The Ponzi Scheme Puzzle A History and Analysis of Con Artists and Victims

Author: Tamar Frankel
Publisher: Oxford University Press USA
ISBN: 9780199926619
Published In: August 2012
Format: Hardback , 224 pages
Jurisdiction: U.S. ? Disclaimer:
Countri(es) stated herein are used as reference only

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- First to provide a detailed, anecdotal view of many Ponzi schemes
- Controversial thesis that shows similarity of con artists and their victims
In a Ponzi scheme, new investments are used to pay existing investors, to cover the cost of salespersons, and to finance the Ponzi schemer's satisfying lifestyle. Although Charles Ponzi recruited investors in Boston in 1919 and died in 1949, his design and mode of operation are alive and well today. Indeed, losses from Ponzi schemes in the United States are equal to losses from shoplifting. Ponzi schemes catch in their net highly sophisticated individuals and institutions as well as low-income and middle-income investors, and these schemes have attracted investors all over the world, in Russia, England, India, Albania, Romania, Portugal, Costa Rica, and elsewhere.

Looking into the innumerable cases of Ponzi schemes throughout the years, Tamar Frankel observes that even though patterns began to emerge in the stories of con artists and their victims' behavior, the main puzzles still remain: 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 con artists divert investors' attention from the soft spots of their stories? And while there are so many books and articles about Ponzi schemes, their warnings and constant advice on how to detect and avoid con artists go unheeded. In The Ponzi Scheme Puzzle, Frankel explores con artists' fascinating power of persuasion and deception, and analyzes their subtle signals that mimic truth and honesty. She identifies the reasons for the local and global success and longevity of such schemes and seeks to understand the nature of the con artists and their victims. She combines the many stories of Ponzi schemes, derived mostly from court cases and newspaper articles, to show the patterns of such frauds, the nature of the con artists, and character of their victims. These patterns tell us much about human nature, about our society, and about ourselves. The book first analyzes the design and pattern of the con artists' attractive offers and how they hide deceptions, then deals with the ways in which schemes are advertised and sold. Next, it focuses on the core of con artists' success, then discusses the characters of con artists and their victims. Finally, Frankel offers a number of observations on the lessons we can learn from these stories and analyses. She concludes that our attitude to con artists is ambivalent and uncertain perhaps because their behavior is so close to the behavior of honest people; or perhaps because they act like the social leaders with whom they are likely to mingle, or perhaps their actions are necessary to shake up a complacent society. Therefore, she writes, self-protection from charming, dangerous con artists must involve self-examination: once we recognize our own tendencies we can better protect ourselves from their toxic attraction.

Readership: Investors, lawyers (especially those who deal in criminal, and insurance), broker dealers, management in financial institutions, accountants; government regulators, judges, and legislators (federal and state).
PREFACE
INTRODUCTION
CHAPTER 1 CON ARTISTS AT WORK
A. Three Stories of Ponzi Schemers
1. Charles Ponzi
2. Bernard Madoff
3. Gregory Bell
B. The Basic Design
1. Drawing attention to the offer
a. High Returns At No Risk
b. Stories to Satisfy Investors' Curiosity
c. Con Artists' Stories Are Exceptional and Creative.
C. Gaining Trust and Concealing the Truth
1. Words Can Be Used to Signal Trust
a. Words Can Denote Trustworthiness
b. Signals to raise Trustworthiness
c. It Depends On How You Say False Things. Specific Promises with Vague Roles
d. The Way a Story Is Told Can Signal Truthfulness
e. Refusing to Provide the Details of a Scheme Need Not Undermine Trust
2. Familiar Transaction Businesses and Forms Seem to Make Verification Superfluous
3. Hiding Fraud by Actions. Prompt Payments That Spell Trustworthiness, Low Risk, and Much More
D. Hiding the Vulnerable Part of the Story: Secrecy and Costly Verification
1. Concealing the True Nature of the Ponzi Business
2. The Use of Justified Secrecy
3. Stories That Are Costly to Verify
4. Details That Hide the Truth by Drowning It
a. Details Can Hide the Truth
b. Complexity Helps Hide the Truth As Well
E. Con Artists Deceptive Friendship, and Seeming Vulnerability by Age and Naivety
1. Deceptive Friendship and Love
2. Deceptive Weakness of Age and Seeming Naivety
a. Old Age Can Deceive
b. Naivety Can Deceive
CHAPTER 2: SELLING THE STORIES
A. Advertising
1. The Importance of Advertising
2. Where To Operate And How To Build a Reputation
3. Show Generosity
4. Entertain
5. Draw Attention by Engaging in Attention Drawing Conflicts
B. Recruiting Helpers
1. Cooperation, Competition and Congregation Among Con Artists
2. Birds of a Feather Flock Together
C. How Do Con Artists Approach Their Victims?
1. From Family and Friends to Institutions to Affinity Groups
a. Introduction
b. Affinity Groups: Ethnic and Religious Groups
c. Religious Institutions
d. Hybrid Institutions And Overtones
2. Technology Has a Growing Impact On The Growth Of Ponzi Schemes
D. The Sales Force
1. Collecting and Distributing Information
2. Paid Sales Force
3. A Pure Sales Structure: Pyramid Schemes
CHAPTER 3 CON ARTISTS' BEHAVIOR SEEMS A <"NORMAL USUAL BEHAVIOR>"
A. Humans Have a Natural Ability To Pretend, Lie, And Influence Others
1. Humans And Even Primates Have Innate Abilities To Lie Convincingly
2. Signs Of Misleading Signals
3. Legitimate Lying
4. Exploiting The Weakness Of The Social System
5. The Slippery Slope: From Honesty To Fraud
6. Ponzi Schemes <"Businesses>" Mirror Respectability
a. Legitimate Businesses: Banking and Financial institutions
b. Stock Market Trading-Following The Trends
c. Salespersons And Traders
d. Entrepreneurs
e. Con Artists Are Believable: They Believe in Their Activities And View Them As Businesses
f. Longevity of the Businesses Breeds Respectability
CHAPTER 4 A PROFILE OF THE CON ARTISTS AND THEIR VICTIMS
A. The Dark Side Of Con Artists (And Some of Their Investors)
1. Con Artists Are Different From Most People
2. On Very Rare Occasions A Con Artist Might Resort To Murder
3. On Very Rare Occasions A Group Of Con Artists Can Be Deadly As Well
4. Con Artists Lack Empathy
a. What Does Empathy Mean?
b. Lacking Empathy Can Bring Repeat Frauds
c. Lacking Empathy Can Render Con Artists More Effective
d. People's Empathy Is Socially Important
5. How Do Con Artists Present Themselves?
a. Protecting the Weak Ego: We Are Special!
6. Con artists' mechanisms of ego protection and justifications
a. Denial
b. Blaming The Government
c. Blaming The Laws
d. Blaming The Victims
e. Blaming Others, But Avoiding A Show Of Weakness
f. Our Actions Are Justified. Others Are Fraudulent, And We Must Protect Ourselves Against Them By Defrauding First; Besides, Everyone Does It
g. Our Good Works Testify To The Legitimacy of Our Actions
B. The Profile Of The Victims. What Kind of Persons Are the Sophisticated Victims? What Makes Some People More Vulnerable to Ponzi Schemes Than Others?
1. The Dark Side of Some Investors: Lacking Empathy Toward Other Investors And Shared Greed
2. Investors In Ponzi Schemes, Who Suspect Or Know The Nature Of The <"Investment>" Yet Invest.
3. The Element of Greed
4. What Drives the Victims?
a. Gullibility
b. Risk-Tolerance may cover tolerance to the risk of being caught for illegal activities
c. An optimistic nature and outlook on life affects risk tolerance
d. Social Status
e. The role of education in risk tolerance is unclear
f. A Reminder of the Stories in Chapter 1: The Ways Con Artists Make Their Offers
5. The Dark Side of Some Investors and Their Representatives: Lack of Empathy Towards Other Investors and Shared Greed
a. Investors in Ponzi schemes, who suspect or know the nature of the <"investment>" yet invest in it, do not demonstrate empathy with their fellow investors
b. How do sophisticated victims of Ponzi schemes view themselves?
6. How Do Some Victims React To the Discovery of Con Artists by the Government?
a. The victims' attitude towards the government
b. The nature of a Ponzi scheme justifies this view of some investors
D. The Issue of Addiction. Ponzi Schemes Are Addictive For Con Artists And For Some of Their Victims. The Slippery Slope to Addiction and Illegality
1. What Is Addiction?
2. What Causes An Insatiable Craving For More, And A Loss Of Self-Control?
3. What Are Con Artists and Perhaps Their Victims Usually Addicted To?
4. Con Artists Are Repeat Offenders
CHAPTER 5. HOW DOES THE PUBLIC VIEW THE CON ARTISTS AND THE VICTIMS?
A. America Is Ambivalent About Its Con Artists
1. Con Artists That Defrauded Small Investors Are Viewed Somewhat Differently
2. When Con Artists Mimic The Power Elite, They Are Close To, And Live Like, The Very Wealthy And Politically Powerful
3. The <"Barren and Destructive Creators>" The Benefits of Creative Harm
4. Con Artists Can Be Corrupting Teachers
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
2. A Related Reason For Condemning The Victims Is That They Did Not Do Their Homework.
C. Are There Available Protections For Sophisticated Potential Victims?
1. Red flag: a very high return-low risk.
2. Red flag: The mystery source of the higher returns.
3. Red flag: Continuous offerings of obligations
4. Red flag: Con artists' activities outside the legal protections
5. Other red flag signals
6. Separating Business, Emotion, And Faith
7. Advice To Investors As Protection Against Affinity Scams Is Similar
CHAPTER 6. THE LEGAL AFTERMATH
A. Collecting the Assets and Mediating Among the Victims
B. The Issues Error!
C. Who Collects the Remaining Assets?
D. Who, Among the <"Helpers>" of Con Artists, Must Pay?
1. Who Helps The Con Artists?
2. What About Suspecting Helpers?
E. How To Divide the Remaining Assets?
F. Are All Victims Equal? They Are Not
1. Distinguishing between initial investment and profits
2. Markets and stolen goods: Policy issues
3. What about victims that <"smelled a rat>" and decided to withdraw their money after collecting the profits?
EPILOGUE
Tamar Frankel, Professor of Law, Boston University School of Law

Tamar Frankel is Professor of Law at Boston University School of Law. She is the author of Trust and Honesty: America's Business Culture at a Crossroad
"A financial thriller, a masterly page-turning inquiry into tragi-comic gullibility and greed, of Ponzi victims and perpetrators alike. The belief in market rationality (another confidence trick?) and the rocketing returns of finance, induced clever people to forget that there was no free lunch."--Avner Offer, Chichele Professor Emeritus of Economic History, University of Oxford

"Professor Frankel's book is a must read for anyone considering investment opportunities as well as those who provide investment advice and those charged with preventing investment fraud. Professor Frankel provides a captivating exploration of the characteristics of con artists who perpetrate Ponzi schemes along with the characteristics of those who fall victim to such schemes. But more importantly, she highlights how and why such schemes so successfully defraud everyone from the novice investor to those considered financially sophisticated, all while providing a provocative analysis regarding how best to ensure that we do not become the next Ponzi scheme victim."--Lisa M. Fairfax, Leroy Sorenson Merrifield Research Professor of Law, The George Washington University Law School

"Professor Tamar Frankel's book is a fascinating look at the world of con artists. How do con artists hide their scams-scams that often seem so obvious after the fact? Who do they scam? And why don't investors ever seem to learn? Throughout her investigations of these questions, she introduces a colorful cast of characters from today and yesterday. The book is a terrific read whether one is interested in human psychology or just wants to learn more about an irresistible, limited-time-only investment in 'gold-backed railroad bonds.'"--Allen Ferrell, Greenfield Professor of Securities Law, Harvard Law School