Script

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SLIDE 1—Ponzi Schemes

This video will explore the topic of Ponzi schemes.

SLIDE 2—What is a Ponzi scheme?

The definition of a Ponzi scheme, according to Cornell Law School’s Legal Information
Institute, is a type of investment fraud in which investors are promised artificially high
rates of return with little or no risk; original investors and the perpetrators of the fraud
are paid off by funds from later investors, but there is little or no actual business activity
that produces revenue. This type of fraud constantly requires new waves of investors,
as the newest investors are used to pay the older investors. Without new investors, a
Ponzi scheme dies because the only source of revenue is from the investors one-time
payment. The perpetrators appear to be running a legitimate business; however, there
is rarely any money that is actually invested.

SLIDE 3—Example Ponzi Scheme

This chart shows a rough outline of how a Ponzi scheme works. Graphically, a Ponzi
scheme forms a triangular shape. The perpetrator is represented at the height of the
graph, while the waves of investors are shown at the bottom. The first wave of
investors, pay a one-time payment, thinking that they are investing in the stock market.
Rather, their money goes directly to the perpetrator. The first wave of investors is
expecting high and consistent returns. To meet this demand, a second wave of
investors is required. The second wave must contribute enough revenue to pay the
returns for the first wave, as well as a sum left over for perpetrator’s profit. As a Ponzi
scheme progresses, more and more waves are required to keep up with the
demand. The more waves, the higher the demand for more revenue. This chart only
shows four waves; however, for a Ponzi scheme to keep afloat, an infinite number of
waves must follow. In theory, the number of investors in each wave in irrelevant. The
amount of money invested by each wave is the main concern. The newest wave must
invest enough money to pay for all the waves preceding it and the perpetrator. So,
looking at how a Ponzi scheme works, notice how there will come a time when the
perpetrator cannot gather enough revenue.

SLIDE 4—Signs of a Ponzi Scheme

According the Securities and Exchange Commission, the Signs of a Ponzi scheme
include:
▪ High investment returns with little or no risk
▪ Overly consistent returns
▪ Unregistered investments
 ▪ Unlicensed sellers
▪ Secretive/Complex organization
▪ No minimum investor qualifications
▪ Problems with paperwork
▪ Difficulty receiving payments

Note: All Ponzi schemes are different and might not exhibit all of these
characteristics.

SLIDE 5—Origin

The phrase “Ponzi scheme” was named after Charles Ponzi. The Italian immigrant in
the United States became well-known in the 1920s. He offered high returns to his
investors. Ponzi claimed to be buying postage stamps from other countries at low prices
and exchanging them in the United States. He never exchanged postage stamps.
Instead, he used the newest investors’ money to pay the returns of the older investors.
Ponzi’s scheme cost his investors millions.

The origin of the first Ponzi scheme is unknown. Charles did not create the first scheme
of this type. In fact, several individuals pulled off schemes of the like prior to
Ponzi. Due to the publicity surround Charles Ponzi, this type of fraud was named after
him.

SLIDE 6—Bernard Madoff

Bernard Madoff created the world’s largest Ponzi scheme. Madoff’s complex
organization was based out of New York City. Some estimates put the amount of stolen
money at more than $50 billion dollars with more than 4000 clients. He started his
scheme in the early 1990s and was not arrested until 2008. Madoff’s two sons turned
him into the authorities, which lead to his arrest. Currently, Bernard Madoff is serving
his 150-year sentence in a United States prison. In contrast, Madoff was not caught by
authorities for over a decade, whereas Charles Ponzi’s scheme, 70 years earlier, was
shut down after about a year. Madoff’s scheme was not discovered due to his inside
knowledge of the United States government, as he and his family held occupations that
gave them access. He donated to political campaigns, which gave him government
access as well. Another reason that his scheme lasted so long, was due to the fact that
a large portion of his business was legitimate. He created a Ponzi scheme to fund
actual business activities. This allowed his scheme to go unnoticed by authorities.
While Charles Ponzi created his scheme when regulations and law enforcement were
not as powerful, Madoff lasted much longer due to the resources that were at his
disposal.

Slide 7—Aftermath of Madoff

The havoc of Bernard Madoff’s scheme lasted even after his arrest on December 11,
2008. At the time of his arrest, his investors were frantically trying to pull their
investments; unfortunately, many of the attempts were unsuccessful. Following his
arrest, numerous lawsuits were filed, fighting for the rights of Madoff’s victims. Much of
the money stolen by Madoff was never returned. In response to the calamity, the United
States government began the Madoff Victim Fund, which is responsible for giving
payouts to the victims of the Madoff scheme. Legally, no major legislation to combat
Ponzi schemes was created as a result of the Madoff scheme; however, the Securities
Exchange Commission, the regulatory agency in charge of facilitating and ensuring the
functionality of the securities market, was under strict scrutiny due to their inability to
detect Madoff’s scheme for over a decade. As a result, reforms within the agency were
made to prevent a Ponzi scheme from ever growing to the size of Madoff’s again.

Slide 8—Economic Effects

Ponzi Schemes affect the local, national, and global economy. They consume large
sums of money, that otherwise, would have been invested into the economy, which
would have stimulated growth. Many who invest in Ponzi schemes never get their
money back. Sometimes, that money is people’s entire life savings. The loss of a life
savings would be detrimental to one’s financial stability. Even large business can fall
into financial ruin if a large investment fails. Overall, Ponzi schemes have similar effects
on every economy (that is, local, national and global). The variation lies in the wealth
established in the economy along with how fast the economy can recuperate from such
a loss.

Slide 9—Psychological Effects

Fraud depletes the trust that people place in financial institutions, resulting in a trying
economy. As mentioned earlier, Ponzi schemes may consume people’s entire life
savings. This may lead someone to become emotionally unstable. Additionally, people
who have lost their fortunes have experienced weight loss, insomnia, paranoia along
with numerous other conditions. Some even turn to suicide after their hard-earned
money has been unlawfully taken from them. Alternatively, perpetrators of Ponzi
schemes are also at risk of negative psychological effects.

Slide 10—Victims

Anyone can be affected by fraud. Those that take the proper precautions and know
what to look for are less likely to fall victim to fraud than those who are unaware of the
tell-tale signs. Senior citizens are one group in particular that are targeted. One specific
reason that Ponzi schemes target senior citizens is due to the fact that they have had a
longer time to amass their fortunes. In other words, they are more likely to invest larger
sums compared to younger age groups.

Slide 11—Legislation

There are numerous laws in the United States relating to Ponzi schemes. The
Securities Act of 1933 and Securities Exchange Act of 1944 are the most prevalent in
Ponzi scheme cases.

The Securities Act of 1933, in the simplest terms, has two main goals. The first,
requires that investors receive financial and other important information regarding the
securities that are for public sale. The second, restricts and “deceit” or
“misrepresentations” with the securities.

The Securities Exchange Act of 1944 allows the United States Securities and Exchange
Commission to have jurisdiction over securities in the United States. This act gives the
SEC the “power to register, regulate, and oversee brokerage firms, transfer agents, and
clearing agencies as well as the nation’s securities self-regulatory organizations.”

Madoff was charged with violating both of these laws, as well as many other
perpetrators of Ponzi schemes.

Slide 12—Regulatory Agencies

Regulatory agencies enforce the laws that have been established. Some specialize in
fraud, while others specialize in dismantling Ponzi schemes.

The Securities Exchange Commission specializes in securities fraud, which covers

Ponzi schemes.

The FBI White Collar Crimes division plays an integral role in taking down Ponzi
schemes. They specialize in fraud, and like the SEC, they dismantle Ponzi schemes as
well.

The Internal Revenue System has been known to discover Ponzi schemes, mainly
through auditing. This allows them to find any discrepancies, such as the financial
situation of a perpetrator

These are the main three regulatory agencies that discover and dismantle Ponzi
schemes; however, lots of other agencies work in collaboration to shut down Ponzi
schemes.

Slide 13—Do Ponzi schemes still occur?

Ponzi schemes occur quite often; however, they are not always widely covered by large
media outlets. PonziTracker.com is a website, ran by Jordan Maglich, who is an
attorney that specializes in financial services, including securities. The site post Ponzi
schemes that occur in the United States as well as important updates related to each
case. Popping up on the screen are some of the many updates posted on
PonziTracker.com within the last few years.
While many have heard of Bernard Madoff, they are not always familiar with Ponzi
schemes. Knowing what a Ponzi scheme is and how it works is important in the
prevention process. The number one defense against this type of fraud is awareness.
The goal is to inform as many people as possible about Ponzi schemes, in hopes that it
will keep them safe from such a dangerous form of fraud.

The following videos will show the difference between a Ponzi scheme and a real
investment. The first, will show a Ponzi scheme.

This video will resemble the process of making a real investment