that women are more likely to be vic-
tims of a lottery fraud, to have had more negative life events, to be
more religious, and to read materials or listen to sales agents whom
they do not know.
The two studies differ in that the 2010 survey focused on the
character of the Ponzi scam victims while the NASD study compared
the victims with nonvictims and focused on lottery frauds as well.
Nonetheless, these studies as well as the materials in this book are
quite similar in their conclusions, perhaps not surprisingly.
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.”
138
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.
139
As the cost of verification rises, the criticism of gullibility falls.

One court noted: “While . . . the [investor] could have investigated
the [story of a promoter], the means of knowledge were not readily
available to him”; therefore, his reliance was justified.93
However, gullibility alone does not mark the type of Ponzi
scheme victims. The other strong tendency of such a victim is risk
tolerance. Gullibility and risk tolerance may combine to create a
strong tendency. Such people are inclined to take more risk not only
in financial matters but in other contexts as well (as an example, they
might be mountain climbers). Thus people who take high risks in
other situations are more likely to do so when exposed to offers of
Ponzi schemes.94
B. TOLERANCE TO THE RISK OF BEING CAUGHT FOR

ILLEGAL ACTIVITIES
The degree of risk taking may be manifested by the patterns of peo-
ple’s investments. Risk takers act out their tendencies by rolling over
their interest in Ponzi schemes and investing larger amounts in these
schemes. Another example of risk taking was noted before: we found
that some Ponzi schemes suggest a “whiff ” of illegality. Researchers
likened acceptance of legal risk to the desire for exclusivity as well as
risk tolerance. In this case, exclusivity may provide some protection
from this risk through lower likelihood of being found out. It is hard
to determine, let alone measure, the balancing forces that make us
move in one direction rather than another. Yet it is a possible explana-
tion that the suspicion of illegality raises the attractiveness of the
scheme, while the lessened risk of discovery reduces the concern of
being caught and makes the scheme less attractive.
Various factors influence risk tolerance. These include, for ex-
ample, a person’s “outlook on their present personal economic condi-
tion.”95 Some researchers suggest that, at least in the United States,
wealthy people are more risk-tolerant than poorer ones. However,
140
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.
C. AN OPTIMISTIC NATURE AND OUTLOOK ON LIFE

AFFECTS RISK TOLERANCE
Investors in Ponzi schemes “tend to be generally optimistic, with the
large majority of investors expecting better personal economic con-
ditions in the future, and just over half expecting better national eco-
nomic conditions.”97 The risk exposure of these investors may
represent their desire “not to be left behind in a period of expected
widespread prosperity. Being dissatisfied with their current eco-
nomic status, such investors are willing to take significant risks in an
effort to share in the expected national prosperity. . . . Persons who
received higher returns from such schemes were willing to invest
larger sums of money in proportion to their income.”98 Scott Halford
noted that the optimists make more money, provided they take risks
with a measure of realism.
In contrast, pessimists may be more accurate. Yet they are more
prone to depression. Halford suggests that the balance is to avoid
viewing a bad occurrence as permanent and a good thing as tempo-
rary. Thus the tendency of both optimism and pessimism depends on
the effect that events have on future expectations.99 Optimists will
view a failure as temporary and will try to do the same thing again.
Pessimists will not try.
Risk tolerance may be traced to personal circumstances. It has
been shown “that single people in managerial and supervisory posi-
tions are more likely to be highly risk tolerant.”100
One reason for taking investment risk that has not been empha-
sized in this discussion is the expectation of returns. Returns draw
141
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
142
need the difference. We will resist changes in how we perceive our-

selves. Group identity serves as a source of uniqueness as well, distin-
guishing members of the group from outsiders.104 Greed, too, may be
linked to the need to be unique.105
Therefore, people experience conflicting drives. They need to be
part of a group. In fact, they are dependent on others. Yet they also
need a sense of being unique, and this drives them to search for a
balance. People want to be unique but avoid social rejection.106 They
try to act according to social norms and receive social approval, but
they desire to be special and therefore different.107 A small, special
group may provide both the feeling of belonging and the recognition
of being special.
E. THE ROLE OF EDUCATION IN RISK

TOLERANCE IS UNCLEAR
On the one hand, people with higher education can evaluate risks
better than people who are less educated. Yet higher education does
not shield investors, especially those who have a taste for experi-
menting. For example, education does not seem to undermine or
erase popular beliefs completely. A small percentage of victims exam-
ined in one study invested in a Ponzi scheme believing that the in-
vestments were safe because of the long past record of the scheme:
“The longer Ponzis are allowed to operate, the greater the perception
that they have an established track record, and greater the likelihood
that people will place their trust and their money with them.”108 As
noted before, this belief is mistaken because in Ponzi schemes the
first investors might gain, while the later investors are sure to lose. The
probability of retrieving their capital and gaining the promised profits
will depend on the chance of being wrong, the probable number of
new investors, the length of the period in which these new investors
will join the scheme, and how much money the new investors are
likely to invest.
143
Intelligent and knowledgeable professionals can fall victim to con

artists for a number of reasons. A 2006 study by NASD (now FINRA)
found that “investment fraud victims scored higher than non-victims
on eight financial literacy questions.”109 Some may be sure that their
own intelligence, and expertise in their area, can assure them of exper-
tise in other areas as well. They might believe that intelligence could
protect them from fraud, even if they have no information on the
investments.110 Some may suspect a Ponzi scheme, but rely on the
assumption that they can withdraw their money in time.
However, this attitude has serious pitfalls. Financial investments
require more than a choice between two possibilities. It has been
shown that our brain is efficient in making a choice between two pos-
sibilities but is far less adept in choosing among many alternatives.
Therefore, regardless of how smart people might be, they do not
process many possibilities quickly. Instead, they tend to rely on their
general wisdom. This may be the reason for their reliance on others as
well, as the discussion on affinity groups demonstrates. This human
tendency is the basis for the legal requirement that permits investors
who choose certain complex investments, such as variable annuities,
to rescind their purchase within a few days. This time period allows
them to withdraw from a signed obligation. The permission may also
be based on the recognition of strong, effective salesmanship.
Added to belief in one’s own brain power is the optimism that
many fairly successful persons carry. In his book Wealth of Nations,
Adam Smith noted:
The over-weening conceit which the greater part of men have of

their own abilities, is an ancient evil remarked by the philoso-
phers and moralists of all ages. Their absurd presumption in their
own good fortune has been less taken notice of. It is, however,
if possible still more universal. There is no man living who,
when in tolerable health and spirits, has not some share of it.
144
The chance of gain is by every man more or less over-valued, and

the chance of loss is by most men under-valued, and scarce by
any man, who is in tolerable health and spirits, valued more than
it is worth.111
F. A REMINDER OF THE STORIES IN CHAPTER 1: THE WAYS

CON ARTISTS MAKE THEIR OFFERS
The conclusions of the NASD Study reflect the stories outlined in Chap-
ter 1. The conclusion is that “investment fraud pitches” are extremely
varied, “tailored to match the psychological needs of the victim.”112
Another source suggests techniques that affect victims of
frauds, as were itemized in Chapter 1. Robert Prentice notes that
“sellers can influence people to believe that they want or need
things that, absent the persuasive effort, they would not buy,”
including tobacco and securities. He lists the basic categories of
influence techniques proposed by Robert Cialdini, noting that
even educated intelligent investors can be influenced by these tech-
niques, most of the time.
First, people are pressed to reciprocate. An offer of something
“free” is enticing, but it induces pressure to reciprocate (for example,
buy). Second, people approve of consistency. Once a step is taken
(e.g., buying from a broker) there is pressure to continue and be con-
sistent and commit to the seller. Even when sophisticated investors
choose a stockbroker, they have a strong desire to trust that broker,
notwithstanding warning signs to the contrary. Third, social approval
is important (following the crowd). This is generally sensible to do;
after all, if everyone does it, it must be the right way. This is one rea-
son testimonials are esteemed, especially by people similar to the fol-
lowers. Fourth, people have a tendency is to say yes rather than no,
especially to those whom they like, or who are usually attractive or
similar, who make them feel good (for example, by flattery). This ten-
dency may be the reason for successful selling to affinity groups.
145
Fifth, people pay attention to and follow others in a position of

authority. And last, as we noted, scarce things are valuable.113
G. HOW DO SOPHISTICATED VICTIMS OF PONZI SCHEMES

VIEW THEMSELVES?
In contrast to con artists, and perhaps under the pressure of social
condemnation, many victims of Ponzi schemes agree with the
general verdict against them. A study by the U.S. Department of
Justice in the late 1990s listed the emotional consequences of
fraud for victims as self-blame, shame, and guilt. Victims fear the
“societal condemnation and indifferences (the attitude that vic-
tims of fraud deserve what they get as a result of their own greed
and stupidity) and isolation (when victims suffer their losses in
silence rather than risking alienation and blame from family mem-
bers, friends, and colleagues).” A relative of a Madoff fraud victim
noted: “My uncle pulled on the heart strings of Bernie Madoff
and said please my niece is floundering, she is having a very hard
time, she’s had a terrible tragedy with the loss of her husband, will
you take her on as an investor?”114 Another person said: “I involved
all my kids in it and all my grandkids.” And another investors
noted: “I guess the shame is shame on me, for trusting somebody
that has been holding my families [sic] money for 45 years.”115
The victims’ shame is often exacerbated by lack of a support
group. They expect their family and friends to condemn them just
as the con artists do: “How could you be so stupid?” They expect
no sympathy, and no fury directed at the con artists. They feel
alone. A con artist who practiced swindles all his life and special-
ized in the sale of fake stocks noted in his autobiography that the
victims seldom complained: “They preferred to take their losses
rather than let the world know that they have been so gullible.”116
Thus the public seems to send a general message that, regardless
of the fraud, some victims could have protected themselves from
146
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.
147
5. How Do Some Victims React to the Discovery of Con

Artists by the Government?
A. THE VICTIMS’ ATTITUDE TOWARD THE GOVERNMENT
One would assume that, like victims of violent crimes, the marks of
Ponzi schemes would seek government help, or at least heed the gov-
ernment’s warnings. Not always. Charles Ponzi’s followers blamed
government interference for the demise of his business.127 This atti-
tude may prevail in connection with other Ponzi schemes, and it may
contribute to the victims’ reluctance to approach the government or
help prosecute the con artists. The deeply religious may tend to ques-
tion any other authority, including the government. Terry Greene
Sterling noted that there are always certain groups of people who
“abhor big government”: “With 16 million believers, the nation’s
largest Protestant denomination is staunchly independent . . . [and
encourages] each individual to build his or her own relationship with
God. . . . This explains why in Arizona, Southern Baptists chose to
entrust BFA solely to a board. . . .”128 There was no supervisory over-
sight in the church’s structure.129 It was trusted, while the government
was not. Faithful supporters of con artists berate the government. In
the Cornerstone case, supporters of the con artist agreed with the
founder of the organization “that they are all victims of a government
conspiracy.”130
Similarly, when a con artist’s dot com failed, investors continued
to believe in him. They demanded his release from jail so that he
would continue to produce profits or at least repay them. One in-
vestor wrote to the Securities and Exchange Commission that
keeping this man in prison was “disgraceful.” The writer “did not
understand how American laws could suppress a man like this.”131
High returns to a community may create strong antigovern-
ment sentiment. One Ponzi scheme contributed to the temporary
prosperity of the victims, and as a result the population of the
148
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.
Government officials had a different view of the bank. Investigators

who “dropped unannounced” into the bank’s office and examined the
books
were amazed by what they found. The numbered company,

offering 12 percent interest rates, had taken in about $40 million
from 400 to 500 “investors” in amounts ranging from $190 to
$2 million—and had lent most of that money, at rates of 17
percent and 18 percent, to about 1,400 borrowers for every-
thing from weekend spending money to heavy equipment
financing. . . . By recycling vast amounts of money through the
149
community over the past 10 years, Anderson and Montaldi had

kept the Burns Lake economy vibrant despite severe cutbacks
in the forest industry. What the local CIBC and Royal Bank
branches could not or would not provide, the numbered com-
pany did.132
What the investigators discovered was a Ponzi scheme in the form of a

bank. Large loans were made to the bank’s directors. “Bank 439288”—
which was its registered name—was insolvent. Yet the residents of this
small town were passionately supportive. In fact, one of them said: “If
they did commit a crime, then the people in this community are
willing accomplices. If they are found guilty, the people are guilty, too.”
In the view of the community, the government spoiled the business.
The victims’ attitude is similar to that of the players in a prohibited
game of chance who hope to win the jackpot. They are hostile to the
authorities attempting to protect them for their own good by shutting
down the game. These investors believe that, but for the government’s
prohibitions, the scheme would have continued to produce large
profits for them.
B. THE NATURE OF A PONZI SCHEME JUSTIFIES

THIS VIEW OF SOME INVESTORS
At the very least, the earlier investors will continue to benefit from
the scheme so long as new investors are recruited. The victims may be
either the winners, who have already recouped their capital and con-
tinue to receive profits from the money of later investors, or those
who believe they will be enriched if the con artist is allowed to con-
tinue his activities. In United States v. Gragg, a victim invested in the
scheme despite his knowledge that the con artist had been served
with a cease-and-desist court order.133 Trust in the con artist and the
desire to gamble and win was stronger than trust in the government
and its wisdom.
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C. THE ISSUE OF ADDICTION
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,”
151
speculation entails analysis and thinking about a decision in advance

of acting; it denotes planning. Therefore, long-term investors are
less inclined to become addicts than day traders, who rely mostly
on market movements and tend to believe in the luck of the draw.
Addiction depends on whether the actor controls the speculation
or the speculation controls the actor. Speculative activities can
become addictive when their main objective is to gain, when the
chances of achieving the objective cannot be rationally calculated,
and when the actors are unable to stop playing, regardless of possible
gain or loss.138
For example, gambling is not necessarily addictive. Addiction to
gambling may depend on the type of gratification that the activities
produce. Thus, gambling for amusement is not likely to be addictive
(after all, paying for pleasure is not considered a loss); gambling can
be a harmless entertainment.139 As one writer suggested, the “gam-
bler knows nothing about the event on which his gambling outcome
depends, because” gambling deals with the unknown. The gambler
plays for excitement.140 So long as these activities are designed to
amuse and are paid from people’s internal “entertainment budget,”
they are not addictive. Similarly, con artists’ addiction is not limited
to money. They may be drawn to the excitement of “conning” and the
success they feel at being smarter than those considered the smartest
in society. But when they crave the emotional satisfaction and cannot
control the craving, they are addicted.
Speculation need not be illegal, either. The very act of taking a risk
does not necessarily make it an illegal activity.141 But the law imposes
limits. Lotteries are legal when operated by the state, and gambling and
betting are legal when approved and licensed.142 Yet the acts of buying
lottery tickets, gambling, and speculating in the stock market are sim-
ilar to Ponzi scheme investments. Even addiction need not be il-
legal, or necessarily the exclusive province of fraud. After all, lotteries,
gambling, and trading in securities can involve addictive speculation.
152
A lottery is “a drawing of lots in which prizes are distributed to the win-

ners among persons buying a chance,” and “an event or affair whose
outcome is or seems to be determined by chance.”143
Gambling is placing a “bet on an uncertain outcome.”144 And
trading securities in the stock market is based on predicting the future
performance of the issuing company and the market price of its secu-
rities. All these activities are based on predicting a profitable out-
come, and putting money that is owned at the risk of loss. Investors in
Ponzi schemes are similar to market speculators. They bet that the
alleged business will produce enormous profits or, in the case of in-
vestors who suspect the scheme, that many additional investors will
join later, will finance the high returns for earlier investors. How dif-
ferent are they from any other investor?
However, legal and illegal speculative activities share similar fea-
tures that can become addictive.145 Speculative activities aim at a
chance for quick and gratifying results. Like addictive gambling,
lottery tickets often provide the betting results on the spot, or
within a short period. Stock speculation, as in trading securities on
the Internet, can produce gains or losses almost instantaneously.
The monthly or quarterly receipt of an anticipated large check in a
Ponzi scheme can produce a similar pleasure. A legal and legitimate
activity can become addictive if it is treated as a gamble, for example
if the choice of securities for investment is determined by the throw
of the dice.146
2. What Causes an Insatiable Craving for More ,

and Loss of Self-Control?
It seems that people can become addicted if being right about a bet
gives them a high, while the memory of being wrong about the bet is
suppressed. Instantaneous gratification, that is, the excitement of
winning, may cause some people to continue to speculate without
153
being able to stop.147 Addiction to securities investing and specu-

lating can be created by the “excitement of the markets, the thrills of
the trade. Millions gained and lost daily” and the “You can do it!”
atmosphere of brokerage advertisements and the financial media.148
Market volatility, the ease of trading by the click of a mouse, and the
excitement of winning large sums of money can induce addiction.149
This compulsion can grow as people play the markets for the wrong
reasons.150
Addiction grows with the speed of the addictive activities, such as
trading or Ponzi scheme playing. Its power increases not merely by
the chance of becoming rich but through the chance of becoming
rich quickly. The fact that the trader or gambler or con artist or in-
vestor controls the timing of the game helps create addiction. If no
outside controls limit the pleasure of the activity, addiction is likely to
grow. The pleasure is enhanced until the craving cannot be reined in.
For this reason, some activities can become addictive very quickly,
such as video poker and daily playing of the stock market.
Addiction can grow by degrees. This may depend on the extent to
which people have, or can obtain, information, and to what extent
they are masters of the outcome. The more active and controlling
people are over all aspects of the speculative activity, the less likely
they are to become addicts. For example, buying a lottery ticket can
become addictive because the buyer can only choose the ticket
number, and sometimes not even that. The outcome depends en-
tirely on the luck of the draw. In contrast, some card games may
involve skill such as memorizing the cards that were dealt or reading
the facial expressions and other signals of the other players. Poker
and blackjack games involve more skills than roulette does. This is
why these games may be less addictive than playing roulette. We as-
sume that stock trading, even when it is speculative, involves a high
level of skill and judgment. Presumably the most informed trader is
likely to make the most gainful decision.151
154
3. What Are Con Artists (and Perhaps Their Victims)

Usually Addicted To?
Charles Ponzi’s obsessive addiction was to money: getting it, spending
it, and using it to exercise and experience power.152 He confessed having
developed “an awful appetite” to buy everything in sight, and this
appetite increased with buying.153 Ponzi believed that money talks
everywhere. It is difficult to fault him as one reads of the number of
officials who helped him.154 Many con artists are similarly addicted,
and so are thieves. Money seems to have a different meaning for them
than for most people outside the criminal circle. Criminals assert that
they do not want money to control them, and yet they are not pre-
pared to live without having plenty of it.155
White-collar criminals such as fraudulent telemarketers are simi-
larly addicted to money. According to journalist Don Jacobs, their
background does not indicate low income and poverty environment.
Rather, many telemarketers come from upper-middle-class families.
As with many crimes, telemarketing offered them quick cash and a
lifestyle that included parties, alcohol, and drugs.156
It seems that addicted people love the game. Unlike other
white-collar criminals, con artists accept the law as a hindrance that is
part of their lives. It does not prevent them from continuing their
adventure. In fact, the danger of being caught and taking the risk of
illegality may be a feature of addiction. One study found that 13 per-
cent of shoplifters have admitted to shoplifting every day, and more
than half admit to stealing every month.157 It may be that the excite-
ment and benefits of financial fraud satisfy the needs of con artists,
and they cannot stop from engaging in their special kind of fraud.
Con artists are “manipulative,” that is, they exploit and maneuver
others to attain their own objectives. Yet they are less calculating in the
sense of precisely and logically figuring out the results of their activ-
ities and plans, although they may be calculating in the sense of coldly
155
scheming or conniving, or being shrewd and crafty.158 Thus one can

fit con artists into the “rational” model as well as into the model of the
irrational compulsive personality. Though they are masters of manip-
ulating others, they are the subject of their own internal self-manipu-
lation as well. They lie to others; they may lie to themselves as well. A
similar analysis may fit the victims.
4. Con Artists Are Repeat Offenders

A 1990 study found that a significant number of white-collar crimi-
nals are repeat offenders.159 “Many white-collar criminals evidence
multiple prior arrests. In the case of credit fraud, false claims, and
mail fraud violators, about 4 in 10 offenders had two or more prior
arrests, and about 3 in 10 had four or more prior arrests,” and 46 per-
cent of the credit fraud offenders have been convicted. More than
one in seven securities fraud violators had prior felony convictions, as
is true of more than a quarter of those convicted of credit fraud, false
claims, and mail fraud. The authors state that “evidence of criminal
careers can be found even within a highly restricted population of
elite white-collar offenders.”160
Barry Minkow served seven years in prison for “bilking investors
out of tens of millions of dollars through a phony carpet-cleaning
company called ZZZZ Best.” He then spent ten years as a stock fraud
investigator. Yet he did it again! In April of 2011 he pleaded guilty to
a stock fraud conspiracy.161
Let us follow the story of David and Martha Crowe at length
because the couple demonstrate the nature of repeat offenders so
well. For more than sixteen years, this couple operated pyramid
schemes involving the purchase of gold coins. Securities regulators in
North Dakota and South Dakota and Massachusetts issued cease-
and-desist orders against the pair. In early cases, the Crowes agreed to
pay a fine and cease conducting a business in Massachusetts. Then
156
they moved to North Carolina and resumed their operation. Their

activities attracted regulators’ attention in that state and “the State’s
Attorney General suggested that the [Crowe’s] company prove its
validity by paying off existing obligations before soliciting more
recruits.” The company failed, for unclear reasons, even before the
attorney general took action. The gold vendors ceased to deliver gold,
and not surprisingly investors were furious and complained daily by
the hundreds. The Crowes moved to Kentucky without reimbursing
the roughly five hundred victims, who claimed losses of $370,000.
On January 22, 1992, the Crowes incorporated a Delaware com-
pany based in Kentucky. Its operations lasted four years. The com-
pany offered investors a plan similar to the Dakotas and Massachusetts
investment plans. In April 1992, the Crowes received another cease-
and-desist order. The court found that the program “emphasized
recruitment of clients, not sales of products, and thus constituted an
illegal pyramid scheme.” In October 1993, the couple settled with the
state, agreed to pay restitution to the corporation’s participants, and
submitted to a permanent injunction. Then they pleaded guilty to
charges of false advertising in another criminal case and received a
suspended sentence.
Injunctions and a suspended sentence mattered little; the Crowes
were back in business, offering investors a similar plan. A lawyer
whom they consulted warned them that their plan was illegal. David
Crowe responded that this was none of the lawyer’s business. At this
point the story becomes tediously repetitious. In February 1995
came another cease-and-desist order from North Dakota and a
$40,000 civil penalty. Montana, Minnesota, and the federal govern-
ment entered the enforcement arena. The Crowes’ company records
were seized and the offices were finally closed. As of March 1995,
ninety-six thousand participants had paid $43 million to the com-
pany. The company paid participants $5 million in commissions. Its
profits from the sales of 12,628 coins produced $552,620.
157
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
158
caught or if they disappear while awaiting sentence. Con artists who

operate Ponzi schemes and are caught seem to have few resources
left. This may be one reason they continue the game,165 although it
does not seem to be the only one. The love of the game, peppered
with risk and sprinkled with optimism, may suppress all thought of
planning, or even concern for the future.
Public opinion and attitude plays an important role in the lives of
most individuals. Therefore, exploring the players in Ponzi schemes
is incomplete without examining how the public views the con artists
and their victims. This subject leads us to the next chapter.
159
Chapter 5
How Does The Public View the

Con Artists and the Victims?
A . AMERICA IS AMBIVALENT ABOUT ITS

CON ARTISTS
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.
160
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
In contrast, the legitimate businessperson who turned to be-

coming a con artist should enjoy more benefit of the doubt as to
bad intentions. There may be uncertainty as to whether this per-
son intended to defraud others; perhaps the person deserves sym-
pathy. After all, desperate circumstances could have driven him or
her to fraud.
Yet this con artist invokes far less public affection and admira-
tion. It is as if people are saying, “We expected better of you.” It may
well be that people feel more betrayed by honest persons gone
wrong than by those who are incorrigibly bad. People might not
identify with genuine fraudsters, but they may sense more affinity
to legitimate businesspersons. If these businesspersons go astray,
people may feel betrayed by their own kind. This sense of betrayal
reflects the disappointed trust that we want to feel toward legitimate
businesses, and it may explain why we are far angrier at Ponzi
schemes that affect numerous people through public distribution
of shares than at those schemes affecting fewer people in face-to-
face relationships between the con artists and their marks. This may
be the reason Bernard Madoff, wrapped in and hiding behind a
legitimate brokerage and advisory service business, is not viewed
with the same ambivalent admiration we bestow on other con art-
ists. Our anger may reflect concern, or even fear, for our own
well-being, and for the system on which the safety of our life sav-
ings may depend.
Yet even Madoff, who robbed many who trusted him with their
life savings and who stole from not-for-profit-organizations money
destined for good social causes, has not received the kind of hatred
and fear with which those who use physical force or violence are
viewed. Madoff might indirectly publish a book that people will buy
without feeling revulsion in touching it, and the money they pay
might bring him a softer life in prison, even though this is not the
buyers’ intention.
161
1. Con Artists Who Defrauded Small Investors Are Viewed

Somewhat Differently
Though the public views con artists with indulgence for defrauding
wealthy and sophisticated victims, this indulgence turns to rage
when the victims are small and unsophisticated investors. Small in-
vestors are not blamed for falling prey to con artists. They had no
chance; the match was uneven and unfair. Small investors are true
victims who could not fend for themselves. Nonetheless, even with
respect to small and unsophisticated investors, the public view of
such con artists is somewhat ambivalent. After all, those victims
could ask and consult others. The attitude of the public in this case
is an expectation of self-protection. This may be the attitude in the
United States, but not necessarily in other countries. Although in
the United States independence, self-protection, and a strong belief
in competition (and let the best person win) are exalted personal
features, there are countries in which a prohibition of taking unfair
advantage of the weaker and the duty of fair dealing are far stronger.
In the United States the freedom to invest is coupled with responsi-
bility to do one’s homework and make reasonable decisions. If
one does not understand the deal, one should not make the deal.
In other countries the duty of people to deal fairly with others is
heavier.
Whether America’s public reactions to con artists and their vic-
tims have changed, in light of the financial scandals of 2002 and 2008,
is unclear. The suggestions outlined above are not the product of me-
ticulous research; they are topics for reflection and inquiry. Too many
victims were unrealistic and gullible in the years of the market bubble.
For example: one Ponzi scheme drew $8 million of investments that
were described as safe. The court held that the investors had a duty to
investigate, “given the suspicious circumstances and the plaintiffs’
[investors’] savvy.”1 Could the “rational” view be that we should not
162
condemn con artists who take advantage of market euphoria to

benefit at some risk to themselves?
2. When Con Artists Mimic the Wealthy Power Elite,

They Live Like the Wealthy Power Elite
The view of corporate managers as Ponzi scheme con artists has var-
ied over the years. In 1980, for example, Clinard and Yeager wrote:
“Corporate crime is indicative of the distribution of power in our
society . . . . Corporations are seldom referred to as lawbreakers and
rarely as criminals in enforcement proceedings. Even if violations of
the criminal law, as well as other laws are involved, enforcement attor-
neys and corporation counsels often refer to the corporation as
‘having a problem’: one does not speak of the robber or the burglar as
having a problem.”2 Since the 1980s, this attitude changed somewhat
but was later revived. After the debacle of 2008, the attitude changed
somewhat again.
The danger of viewing con artists as reflecting the power elite is
still strong. Generally people do not identify with burglars, robbers,
and violent criminals; nor do they identify with petty thieves. But
white-collar criminals of the con artist variety are far more easily
identified both with and by the power elite they associate with and in
whose ranks they appear. As with the black sheep of the family who
has gone astray, they are family nonetheless. The ambivalent con-
demnation of con artists is reflected by their associates. Those who
are committed to financial leadership recoil from condemning even
mimics of this leadership. The mimics’ violations are ignored, for-
given, and viewed with “understanding.” One example concerns the
leaders of large and prestigious financial institutions, and the devel-
opment of networks for acquiring insider information.3
The number of cases that have been—and are still being—
brought against corporate management and money managers since
163
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
3. The “Barren and Destructive Creators”: The Benefits of

Creative Harm
Con artists, and perhaps some of the suspecting investors, feeder
organizations, and others who help them, are creative and innova-
tive. Lewis Hyde wrote that people can shape the world, but with
“shapeliness comes a set of rules meant to preserve the design. ‘Do
not steal. Do not lie. Do not blaspheme . . . Behave yourself. You
should be ashamed. . . .’ Whoever has the wit to break these rules,
whoever puts the guards to sleep, slips across the threshold and
floods the sacred meadows with contingency, whoever steals the
boundary stones of clear distinction, that person strips design of
its protective glamour.”5 Hyde notes that con artists are barren cre-
ators. They are creative, but not productive. Like mythological
tricksters, they “are ridden by lust, but their hyperactive sexuality
almost never results in any offspring.”6 The mythological trickster
is described as self-contradictory, as a “creative idiot” and “wise
fool.”
Yet tricksters do not only break barriers; as they cross existing
boundaries, they invent new boundaries as well.7 Though they fraud-
ulently implement new ideas, these ideas can then be selectively cho-
sen to benefit society. For example, Michael Milken manipulated the
164
securities markets and violated the prohibition on insider trading. Yet

he left a legacy of “junk bonds,” which became an acceptable means
of financing. When all was said and done, he helped break the
shackles of familiar forms of financing. Before his time, issuance of
high-risk bonds was not an acceptable form of financing. He showed
that they worked, and he made them acceptable. His disdain for the
law may not have been necessary to introduce his invention. More-
over, after he served a two-year prison sentence for racketeering and
fraud, he “helped broker a $1.35 billion investment in Rupert Mur-
doch’s News Corp. and advised MCI in other ways, earning himself
$42 million.”8 In addition he “launched the Milken Institute Global
Conference, ‘where ideas are born, markets analyzed and networks
created.’”9 No doubt about it, he is a very able man. He may not have
been barren.
However, even though con artists put the existing order under
sufficient and continuous pressure for reevaluation, they endanger
society as well. Like cancer cells that do not follow the structural
rules of the body, con artists do not follow the social rules of the body
politic. A body can tolerate some abnormal growths, but if cancer
cells continue to spread and play havoc with the structural rules, the
body will die.10 If con artists spread over the population, the health of
the social body is endangered.
4. Con Artists Can Be Corrupting Teachers

In addition, some con artists are inclined, and have the ability, to
teach others how to defraud. Through their efficient communication
they reach not only a vast number of victims; they also reach poten-
tial con artists. Jerome Schneider was able to communicate effec-
tively in writing, so he published a number of books. One is entitled
Hiding Your Money: Everything You Need to Know About Keeping Your
Money and Valuables Safe from Predators and Greedy Creditors. The
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title of another book is The Complete Guide to Offshore Money Havens,

Revised and Updated 3rd Edition: How to Make Millions, Protect
Your Privacy, and Legally Avoid Taxes. Another variation on the same
theme is Using an Offshore Bank for Profit, Privacy and Tax Protec-
tion.11 Schneider was indicted by a grand jury for conspiracy to
defraud the United States, wire fraud, and mail fraud.12 His co-
conspirator, Eric Witmeyer, pleaded guilty to tax evasion con-
spiracy, having promised to cooperate with the prosecutors.13
Schneider has had interested readers. As Christopher Albert of
the U.S. Attorney’s office in Boston mentioned in his talk “Tech-
niques to Detect and Recover Hidden Assets,” one of Schneider’s
books was found on the bookshelf of a lawyer, Morris Goldings,
who was convicted of money laundering.14 These people create a
following.
The destructive consequences of pyramid schemes are social as
well as financial. One English publication noted that “[o]n the Isle of
Wight, family member has turned against family member, and neigh-
bour against neighbour in the quest for a magic formula which can
turn £3,000 into £24,000. Banks have had cash shortages.”15 The op-
erator of the scheme required all payments to be made in banknotes
that cannot be traced. The publication continued:
. . . Women Empowering Women (WEW) scheme. Far from

being an act of gender advancement, it is a classic pyramid which
purports to enrich everyone even though these plans always
take cash from the many to give to the astute few. It is not even
confined to women—men have taken some leading roles and
hoovered up much of the cash. . . . [These schemes have appeared]
in Glasgow, south Wales, Swindon, Surrey, Leicester and south
London. But on the island itself, WEW has already produced
so many £3,000 losers that they are trying to recoup their defi-
cits—often their life savings—by setting up a new pyramid to
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suck in fresh cash. This week, the Community Investment Club,

based in a shopfront in Newport, promised via details in the win-
dow to turn £100 into £88,300 but did not mention that one
£88,300 winner requires 882 losers. This “club” is open to both
sexes.
The public was warned by the authorities, but it is unclear whether

the warning was effective.16
B. HOW DOES THE PUBLIC VIEW THE VICTIMS ?

1. With Few Exceptions, People View the Victims of
Con Artists Differently Than They View the Victims
of Violent Crimes
Almost invariably, the first reaction of people at the mention of Ponzi
scheme victims is to blame the victims. The victims of risky investing
are deemed “greedy” because they are drawn to enticing offers that
are too good to be true; they are gullible and stupid because they
ignore investment risk and the risk of possible fraud. Therefore the
victims got what they deserved.17
This reaction is similar to the reaction toward rape victims, who
(so it is said) happened to visit a bar at night or who are viewed as
too pretty and sexy for their own good. It is their fault that they
attract men and entice them into committing rape.18 However, in the
context of investments, not all victims are treated alike. One consid-
eration in judging and differentiating among victims could be the
nature of their relationship with the con artist. Mixing business with
friendship reduces the arm’s-length relationship with the solicitors.
Even though people may seek such a mix, they condemn it when
friendship blinds the victims to the nature of the con artists and their
offerings. Because the relationship between con artists and their
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victims is important to our understanding of the public’s judgment

of the victims, we digress somewhat and deal with this relationship
here.
In the “friendship context,” two reasons may underlie social con-
demnation of the victims. One reason is, as we have seen, that the
victims got what they bargained for. Emotional gratifications are not
free. The victims’ losses constitute payment for what they received
(in hope, excitement, and sometimes money). After all, they should
not have expected to receive these benefits without paying for them.
The victims have nothing to complain about. Victims may be con-
demned because they fell for false friendship and false appearances.
Rightly or wrongly, it may be assumed that one can easily uncover
false expression of feelings.
2. A Related Reason for Condemning the Victims Is That

They Did Not Do Their Homework
The victims failed to examine what they were supposed to examine:
the transaction itself. First, those who lost their own money should
not complain. They should know better than fall for the proposed
investments. Thus, in one case, sophisticated victims of a Ponzi
scheme lost their claims against the schemers because the investors
failed to make inquiries they were capable of making.19
Second, representatives of institutions and others who lost other
people’s money are condemned even stronger for having failed to do
their job for which investors or employers have paid them. These rep-
resentatives neglected to evaluate the transaction carefully. Although
the individual victims neglected to take care of themselves, the insti-
tutional representatives are more blameworthy for having failed to
take care of clients who trusted them to take care of the clients’ assets.
A similar distinction appears with the harsher judgment of legitimate
businesses that find themselves in dire straits and “backing into”
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Ponzi schemes, compared to the more tolerant judgment of those

who started and ended as con artists.
The following cases demonstrate sophisticated investors’ follies.
Crigger (a sophisticated investor) was approached by a man
called Mason in January 1995. Mason offered to Crigger an invest-
ment in a corporation named Rayvon “as a safe investment with a
guaranteed return of principal and an assured income stream of six
to seven percent a month” (court’s emphasis). Mason explained that
this surefire arrangement was based on a hitherto undiscovered
arbitrage opportunity that defendants had identified: Rayvon would
use one-year U.S. Treasury bills as security for a loan from a bro-
kerage firm (here, Fahnestock), the proceeds of which they would
use to buy and sell certificates of deposit (“CDs”) to banks in several
countries; profit would be generated by arbitraging the spread in in-
terest rates of the CDs. Crigger was assured that his money would
be repaid because it would be held in a brokerage account under
instructions “that his investment would not be removed from the
account and that Crigger could seek the return of his funds at any
time.”
The next month, Crigger invested $3 million in Rayvon. He
received no disclosure materials and the brokerage instruction were
not so reassuring. They gave Rayvon control of Crigger’s account and
did not ensure repayment of his investment of $3 million, promising
“only that he would receive the ‘proceeds’ from the sale of the Trea-
sury bills—i.e., what was left in his account after all the buying and
selling of the CDs.” Crigger did not make any independent inquiries
or seek any advice before making the investment. In fact, he and
other investors were prevented from trying to verify the story or di-
rectly contacting the brokerage firm that held his account. If he did
that, he was told, he would be “‘automatically disqualified’ from par-
ticipation. Crigger and other investors admitted in their testimony in
court that the promises of these enormous profits were “too good to
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be true,” and “pretty amazing.”21 The court denied their claims,

holding that these investors were not defrauded because they recog-
nized the signals of fraud but did nothing about it.22 In another case,
it was hard to sympathize with investors who paid for a promise of
profits up to 4,000 percent.23 In the year 2000, such profits are not
realistic.
Therefore, sympathy for the victims of a Ponzi scheme may dry
up if it seems the victims suspected the scheme and suspected that
their gain would come from the investments of later investors. Per-
haps these victims share some of the characteristics of con artists and
adopt the cons’ view of the world. If such investor-victims invested
early enough, they would indeed gain from the money of those who
invested after them. One could view the cons and these “victims” as
engaged in a joint venture.24
C. IS THERE PROTECTION AVAILABLE FOR

SOPHISTICATED POTENTIAL VICTIMS?
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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diversions, feelings, excitements, and fascinations, these elements are

quite easy to identify. They earmark the Ponzi scheme. Any one of
them should raise a danger sign—a red flag.
1. Red Flag : A Very High Return at Low Risk

Borrowers and issuers who promise extremely high returns are likely
to default or fail. The offer to pay very high interest sends a signal of
financial stress and need. It also suggests that the borrower or issuer
does not care about the level of interest he must pay because he does
not intend to pay any amount. Not just the interest but the investor’s
capital is at great risk. Therefore the promise of high return spells
high risk. If high return, low risk are offered, then one part of the
promise is likely to be a lie. It should raise a red flag.
Even if we believe there is no such thing as a free lunch, some
lunches may be literally free (with the salesperson, as a come-on),
although the price covers the salesperson’s cost. But generally, high
return and low risk do not go together. To be sure, in Ponzi schemes
the risk does not reside with a business, because there is no business.
The risk is that investors may not be told the truth about the use of
their invested capital and the source of the returns. In most cases, high
return and low risk is a contradiction in terms, and belief in such a pos-
sibility is unreasonable. No stories, emotions, good relationships, and
friendships should trump the strong signal of danger that high returns
and low risk emits. This red flag does not constitute expert advice.
Finance and business today are too complex and too time-consuming
to truly know, unless one is devoted to acquiring expertise on the topic.
Therefore, rather than rely on one’s understanding (unless really an
expert), it might be desirable to seek a second opinion to determine
whether the combined high return and low risk is trustworthy. When
an offer looks exceptional, the best thing may be to stop and make
no decision, and then seek a reliable, disinterested, expert opinion.
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2. Red Flag : The Mystery Source of the Higher Returns

The second signal of a Ponzi scheme is that the purported profits
come from a business that is not verified by the con artist and that it
would be costly for investors to verify. Regardless of how rational and
convincing the sellers’ reasons for secrecy are, the facts wrapped in
secrecy remain unknown. In addition, one proven fact does not prove
others that remain unknown. Lack of information raises a red flag.
Many a wise investor has advised time and again never to invest in
anything that one does not understand and does not know enough
about. The wise investor recognizes a red flag.
3. Red Flag : Continuous Offerings of Obligations

Although financial institutions engage in continuous fundraising
(offerings of their obligations or those of others), other businesses
hardly ever do so on a regular, short-term basis. If the purported busi-
ness is not a bank, insurance company, mutual fund, or the like, the
fact that the promoters are continuously offering their securities to
the public should signal danger. If, in addition, the existence of the
proposed business is not verified, and if the promoters offer ex-
tremely high returns, the signal becomes a hot red flag indeed.
Enron Corporation, for example, issued its shares continuously.
Since it did not purport to be redeeming shares, the question should
have been asked, What does the corporation use the ceaseless flow of
capital for? In fact, the answer would have illuminated the fraud. The
corporation used its own securities as collateral for its own obligations.
In fact, it did not even produce the shares but just promised to produce
them if it failed. Enron’s design was not a classic Ponzi scheme, but it
contained the same ingredients. The transaction appears to involve
two parties: the corporation’s promise and a second party. In fact,
there is only one party: the corporation. Its obligations were backed
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by a collateral of its own obligations, although of a different type. There

was a single note in the financial statements that might have pointed
the way to further research. But no one asked. The imponderable
design should have raised a red flag for investors.
4. Red Flag : Con Artists’ Activities Outside

the Legal Protections
Ponzi schemes involve offering securities or investment advice. These
are regulated activities. Unsophisticated investors may not know the dif-
ference between a public offering, which requires registration with the
SEC, and a private placement, which requires provision of information
but does not pass the scrutiny of government officials. But sophisticated
investors do know or should know the difference. If they know, they
should note that the information is not provided to them as it is in other
cases. Absence of legal compliance should raise a red flag.
5. Other Red Flag Signals

In addition to the nature of the scheme clearly signaling danger, there
may be surrounding circumstances that add reasons for caution.
First, there may be warnings from insiders who should know. To be
sure, the con artists who manage the business are persuasive in calm-
ing excited investors, and in convincing even professionals. Yet if pro-
fessionals, and especially private sector actors who serve as verifiers
of information for public investors, receive warnings from insiders
(or outsiders), they should take heed. The warnings can come from
employees who resigned and who then contact an adviser bank and
corporate lawyers.25 The warning can come to management from
insiders, as in the case of Enron, or from employees who left the cor-
poration and contact reporters and analysts to tell the story of the
fraud.26 The recipient of such information should treat it as a red flag,
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especially if it comes from insiders, regardless of management’s

response. The more successful the corporation, especially if its rise is
fast and exceptional, the higher should the offer raise a red flag.
6. Separating Business, Emotion, and Faith

Investors would see a suspicious scheme more clearly if they did not
mix their business decisions with nonbusiness matters, such as reli-
gious and personal relationships or the attraction of a mystery. The
mix can be deadly because personal relationships, religious influence,
and similar influences mute the person’s focus on the business and
reduce diligence while heightening reliance and trust. Salespeople
often seek personal relationships with potential and existing clients.
This is not to say that they mean to mislead. But it does mean that an
investor should be somewhat on guard, especially if the salesperson
is pressing for a closer-than-usual relationship. A salesperson who of-
fers and seeks a personal relationship should raise a red flag. The offer
may be genuine, but it might not be.27
7. Advice to Investors as Protection Against

Affinity Scams Is Similar
The “don’ts” include making an investment one does not under-
stand, or making an investment solely on the recommendation of
people you know through an organization, religious, or ethnic
group to which a person is a member, as those people may already
be victims. Be well aware that if some investors receive a return this
does not mean all investors will be so fortunate. The famous “If it’s
too good to be true, it probably is!” is an extension of the admoni-
tion that all investments involve risks, especially if accompanied
by a promise of a very high return. It is also a warning against in-
vestments that are open to a select few or that one is asked to keep
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confidential. Investors should ask for documentation. Fraudsters

do not like to leave a paper trail; honest people do not mind doing
that. Investors should ask for explanations and reject any accounting
for why they are not forthcoming. Investors should take time to
make a decision even if they are hard-pressed to quickly seize a
once-in-a-lifetime opportunity.28
Significantly, similar red flags cover specific types of fraud. The
Securities and Exchange Commission published a list of signs of
banking-related investment frauds.29 These danger signals include ex-
cessive guaranteed returns, fictitious financial instruments, extreme
secrecy, and exclusive opportunity. There is nothing new in this list. It
could apply effectively to other stories of Ponzi schemes.
In sum: Is it really difficult to identify a potential Ponzi scheme?
After identification, is it really difficult to determine whether the
scheme is in progress by discovering the real risk, by seeking informa-
tion about the true source of the returns, and by verifying the offered
information?
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Chapter 6
The Legal Aftermath
A . COLLECTING THE ASSETS AND MEDIATING

AMONG THE VICTIMS
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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T H E L E G A L A F T E R M AT H
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?
C. WHO COLLECTS THE REMAINING ASSETS?
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
D. WHO, AMONG THE “HELPERS” OF CON

ARTISTS, MUST PAY ?
1. Who Helps the Con Artists?
Members of the professions such as lawyers and accountants can, and
sometimes do, bestow credibility on con artists and their ventures.5
There are professionals who act as agents of con artists (knowingly or
unknowingly) and can induce people to invest in the con artists’
schemes.6
If such professionals are initially unaware of the nature of the
scheme, they usually discover it later. On discovery, some depart and
avoid any contact with the con artist. Others might continue to be
involved, perhaps because they need the money and perhaps because
they hope to extricate themselves from liability later, by pleading
ignorance, as one lawyer has done.7
Banks can lend credibility to con artists as well. In the case of
Connecticut National Bank v. Giacomi, a bank approved a loan to a con
artist’s business.8 The bank’s approval sent investors a powerful signal
that the con artist’s business was creditworthy, on the assumption
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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.
2. What About Suspecting Helpers?

Assume the employees of a financial institution such as a bank know
what is going on in some of the bank’s accounts, and they tell a
number of their select customers to avoid investing with the con
artist. Assume further that, notwithstanding their suspicions, the em-
ployees continue to serve the con artist with respect to his or her
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banking needs. Do these employees and their institutions have a duty

to alert the customer-victims, or potential victims, or notify govern-
ment agencies of their suspicions?
Generally, the answer is no. Institutions may suspect that a cus-
tomer is conducting a Ponzi scheme, but institutions such as banks
generally do not owe a duty of protection from fraud perpetrated by
the institutions’ customers.13 Yet even though financial institutions
are not the financial police, their position allows them to indirectly
offer financial assistance to fraud. The line is not easy to draw, and it
is being litigated.14
A similar question with a somewhat different answer is posed by
feeders to con artists, especially if they richly benefited from invest-
ing their clients’ money with the con artist. Some of these feeders
are the institutions (including advisers) that channel customers’
money to the con artist, sometimes on their own initiative, and
sometimes on the clients’ directives. In both cases, feeders who
acted as advisers to the clients may bear responsibility for failing to
admonish their clients that the con artist’s offers are too good to be
true, or failing to examine the con artists’ investments, accounting,
and custodial services before recommending or investing their cli-
ents’ money with the con artist.
These feeders are fiduciaries required to serve their clients hon-
estly and well. They may be in a more precarious legal position than
banks that shelter the con artists’ money because banks generally do
not serve the investors as trusted fiduciaries of their customers, while
feeders, being investment advisers or money managers, usually do.
In July 2011 Irving Picard, the trustee liquidating Madoff ’s assets,
announced a settlement to the tune of $1 billion with a group of
Madoff ’s feeders. The settlement covered “more than a dozen domestic
and foreign investment funds and their affiliates” and needed “approval
of the U.S. Bankruptcy Court for the Southern District of New York.”
In addition, Picard “settled with a former chief executive associated
180
with” a large money management company that operated “the second-

largest Madoff ‘feeder fund’ group.” These operations as well as the liq-
uidations by the SIPC and the SEC’s involvement and oversight of
liquidation, will be evaluated by Congress.15 In addition to feeders,
there may be friends with whom the con artists have “parked” much
money for free or for payment. Thus, trustee Picard reached an
agreement with the widow of one of Madoff ’s deceased friends for a
repayment of more than $7 billion.16 And then there are friends who
merely received gifts that the rich give to the rich. The question is:
under what conditions should these friends return their gifts?
E. HOW TO DIVIDE THE REMAINING ASSETS?
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
181
adequately proven, may be recovered regardless of the customers’

good faith.”17 Therefore, money that investors paid can be claimed
(absent bad faith). Similarly, investors may retain the money that was
repaid by the con artist.
Further, usually creditor-investors may not keep money the
debtor (con artist) gave them within ninety days before the bank-
ruptcy petition was filed.18 Such a payment would be considered
fraudulent (unless the money was made in payment for an ongoing
business). This rule can be traced to Charles Ponzi’s bankruptcy, and
a Supreme Court decision in 1924:
When news of [Ponzi’s] insolvency was published in the paper,

the lenders [creditors] rushed to get repaid. Shortly thereafter, a
petition in bankruptcy was filed. The trustees then brought an
action against the lenders to recover the payments made shortly
before bankruptcy as unlawful preferences. When the trial court
and the appellate court dismissed the trustees’ action, they filed
a petition for a writ of certiorari. The Supreme Court held that
the payments to the Trustee should recover the payments to the
creditors.
A preference to a creditor should be avoided when the creditors could

reasonably believe that the payment gave him a greater percentage of
his debt than the bankrupt’s other creditors of the same class.19
So it would seem that those victims who escaped with their
money more than ninety days before the bankruptcy filing may keep
their money and the profits the con artist gave them.
Well . . . not exactly. One court held that a gift of stolen money
cannot vest rights in the recipient even if the gift was made before the
ninety-day cutoff point.20 Stolen money does not change its nature by
transfer. It remains stolen money, and a thief cannot bestow owner-
ship that the thief does not have. Therefore, with a few exceptions,
182
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
183
In addition, some courts have limited payments to victims who

were negligent or should have known that the con artist’s offers were
too good to be true. There are arguments that attacked the equitable
basis for precluding victims from collecting what is due to them
because they were “negligent or worse” with respect to the existence
of a Ponzi scheme.26
What about victims who “smelled a rat” and decided to withdraw
their money after collecting the profits? What if they suspected that
the money they received was stolen? What if they knew that they
were receiving stolen money? Might they be not entitled to any
amount, not even the money they gave the con artist? After all,
money is fungible. What they gave the con artist is not the money
they received from the con artist upon withdrawal. That money may
be stolen as well. On the one hand, we want people to be vigilant and
protect themselves against fraud. But on the other hand, what if that
protection results in receiving stolen money?
When one Ponzi scheme collapsed and the con artist was con-
victed, an investor company claimed some of the con artist’s assets as
a “purchaser” who received the property in “good faith and for value.”
The government argued that the investor company had reason to
believe, or could find out by conducting a reasonable investigation,
that the property was subject to forfeiture. Under bankruptcy law, the
court determined that the transfer from the con artist to the investor
was fraudulent and could not have been an honest purchase for value.
This investor had to “wait in line with the rest of the investors that the
[con artist] had duped.”27
Some cases reach a compromise. In one case the court balanced
the equities among the defrauded investors. The plaintiff in this case
was one of thousands of investors in a Ponzi scheme that promised
investors a 20 percent return in ninety days. The investor was
requested to return a portion of the payments he received and
184
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
185
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
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
What social factors feed Ponzi schemes? Perhaps these factors

arise with “market exuberance” and bubbles, and come to light, like
mushrooms popping up after the rain, with the crashes. Perhaps
Ponzi schemes percolate as many people become greedy, following
other people’s unbelievable rise of wealth. In a country where equality
is the guiding motto, why should some people have private airplanes
and homes all over the world, while others cannot make ends meet?
Perhaps the schemes feed a quest for self-satisfaction rather than a
search for strength in self-limitation. Recognizing that truth, trust,
and honesty are indeterminate, and realizing that people follow many
routes with different measures of truth and honesty, we may conclude
that “a little dishonesty” will always be there. So a little dishonesty is
acceptable or even justified.
Here lies our greatest danger. A society that accepts a little dis-
honesty as a way of life is headed toward deception and abuse of trust
on a grand scale. Because con artists resemble us, the true danger is
that we might become like them. Knowing that fully self-enforced
honesty cannot be achieved does not mean that accepting a little
fraud, deception, and just a bit of breach of trust is the way to go.
Some people believe that the criminal justice system ought to
protect them from fraud. Others believe that once fraud has occurred,
the criminal justice system can do very little.1 It is unclear whether
potential prison sentences deter addicted con artists. Nonetheless
the frauds that were discovered after the crash of 2008 have shaken
the public, regulators, and Congress. Con artists are discovered and
jailed. The Securities and Exchange Commission is vigorously pur-
suing perpetrators of securities fraud. But no one believes that this is
enough to stem the tide of fraud.
Some people suggest that the best crime prevention is investor
education. Unlike robbery, investors can say “No!” to suspicious
investments.2 Yet this education has been tried for years, without suc-
cess. Who wants to read copious disclosure documents and evaluate
189
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
Having paused, notwithstanding the pressure and the attraction

of an investment proposal, we will be safer. We might lose a good
opportunity but avoid a disastrous investment. Knowing what draws
us, we will be more cautious, more questioning, and more skeptical.
This approach does not necessarily turn us into suspicious and mis-
trusting persons. But it helps us remember the power of an enticing
story and captivating people. It can raise our awareness of the appeals
that induce hasty and risky decisions. This awareness can help us
become wiser—and in the long run wealthier.
191
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.
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
market funds; he pretended to invest in genuine money market funds; and he

issued fraudulent promissory notes”).
12. Binyamin Appelbaum and David S. Hilzenrath, SEC Didn’t Act on Madoff Tips;
Regulator Was Warned About Possible Fraud as Early as 1999, Wash. Post,
December 16, 2008, at D01, LEXIS, News Library, Wpost File.
13. Transcript: The Madoff Affair, Frontline, http://www.pbs.org/wgbh/pages/
frontline/madoff/etc/script.html (last visited February 22, 2012).
14. Some authors noted that Madoff ’s scheme was unique. See Richard Posner,
Bernard Madoff and Ponzi Schemes—Posner’s Comment, Becker-Posner
Blog, December 21, 2008, http://www.becker-posner-blog.com/2008/12/
index.html (last visited February 22, 2012); Diana Henriques, Madoff Scheme
Kept Rippling Outward, Crossing Borders, N.Y. Times, December 20, 2008, at A1,
http://www.nytimes.com/2008/12/20/business/20madoff.html. But another
author disagrees; see Alexander J. Burakoff, Madoff ’s Fraud—a “Ponzi Scheme” or a
“Madoff Scheme”—The Answer Lies Somewhere in Between: A Classic Ponzi Scheme
with a Few Twists (February 2009) (paper written by a Boston University Law
School student with the author; unpublished manuscript, on file with author).
15. Erin E. Arvedlund, Don’t Ask, Don’t Tell: Bernie Madoff Is So Secretive, He Even
Asks His Investors to Keep Mum, Barron’s, May 7, 2001, at 26.
16. Diana Henriques, Madoff Scheme Kept Rippling Outward, Crossing Borders, at A1,
at Ch. 1, n. 14.
17. Joe Nocera, Madoff Had Accomplices: His Victims, N.Y. Times, March 13, 2009,
at B1.
18. Alistair Barr, Madoff ’s Rise Fueled by Leverage, Controversial Fees, Market-
Watch.com, December 18, 2008, LEXIS, News Library, Arcnws File.
frontline/madoff/etc/script.html.
20. M. Corey Goldman, What Were They Thinking? Institutional Investor
(America’s Edition), February 2009, LEXIS, News Library, Arcnws File.
21. Portfolio Staff, Wiesel Lost “Everything” to Madoff, Portfolio.com, February
26, 2009, http://www.portfolio.com/executives/2009/02/26/Elie-Wiesel-
and-Bernard-Madoff/#ixzz18mUpirD9 (last visited February 23, 2012).
22. Diana Henriques, Madoff Scheme Kept Rippling Outward, Crossing Borders, at
A1, at Ch. 1, n. 14.
23. John P. Wise, “20/20” Interview: Madoff ’s Former Daughter-In-Law Drops Bomb-
shells (October 22, 2011), http://www.wisn.com/r/29559390/detail.html
(last visited February 23, 2012); Exhibit A, http://online.wsj.com/public/
resources/documents/madoffclientlist020409.pdf (last visited Feb. 21, 2012)
(list of clients). http://www.forbes.com/2009/02/05/bernard-madoff-bil-
lionaires-business-billionaires-0205_madoff.html.
24. Peterson v. McGladrey & Pullen, LLP, No. 10 C 274, 2010 U.S. Dist. LEXIS
117018 (N.D. Ill. November 3, 2010), unpublished opinion (footnote omitted).
25. State v. Schneider, 148 Ariz. 441, 443 (Ct. App. 1985).
197
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.
Cir. May 7, 1998).
198
N OT E S TO PA G E 2 6
41. Barbara R. Rowe, Ponzi Schemes, Utah State University Extension

Financial Fitness Fact Sheet, FL/FF-05 (February 2000).
42. United States v. Londe, 449 F. Supp. 590 (E.D. Mo. 1978).
43. United States v. Munoz, 233 F.3d 1117 (9th Cir. 2000).
44. United States v. Farris, 614 F.2d 634 (9th Cir. 1979).
45. United States v. Anderson, 993 F.2d 1435 (9th Cir. 1993).
46. Alberta Securities Commission Re: Mid West Marketing Group Ltd. Paul
Dennis Charbonneau et al., Canada NewsWire, November 6, 1997, LEXIS,
News Library, Arcnws File.
47. Singh, Fool’s Gold, at 1, at Ch. 1, n. 39. N. R. Kleinfield, Unraveling Puzzle of L. I.
Car Dealer Reveals Layers of Personal Mystery, N.Y. Times, April 19, 1992, at A26.
48. Kleinfield, Unraveling Puzzle, at A26, at Ch. 1, n. 47.
49. United States v. Weiner, 988 F.2d 629 (6th Cir. 1993).
50. Morof v. United Mo. Bank, No. 09-1711, 391 Fed. App’x 534, 2010 U.S. App.
LEXIS 17586 (6th Cir. August 18, 2010); unpublished decision.
51. FTC v. Network Servs. Depot, Inc., 617 F.3d 1127 (9th Cir. 2010).
52. United States v. Midkiff, 614 F.3d 431 (8th Cir. 2010); S. Cherry St., LLC
v. Hennessee Group LLC, 573 F.3d 98 (2d Cir. 2009) (hedge fund researcher).
54. Ashby Jones, Rothstein Draws 50-Year Sentence, Wall St. J., June 10, 2010, at
C5 (“Former Florida Lawyer Was Convicted of Running a $1.2 Billion Ponzi
Scheme”; the lawyer was sentenced to fifty years in prison. He used the money
to offer political contributions. The paper has a picture of the lawyer showing a
unique watch collection in 2007).
55. United States v. Wolff (In re FirstPay, Inc.), Nos. 09-1076, 09-1107, 2010 U.S.
App. LEXIS 16930 (4th Cir. August 13, 2010); unpublished decision.
56. Adair v. Lease Partners, Inc., 587 F.3d 238 (5th Cir. 2009), cert. denied, 130
S. Ct. 3326 (West 2010).
57. Cline v. Reliance Trust Co. 245 Fed. App’x 503 (6th Cir. 2007) (unpublished
opinion; plaintiffs lost on the ground of the statute of limitations).
58. SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109 (9th Cir. 2006).
59. United States v. Sudeen, 434 F.3d 384 (5th Cir. 2005) (“The plant was never
built, because of alleged regulatory difficulties”).
60. Jodi Xu, A Guilty Plea in Ponzi Case, Wall St. J., September 16, 2010, at C4,
LEXIS, News Library, WSJ File.
61. Nathan Becker, Man in Ponzi Scheme Sentenced to 9 Years, Wall St. J., Septem-
ber 25, 2010, at A23, LEXIS, News Library, WSJ File.
62. SEC v. Kaleta, Civ. Action No. 4:09-3674, 2011 U.S. Dist. LEXIS 138963 (S.D.
Tex. Dec. 2, 2011), 4:09-3674.
63. Marretta v. Comm’r, 168 Fed. App’x 528 (3d Cir. 2006), unpublished opin-
ion. (Marretta invested “in CNC Trading Company (‘CNC’), . . . [which] sold
investments in CNC ‘contracts’. . . . Investors were told that CNC used their
money to purchase food products each month for resale to food wholesalers
199
and supermarket chains. . . . CNC was a Ponzi scheme. Instead of purchas-

ing food products with the money it received from investors, CNC used that
money to pay out cash or checks on a monthly basis to prior investors.”)
64. United States v. Ramunno, 599 F.3d 1269 (11th Cir. 2010).
65. Carroll v. Stettler, Civ. Action No. 10-2262, Civ. Action No. 10-2262, 2010 U.S.
Dist. LEXIS 120672 (E.D. Pa. November 12, 2010); unpublished opinion.
66. Rowe, Ponzi Schemes.
67. United States v. Midkiff, 614 F.3d 431 (8th Cir. 2010).
68. Pendergest-Holt v. Certain Underwriters at Lloyd’s of London & Arch Spe-
cialty Ins. Co., 600 F.3d 562 (5th Cir. 2010).
69. 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; Forex Ponzi
Figure Is Given Probation, Wall St. J., September 21, 2010, at C3, LEXIS, News
Library, WSJ File (“Federal prosecutors had alleged Bradley D. Eisner was part
of a scheme to defraud investors in Razor FX, a financial-services firm that held
itself out as being in the business of trading in the currency market, but actually
conducted almost no trading”).
70. United States v. Hickey, 580 F.3d 922 (9th Cir. 2009), cert. denied, 130 S. Ct.
2115 (West 2010).
71. Aubrey v. Barlin, No. A-10-CA-076-SS, 2010 U.S. Dist. LEXIS 103700 (W.D.
Tex. September 29, 2010); unpublished opinion.
72. Fort Lauderdale Attorney Pleads Guilty in Billion Dollar Ponzi Scheme, PR News-
wire, January 27, 2010, LEXIS, News Library, Curnws File.
73. Lustgraaf v. Behrens, 619 F.3d 867 (8th Cir. 2010). (“Behrens was President
and CEO of 21st Century Financial Group, Inc. . . .” Investors alleged that they
“invested money with Behrens through National Investments, Inc., an entity
that Behrens controlled. In connection with these investments, Behrens sold
promissory notes to Appellants, listing National Investments as the borrower
[and investors alleged] that Behrens took their money with the promise that
he would invest it and provide them with a steady stream of income. Rather
than invest the money, Behrens ‘misappropriated the funds for his personal use,
spent the money in other ways, or simply transferred money among [Appel-
lants] and other investors to prevent them from discovering the fraud.’”)
74. Merrill Scott & Assocs., Ltd., 253 Fed. App’x 756 (10th Cir. 2007), unpub-
lished opinion; United States v. Ramunno, 599 F.3d 1269 (11th Cir. 2010)
(a Ponzi scheme relating to commodity futures).
75. United States v. Sudeen, 434 F.3d 384 (5th Cir. 2005).
76. Id. (“When a given investor demanded proceeds, Sudeen and Freeman would
claim that the investor was ineligible because he had failed to comply with ficti-
tious requirements, that the profits were ‘tied up’ by the federal government, or
that the returns could not be liquidated from overseas assets.”)
77. United States v. Treadwell, 593 F.3d 990 (9th Cir. 2010); Inland Empire Man
Who Orchestrated $26 Million Ponzi Scheme Sentenced to 14 Years in Prison,
200
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.
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.
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).
May 28, 2001, at 35.
201
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).
(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
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).
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).
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
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).
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).
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.
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.
158. Id. at 1122–23.
159. Id. at 1123.
161. Marion v. TDI Inc., 591 F.3d 137 (3d Cir. 2010), cert. denied, 131 S. Ct. 1479
(West 2011).
162. Id.
204
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).
(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
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.
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.
at 33.
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
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
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
Tammy Bakker story, affirming Bakker’s conviction and remanding in part;

Mary T. Schmich, Bakker Guilty on All Counts, Chicago Trib., October 6,
1989, at 1, noting the conviction on October 5, 1989; United States v. Luca,
183 F.3d 1018, 1024 (9th Cir. 1999); “The district court . . . concluded that
‘many of the victims’ were vulnerable based on their ages and their member-
ship in the church in which Luca held a leadership position.”
67. Butterfield, This Way Madness Lies, at 14, at Ch. 2, n. 52.
68. See, e.g., United States v. Bennett, 161 F.3d 171 (3d Cir. 1998), cert. denied, 528
U.S. 819 (1999).
69. Brigid McMenamin, The Banker and the Nun, Forbes, October 6, 1997, at 100.
70. Id.
71. United States v. Rasheed, 663 F.2d 843, 845 (9th Cir. 1981); see Bruce
C. Smith, Congregation Prepares to Celebrate a Miracle, Faith Baptist Church
Rises from Mountain of Debt, Indianapolis Star, November 20, 2000, at
A1 (pastor took investors’ money to help church and instead lived lavish life-
style, leaving church indebted).
72. United States v. Rasheed, 663 F.2d 843, 845–46 (9th Cir. 1981).
73. Id. at 845. “In early 1977, Rasheed formed the Church of Hakeem. The Church
was incorporated under California law, and received tax exempt status as a reli-
gious organization.”
May 28, 2001, at 35. But see United States v. Spirk, 503 F.3d 619 (10th Cir.
2007): “Unlike most operators of Ponzi schemes, Spirk did not live the high
life while the money rolled in; he plowed the cash into LASCO and ASA, even
reducing his salary so that he could pay the staff ’s wages. This is cold comfort to
the investors, however, many of whom lost their retirement savings.”
75. Michael Gillard, Copperfingers “Took Pounds 35m Hit,” Observer, January
1998, at 1, LEXIS, News Library, Arcnws File.
76. United States v. Hall, 349 F.3d 1420 (11th Cir. 2003), aff ’d sub nom. Whitfield
v. United States, 543 U.S. 209 (2005).
77. United States v. Luca, 183 F.3d 1018, 1027 (9th Cir. 1999).
78. Id.
79. 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.
81. Henderson, Preacher Has Faith in Pitch, at 33, at Ch. 2, n. 61.
82. See Pyramid Schemes, http://www.crimes-of-persuasion.com/Crimes/Deliv-
ered/pyramids.htm (last visited March 3, 2012).
83. Verdery, “Caritas,” at 3 (and authorities cited there), at Ch. 2, n. 14.
84. Kate Nash, Up in Smoke, Advertiser (South Australia), April 22, 2002, at 61.
85. Peter Fimrite, Did He Have a Deal for You, S. F. Chron., February 15, 1998, at
1/Z1.
209
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.
frontline/madoff/etc/script.html (last visited March 5, 2012).
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
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).
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).
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

and Lie 245 (1997).
2. Id. at 128.
3. Id. at 244.
4. Id. at 171; id. at 172.
5. A Brief History of Lie Detection, Fin. Sector Tech., January/February 2004,
LEXIS, News Library, Arcnws File. “Scientists at Manchester Metropolitan
University claim they have developed the most accurate lie detector yet, using
a new technique which interprets facial gestures. ‘Silent Talker’ detects and
analyses the thousands of ‘microgestures’ which indicate someone might be
telling untruths. According to the team at MMU, Silent Talker is 80 per cent
reliable.”
6. Daniel McNeill, The Face 242 (1998).
7. Julia McKinnell, Tips from a Professional Lie Spotter, Maclean’s, August 16,
2010, at 75, LEXIS, News Library, Arcnws File (describing Pamela Meyer, Lies-
potting: Proven Techniques to Detect Deception (2010)).
8. O’Connell, Mindreading, at 60, at Ch. 3, n. 1.
9. Id. at 110.
10. Id. at 116.
211
11. Robert H. Frank, Passions Within Reason 151 (1988).

12. O’Connell, Mindreading, at 139, at Ch. 3, n. 1.
13. Id. at 225.
14. See M. R. Werner, Barnum (1923).
15. 57 Slavic Rev. 774 (1998).
16. Dan Seligman, The Mind of the Swindler, Forbes, June 12, 2000, at 426; If It’s
Too Good to Be True. . . . Pyramid Schemes in Cyberspace: Same Old Deal, http://
www.cbintel.com/pyramidfraud.htm (last visited March 5, 2012), emphasiz-
ing fraud on the Internet in the form of pyramid schemes.
17. Dale Carnegie’s Secrets of Success, http://www.dalecarnegie.com/secrets_of_
success/ (last visited March 5, 2012).
18. United States v. Aptt, 354 F.3d 1269 (10th Cir. 2004).
19. The Scam That Fell to Earth, Australian, July 18, 2001, Finance Section, at 30,
20. James Long and Jeff Manning, Losses Dig Pit That Founder of Capital Con-
sultants Is Unable to Escape, Sunday Oregonian, September 24, 2000, at
A01.
21. Id.
22. Edmund H. Mahony, Hedge Fund Manager Pleads Guilty of Fraud, Hart-
ford Courant (Connecticut), March 8, 2011, at A7, LEXIS, News Library,
Curnws File.
23. United States v. Carpenter, 359 Fed. App’x 553 (6th Cir. 2009), unpublished
decision.
24. United States v. Helbling, 209 F.3d 226 (3d Cir. 2000), cert. denied, 531 U.S.
1100 (2001).
25. United States v. Hartstein, 500 F.3d 790 (8th Cir. 2007), cert. denied, 552 U.S.
1102 (2008).
26. It is not surprising that Ponzi dreamed of transforming his scheme into a legiti-
mate banking business. He had believed for some time that his business would
produce the promised returns. The securitizers of loans also started with the
belief that they could collect more money than others do. Only when they real-
ized that there was no hope of such collection did they begin “empty refinanc-
ing.” See Amended Complaint, Am. Int’l Life Assurance Co. v. Bartmann, No.
99-CV-0862-C (N.D. Okla. 1999).
27. Holly Howard Preston, The Sophisticated Investor’s Worst Nightmare; Invest-
ment Fraud—A New Bumper Crop, Int’l Herald Trib., June 15, 2002, at
13.
28. See, e.g., Peter Byrne, Double Injustice, SF Wkly., July 12, 2000, LEXIS,
News Library, Arcnws File; N. R. Kleinfield, Unraveling Puzzle of L. I.
Car Dealer Reveals Layers of Personal Mystery, N.Y. Times, April 19, 1992,
at A26.
29. Everett L. Shostrom, Man, The Manipulator: The Inner Journey from Manipu-
lation to Actualization 13 (1967); id. at 36–39 (describing various types of
manipulators).
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).
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.”).
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.
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).
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,
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).
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,
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.
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).
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
Economics/10/JeroenVanDeVen.pdf. “We investigate whether experimental sub-

jects can predict behavior in a prisoner’s dilemma played on a TV show. Subjects
report probabilistic beliefs that a player cooperates, before and after the players
communicate. Subjects correctly predict that women and players who make a
voluntary promise are more likely to cooperate. They are able to distinguish truth
from lies when a player is asked about her intentions by the host. Subjects are to
some extent able to predict behavior; their beliefs are 7 percentage points higher
for cooperators than for defectors. We also study their Bayesian updating. Beliefs
do not satisfy the martingale property and display mean reversion.” But see Felicia
Smith, Madoff Ponzi Scheme Exposes “The Myth of the Unsophisticated Investor,” 40
U. Balt. L. Rev. 215 (2010).
87. Tennant, Why Do People Risk Exposure to Ponzi Schemes? at Ch. 4, n. 84.
88. Frankel, Trust and Honesty 49–55, at Ch. 4, n. 21.
89. Id., 49, 53.
90. Gabriel Cohen, For You, Half Price, N.Y. Times, November 27, 2005, § 14, at 4,
http://www.nytimes.com/2005/11/27/nyregion/thecity/27brid.html?ex=12
90747600&en=d5b19f580f176c64&ei=5090&partner=rssuserland&emc=rss
(last visited May 3, 2011).
91. The Scam That Fell to Earth, Australian, July 18, 2001, Finance Section, at 30,
92. Id.
93. Killion v. Huddleston, No. M2000-02413-COA-R3-CV, 2001 Tenn. App. LEXIS
695 (Tenn. Ct. App. September 19, 2001).
95. Id.
96. Id.
97. Id. See also John R. Nofsiger, The Psychology of Investing at 35 (4th ed. 2010).
99. Scott Halford, The Successful Optimist, Entrepreneur , Jul. 27, 2010, http://
www.entrepreneur.com/management/managementcolumnistscotthalford/
article207648.html (last visited May 3, 2011).
101. Id.
102. Id.
103. Michael Lynn and C. R. Snyder, “Uniqueness Seeking,” in Handbook of Positive
Psychology 395, 396 (C. R. Snyder and Shane J. Lopez eds., 2001).
104. Shelley E. Taylor et al., “Toward a Biology of Social Support,” in Handbook of
Positive Psychology 556.
105. Lynn and Snyder, “Uniqueness Seeking,” 395, 401, at Ch. 4, n. 103.
106. Id. at 402.
107. Id. at 395.
109. 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
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,
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,
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,
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
Participants’ Protections Against Fraudulent-Conveyance Actions, 28–4 ABIJ 28

(2009); “Investors are the most obvious victims of Ponzi schemes and similar
frauds, whether they lose their investment or face a clawback after a successful
redemption.” “Warren Buffet famously observed, ‘It’s when the tide goes out
that you find out who has been swimming naked.’” See also Tally M. Wiener,
Essay, On the Clawbacks in the Madoff Liquidation Proceeding, 15 Fordham
J. Corp. & Fin. L. 221 (2009).
4. Susan Pulliam, Jenny Strasburg, and Michael Rothfeld, The Galleon Case:
Defense Worked—to a Point, Wall St. J., May 18, 2011, at C1, LEXIS, News
Library, WSJ File (Raj Rajaratnam, found guilty of insider trading).
5. Lewis Hyde, Trickster Makes This World 216–17 (1998).
6. Id. at 8.
7. Id. at 7.
8. Nancy Dillon, SEC Using Lifetime Ban as Weapon Against Fraud, Daily News
(New York), October 7, 2002, at 30, LEXIS, News Library, Arcnws File; Alf
Young, Balancing Act: Why Modern-Day Capones May End up on Easy Street,
Sunday Herald (Glasgow), August 25, 2002, at 3, LEXIS, News Library,
Arcnws File.
9. Jennifer Wells, The Small Price of Big-Time Fraud, Toronto Star , May 22,
2002, at A03, LEXIS, News Library, Arcnws File.
10. Matt Ridley, The Origins of Virtue, Human Instincts and the Evolution of Coopera-
tion 29 (1996); id. at 32–33 (dealing with parasite cells).
11. http://www.alibris.com/booksearch?author=Jerome+Schneider (last visited
February 29, 2012).
12. Indictment, United States v. Schneider, Eric Witmeyer. File No. CR 02 0403
(N.D. Cal. December 19, 2002); Offshore Gurus Jerome Schneider and Eric Wit-
meyer Indicted, December 19, 2002, http://www.quatloos.com/Jerome_Sch-
neider_indicted.htm (last visited October 19, 2004).
13. Josh Richman, Tax Shelter Guru’s Partner Pleads Guilty, Will Testify, January 21,
2003, http://www.quatloos.com/guru_pleads_guilty.htm (last visited Octo-
ber 1, 2004).
14. Christopher Albert, Talk at Boston University School of Law class re: Federal
Strategies Against Financial Fraud: Techniques to Detect and Recover Hidden
Assets (October 1, 2003).
15. Tony Levene, Curse of the Pyramids Haunts Isle of Wight, Guardian (London),
July 6, 2001, http://www.guardian.co.uk/money/2001/jul/07/personalfinan-
cenews.jobsandmoney.
16. Id.
17. Tamar Frankel, Trust and Honesty: America’s Business Culture at a Crossroad, 35
(2006).
18. See Sricki, The Politics of Victim Blaming, Motley Moose, June 7, 2010,
http://motleymoose.com/diary/2544/the-politics-of-victim-blaming (last
visited March 18, 2011); “Sadly, blaming the victims of rape is a frightfully
222
N OT E S TO PA G E S 1 6 7 – 1 7 7
common occurrence, which contributes . . . to the social stigma associated

with rape.”
19. Crigger v. Fahnestock & Co., 443 F.3d 230 (2d Cir. 2006).
20. Id.
21. Id. The court held that the insurance company was a sophisticated institutional
investor and that investments were an important part of its business. It specifi-
cally acknowledged that it was sophisticated. Even though the insurance com-
pany had little experience in the particular type of transaction, the court found
that it still was capable of evaluating the risk involved. Therefore, the insurance
company could not claim to have been defrauded.
22. National Western Life Ins. Co. v. Merrill Lynch, Pierce, Fenner & Smith., 213 F.
Supp. 2d 331 (S.D.N.Y 2002).
23. U.S. Dept. of Justice, Press Release, Inland Empire Man Who Orchestrated $26
Million Ponzi Scheme Sentenced to 14 Years in Prison ( June 7, 2005). http://www.
justice.gov/usao/cac/pressroom/pr2005/087.html (last visited 2/29/2012),
State News Service, LEXIS, News Library, Curnws File.
24. This issue is debated heatedly among investors, some of whom have received
more than their investments while others have lost not only returns but their
investments as well. See, e.g., Eric Konigsberg, Investors in a Competition for a
Piece of the Madoff Pie, N.Y. Times, June 29, 2009, at B1, LEXIS, News Library,
Curnws File.
25. See Amended Complaint, Am. Int’l Life Assurance Co. v. Bartmann, No.
99-CV-0862-C (N.D. Okla. 1999).
26. See Dirks v. SEC, 463 U.S. 646 (1983).
27. See John R. Nofsinger, The Psychology of Investing, chap. 10 (4th ed. 2010).
28. Regulators Sound Alarm on Affinity Scams, Canada NewsWire, January 29,
2002, LEXIS, News Library, Curnws File.
29. How Prime Bank Frauds Work, http://www.sec.gov/divisions/enforce/prime-
bank/howtheywork.shtml.
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
of claims against estate, or exemptions from property of estate. Another form of

legal process is establishment of an equity receivership for Ponzi schemes. See
David A. Gradwohl and Karin Corbett, Equity Receiverships for Ponzi Schemes,
34 Seton Hall Legis. J. 181 (2010).
3. 18 U.S.C. § 152(7) (2006), prohibiting concealment of assets in contemplation
of bankruptcy case or intent to defeat provisions of Bankruptcy Code; Chad
Bray, Madoff Trustee Goes After Safra, Wall St. J., May 11, 2011, at C3, LEXIS,
News Library, Wsj File, noting that Madoff trustee sought to recover transfers
to bank from Madoff feeder funds; lawsuit alleged bank knew or should have
known of irregularities concerning Madoff. See also, e.g., Trustee Sues Real
Estate Exec for $115M; Williams Realty Founder Accused of Luring Friends into
Ponzi, Indianapolis Bus. J., July 12, 2010, LEXIS, News Library, Curnws File.
4. 28 U.S.C. § 157(b)(1), (2)(A), (B) (2006).
5. See, e.g., Dan McAllister, Tripping over the Past, Am. Law., November 2000, at
78 (Locke Liddell & Sapp, a Texas law firm, was accused of aiding a client, a
former football player, along with three of its lawyers); Terry Greene Sterling,
Accountants Down, Phoenix New Times, December 14, 2000, LEXIS, News
Library, Arcnws File.
6. See, e.g., People v. Luongo, 47 N.Y.2d 418, 423 (1979).
7. Jason Spencer, 100 Investors Sue Law Firm over Losses in Alleged Scam, Austin
Am.-Statesman, September 15, 2000, at B3.
8. Connecticut Nat’l Bank v. Giacomi, 699 A.2d 101 (Conn. 1997).
9. State ex rel. Goettsch v. Diacide Distribs., 561 N.W.2d 369 (Iowa 1997). See
also In re Agape Litig., Nos. 09-CV-1606 (ADS)(AKT), 09-CV-1782 (ADS)
(AKT), 2011 U.S. Dist. LEXIS 33587 (E.D.N.Y. 2011). “Accepting the well-
pleaded allegations in the Second Amended Complaints as true, the Plaintiffs
may have plausibly alleged that Bank of America was negligent or acted with
disregard to the seemingly obvious signs that Agape was defrauding investors.
While this may highlight a need for greater oversight and accountability from
financial institutions, it is not enough to overcome the hurdle of pleading that
BOA plausibly had actual knowledge or provided substantial assistance to the
Agape Ponzi scheme.”
10. Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004 (11th Cir. 1985).
11. Apartment Inv. & Mgmt. Co. v. Nutmeg Ins. Co., 593 F.3d 1188 (10th Cir.
2010).
12. United States v. Lewis, 594 F.3d 1270 (10th Cir. 2010); the investors’ money
was never used to buy these notes but rather to pay the con artists and pay off
earlier investors. The scheme lasted from April 1999 until late 2004 and the
estimated losses to investors were over $40 million.
13. MLSMK Inv. Co. v. JP Morgan Chase & Co., No. 10-3040-cv, 2011 U.S. App.
LEXIS 11425 (2d Cir. June 6, 2011).
14. Id.; In re Terrorist Attacks on September 11, 2001, 349 F. Supp. 2d 765, 830
(S.D.N.Y. 2005), aff ’d., 538 F.3d 71 (2d Cir. 2008).
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
2. Id.
225
INDEX
Addiction 151–56 Brodsky, Reed 56

Advertising by con artists 57 Brown, Byron Keith 108
Akerstrom, Malin 61 Burton, Wayne 45
Albert, Christopher 166 Businesses
Alexopoulos, Golfo 91 Familiar 38
Anderson, Glenn 149 Concealment of 41
Antar, Sam 122 Diverse 48
Aptt, John 94 Respectable 97
Attention drawing 62 Legitimate 97
Longevity 106
Bank Atlantic 5
Bank Trustee 120 Calozza, Michael 42–43
Barnum, P.T. 62, 90 Caritas 6, 40, 60, 77, 132
Behavior of Con Artist 84, 122 Charities 5, 18, 28, 60, 69–70, 74, 76, 78,
Bell, Gregory 20 132
Benkeith, Gary Dean 76 Church 72, 74–76, 151
Bentley, Robert 51 Cialdini, Robert 145
Bernard Madoff 18 Complexity 49
Belief 6, 17, 70–71, 144 Concealing 41
In the markets 138, 162 Con artists
Blair, Charles 69 Approaching the victims 67
Blaming At work 15
The government and the law Behavior of 84, 122
By con artists 125 Blaming the government 125, 127, 128
The victims By con artists 129 Blaming the victims 129
Branca, Dona 7 “Business guru” 73
Braun, Charles 43 Competition with 63
227
INDEX
Con artists (continued) Exploiting

Cooperation with 63 Weakness of the system 91
Dark side of 111 See con artists
Consequences 118–20 Exclusivity 20, 140, 142
Different 111 See also Social Status
Incorrigible 42 Investment decisions 98, 186
Rare—murder 114–16 Investment managers 18, 19, 27, 5
No Empathy 117 Expression, facial 87, 154
Persons 64
Life-style 75, 104–5, 130–31, 155 Familiarity of
Prestige 108, 111, 131, 136 Businesses 38
See also sales Forms 38
Cornerstone Prodigy 59 “Feeders” to Pomzi scheme 13, 27, 177,
Correll, Travis 65 180–81, 186
Crigger, Frederick W. 169 Ferguson, Steven 68
Croft, George 113 Financing 39, 97 103, 107, 165
Crowe, David and Martha 156–58 Followers 17, 70, 124, 145
Ford, Melvin 62
Davis, David and Noelle 115 Friendship 52–54, 63, 86, 112, 167,
Deceit 171
By old age 55
By naivety 55, 56 Gambling 28, 152–53, 190
DiFonzo, Luigi 123 Gamsky, Joseph “Joe Hunt” 116
Dominelli, J. David 5 Gellman, Marc 73
Donations 28, 60, 108, 132 Generosity 59, 61–62
Desire to be special-social status 121, Justifying actions 132
142 Goldberg, Michael 38
Goldings, Morris 166
Economou, Arthur N. 128 Golomb, Elan 113
Empathy 13, 78, 111 Gragg Larry Russell 150
Lack of 117 Greed 129, 135–36, 167, 189
Consequences 118–20 Gregory Bell 20
Ego and its protection 121, 125 Gromov, Vladimir 91
Blaming others 127–31 Gullibility 6, 13, 110, 137–38 140
Denial 125 Guilt 86, 120–21 125–27, 146
Justification 130–32
Enrique, Luis 7 Hedge fund 5, 18, 21, 96, 135
Entertaining 61 Halford, Scott 141
Generosity 59 Helliwell, Dennis L. 46
Justifying actions 132 Helpers
Normal behavior 85–106 Other con artists 63, 178
See also Normal Cooperation by con artists 63
Profile 110 Information collectors 79
Repeat offenders 156 Technology 77
Self presentation 121 Sales force 79
To what are they addicted? 155 Paid 80
Entrepreneurs 101 Pyramid schemes 82
228
INDEX
Hickey, John A. 38 Lilly, William W. 125

High Return 9, 78, 171 Love, deceptive 52, 54–55
Double your money 75, 94 Self 111–12
Hiding the truth 29, 39 Lying and liars 35–36, 87–88, 89
Secrecy 41
High returns 22 Madoff, Bernard 18
Hoaxes and jokes 85, 89–91 Manipulation 86, 88–89
Human nature 85 Masks 87, 89–90
Ability to lie convincingly 86 McNeill, Daniel 87
Misleading signals 87 Merriman, Shawn 119
Pretending 85 Metro Display Advertising, Inc. 50
Hyde, Lewis 164 Midkiff, Neulan 66
Mindreading 86
Investment clubs 68 Minkow, Barry 156
Investment Managers 18–19, 27, 55 Money laundering 115, 166
Investment risk 142 Money managers 80, 87, 95, 133,
International 7 163, 180
Scams 55, 64, 76, 77 Motivation 6, 81, 124
Investment stories Munoz, David Phillip 46
See Stories Murphy, Douglas 94
Investors 23–27, 71–73, 76–77,
141–50 Nadel, Arthur 55
As sales force 79 Narcissists 111–13, 121–22
Followers 80 Nat.Ass. Sec. Dealers (NASD) 81, 137
Profile 18–19, 133–37, 139, 184–89 Study 137–38, 144–45
View of 150–56, 170 Networks 59–60, 79, 163, 165
See also Red Flags Normal behavior 85
Jacobs, Donald 155 O’Connell, Sanjida 86

Optimistic 12, 101–2, 141
Kirschner, William 67
Kusic, Jane 120 Parker, George 139
Pears, Iain 35, 132
Langevoort, Donald C. 18 Personal relationship 47, 53, 174
Legal aftermath 176–81 Petters, Tom 8
Collecting assets 176–77 Picard, Irving 180
Collecting from helpers 177–79 Police 61, 65, 83, 116, 122, 124–25, 147
Dividing the assets 181 Power elite 92, 163–64
Legitimate, legitimacy 83, 128, 132 Ponzi, Charles 15
Lying 41, 89 Ponzi scheme 3–8, 11, 13, 17–18, 41, 43–46,
Businesses 63, 84, 93, 97, 103, 106, 50–53, 58, 93–99, 105, 133–35, 152,
127–29, 161, 168 177, 181
Con artists’ justifications 132 Aggregate cost 8
See con artists, business Attention drawing 22
Levin, Ron 116 Conduct 124
Lewis, Charles 179 Design 22
Life Style 75, 104–5, 130–31, 155 Internet 108
229
INDEX
Primates’ ability to mislead 86 Rowe, Barbara R. 26

Prentice, Robert 145 Rubi, Edmundo 79
Prison, sentence 5, 17, 31, 55, 94, 108, 127,
156, 158 Sales: Approaching the victims 67
Profits 4, 10, 76, 79, 83, 148, 181–82, Family and friends 67
184–87 Ethnic groups 70
Promises 4, 28, 33, 38–39, 53, 85, 169–71 Affinity groups 70
Specific 34 Religious groups 70, 74
See also Stories Hybrid Groups 75
Protection of victims Sales force 79
Red flags 171–74 Paid 80
Self-awareness 190–91 Saturday, Larry 8
Proof Schneider, Jerome 165
See verification Scott, Walter Edward 45
Psychology 11, 120, 122 Secrecy 41–44, 81, 172
Self-condemnation 126–27 Securities 70, 98–99, 145, 152–54, 169–70,
Self-esteem 122–24, 136 172
Self-serving behavior 34, 122 Securities and Exchange Commission 7, 62,
Public 94, 148, 174, 189
View of con artists 160–64 Securities Investor Protection Corporation
View of the victims 167–68 (SIPC) 177, 181
Pyramid schemes 6, 63, 70, 82–83 Shame 112, 125–26, 146–47
Fraudulent 93 Signals 29, 32, 41, 85, 91, 107, 126, 154,
Illegal 84, 157 170–72
Misleading 87–88, 100, 188
Rasheed, Hakeem Abdul 74–75, 85 Of low risk 39
Red flags: To warm potential victims Of danger 175
High return at low risk 171 Of Free gift 54
Continuous offerings 172 Of Naivety 56
Activities outside legal protections Of Trust 29
173 Skolnik, Bradley 44
Others 173 Slippery slope 92
Separate business from emotions See con artists
174 “A little fraud” 117
Regulators 68, 95 128, 134, 189 Slatkin, Reed 75
Religion 70, 73–75, 77, 88 Sluder, Ricky 8
Repeat offenders 156 Sophisticated 19–20, 146, 169, 173
See also addiction Spirk, Terry 101
Reputation 58 Sterling, Terry Greene 148
Respectability of business 106 Stock trading 98
Retirement age 77 Stories 15, 25, 28, 41–42, 44
Reynolds, Larry 8 Compelling 49
Risk Creative 25, 50, 80
Low risk 4, 22, 24–25, 35, 39, 51, 84, How you tell 35
170–71 Details 36, 39
Investment risk 142, 167 Low-risk 25, 30, 81, 169
Scams 55, 64, 76, 77 To satisfy curiosity 22
230
INDEX
To hide the truth 29 Valentine, Debra A. 9

Real estate 26 Van Alstyne, Lance 39
Selling 57 Verdery, Katherine 40
Verification 33, 39, 41, 44, 46–84 Verification 41, 44
Sudeen, Motilall 27 Victims
What kind of persons? 133
Tang, Mamie 38 Dark Side of some 133
Technology 77 Drive 136
Internet 76–79, 92 153 Gullibility 138
Telemarketers 77, 121, 125, 155 Risk tolerance 140
Tennant, David 142 Optimism 141
Thieves 57, 61, 122, 124, 130–31, 155, 183 Social status 142
Treadwell, Randall 8 Education 143
Trusts 21 Self-view 146
Trust 31–33, 36–37, 39–40, 43, 64–65, 71, Reaction to discovery 148–50
81, 83, 107, 137–38, 150, 188–89 Villalobos, Osvaldo 7
Gaining of 29
Signal by words 29, 32 Warning 14, 130, 167, 173–74
Familiar forms, creating 38 Weil, Joseph 129
Truth 42, 98 Witmeyer, Eric 166
Hiding 29, 39, 48, 49
Twardon, Andrew 111 Zirkel, Joseph 55
231

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A History and Analysis of Con Artists and Victims

Oxford New York

© Oxford University Press 2012

You must not circulate this work in any other form

Library of Congress Cataloging-in-Publication Data

1. Con Artists At Work 15

b. Signals to Raise Trustworthiness 32

2. Selling The Stories 57

2. Where to Operate and How to Build a

3. Con Artists’ Behavior Seems a “Normal

4. A Profile of The Con Artists

6. Con Artists’ Mechanisms of Ego Protection

f. A Reminder of the Stories in Chapter 1:

5. How Does the Public View the Con Artists

2. A Related Reason for Condemning the Victims

6. The Legal Aftermath 176

In 2001, I had the good fortune to meet Professor Diego Gambetta of

I owe a debt of gratitude to Professor Diego Gambetta, Professor

The American public is better educated and better informed than

[Scientists] are absorbed by teasing out the secrets of nature. . . . But

It takes brains to be a swindler.

named after Charles Ponzi, who perpetrated such a scheme in the

several books on Wall Street finance.”4 News in May 2002 revealed

share when Dona Branca operated a scheme, paying 10 percent

Some numbers speak for themselves. “Larry Reynolds assisted

side of con artists—their narcissistic character disorder, lack of

society. Therefore, self-protection from charming and dangerous con

Con Artists At Work

A . THREE STORIES OF PONZI SCHEMERS

In business, he showed poetic tendencies. As he wrote in his autobi-

not merely a rational investment, but something that they could be

Moreover, investors forgot the indispensable golden rule of invest-

So why were sophisticated investors drawn to Madoff ? One

Funds provided potential investors with a Confidential Informa-

There were no goods, no true purchase orders, and no real in-

salespersons rather than on what they offered in deciding to partici-

B. THE BASIC DESIGN

A. HIGH RETURNS AT NO RISK

seems to have been implicated in a $326 million Ponzi scheme in

notes based on currency trading that guaranteed interest payments of

B. STORIES TO SATISFY INVESTORS’ CURIOSITY

they come wrapped in a rich variety of investment stories. Barbara

as reliable “feeders” to another investment manager,73 and to other

investments. Charitable institutions frequently receive donations

C. CON ARTISTS’ STORIES ARE EXCEPTIONAL AND

admiration of others. Owning something unique has an emotional

C. GAINING TRUST AND CONCEALING THE

The Securities Exchange Company, for and in consideration of

These notes are interesting. First, Ponzi’s business at 27 School Street

the words used in the federal government obligations. The words on

“Mumbo jumbo” contract language can confuse and help conceal

B. SIGNALS TO RAISE TRUSTWORTHINESS

investment for their own account. This assurance is followed by a

Enron Corporation adopted a similar technique.99 Like investors

C. IT DEPENDS ON HOW YOU SAY FALSE THINGS: SPECIFIC

promises leave promisors little wiggle room and almost no pretext to

D. HOW A STORY IS TOLD CAN SIGNAL TRUTHFULNESS

E. REFUSING TO PROVIDE THE DETAILS OF A SCHEME NEED

This claim carries with it a tinge of moral justification. “I discov-

2. Familiar Transaction Businesses and Forms Seem to Make

transaction in a very familiar form, and it evokes memories of many