A Ponzi scheme is an investment fraud in which investors make money, not from actual profit from a business venture, but from recruiting newer investors into the network. The newer investors’ money goes to line the pockets of the previous ones, giving previous investors the illusion that they're profiting. Usually, the organizer of the Ponzi scheme rakes in the biggest cut of the investments before the network collapses, which happens when the cash flow slows down due to a dwindling lack of recruitment or participants demanding their payouts. Another name for a Ponzi scheme is a pyramid scheme.
Warning signs of a Ponzi scheme include high investment returns with little or no risk, unlicensed sellers or unregistered firms with the government, difficult-to-understand investments with a lack of information and issues receiving payments. Other terms that conceal a Ponzi scheme’s true nature are “offshore investment”, "hedge futures trading", or "high-yield investment programs".
An Italian conman named Charles Ponzi was behind the original pyramid scheme, as the first person in history to successfully pull off the fraud. In 1920, Ponzi (who had numerous aliases throughout his lifetime) recruited investors - or fraud victims - to invest in international 'reply coupons'. The concept was that these reply coupons could be bought in one country and redeemed for postage stamps in another; the difference in the countries’ prices would bring profit to investors. Ponzi sold the idea that it would yield 50 percent interest in 45 days, and 100 percent within 90. In mere months, Ponzi lined his pockets with $20 million, the equivalent of $222 million in today’s dollars. Arrested and charged with 86 counts of mail fraud, Ponzi owed about $7 million and spent 14 years in prison. He died broke in 1949 in Rio de Janeiro, Brazil.
Since Charles Ponzi, such frauds ran rampant throughout the 20th and 21st centuries. However, within the last 10 years, these investment frauds seem to have exploded, with more victims involved, more money stolen and more media coverage. The following are 5 of the most shocking, all defrauding unwitting investors of what amounted to billions of dollars. These stories serve as cautionary tales for any budding investors who receive offers that seem simply too good to be true.
5 The Albanian Rebellion of 1997 ($1.2 billion)
The events that led up to the Albanian Rebellion of 1997 began a few years prior, when the country transitioned from the iron hand of prime minister Enver Hoxha to a liberalized market economy. Soon, Ponzi schemes promising contributors great returns on their investments dominated the madeover financial system. These schemes robbed two-thirds of the Albanian population of $1 billion - that was about 50 percent of the nation's gross domestic product. Furious over losing their money and holding the belief the government was responsible for the scams, civilians rebelled in the streets. The results led to anarchy and the death of 2,000 people before the United Nations intervened. The Albanian Rebellion of 1997 also became known as the Pyramid Crisis, the Albanian Unrest of 1997 and the Albanian Anarchy of 1997.
4 Scott Rothstein ($1.4 billion)
As the head of his South Florida law firm Rothstein Rosenfeldt Adler, the charming Rothstein was able to swindle investors of $1.4 billion between 2005 and 2009. Through his firm, Rothstein got investors to buy shares of settlements he said clients had with former employers. The attorney even convinced investors of the opportunity through forged settlement documents. Investors got their return on investments, all right - from the newer investors who didn't at first suspect where their money was truly going. In 2009, when his Ponzi scheme fell apart, Rothstein fled to Morocco with millions of investors’ dollars in a duffle bag. He was eventually sentenced to 50 years in prison, and has been cooperating with the government in hopes of getting a reduced prison term. Rothstein's scam is Florida's largest Ponzi scheme to date, according to Forbes.
3 Thomas Petters ($3.6 billion)
Victims in Thomas Petters' $3.65 billion Ponzi scheme invested in (nonexistent) electronic products for selling to (nonexistent) retailers. Petters - once a legitimate businessman - and his accomplices were arrested in 2008. One of his accomplices was Deanna Coleman, who blew the whistle on the fraud and was sentenced to 366 days in prison before her release in August 2011. In 2009, Petters was found guilty on 20 counts of fraud and money laundering, and is serving a 50-year sentence. Victim payouts might range from 17 cents to 25 cents on the dollar. Petters' scheme was the biggest in Minnesota's history.
2 R. Allen Stanford ($7 billion)
R. Allen Stanford's investment fraud scammed 28,000 people of $7 billion in paper loss. The number of Stanford's victims was over 10 times the number of victims in the infamous Madoff case. In 2009, the Securities and Exchange Commission filed a suit against Stanford’s company, the Stanford Financial Group, for fraud. In a March 2014 CNBC report, the court-appointed receiver in the Stanford case said that only $263 million was recovered, but half of that (about $120 million) went to expenses that included shutting down Stanford’s global operations. Though Stanford is serving a 110-year prison sentence, he’s appealing his conviction of 13 criminal counts.
1 Bernard Madoff ($17.3 billion)
Considered the most notorious Ponzi scheme in American history, the investors in Bernie Madoff's Ponzi scheme lost an estimated $17.3 billion through Madoff's investment firm. The investment firm, which Madoff launched in 1960, grew successful over the years. It employed Madoff's relatives, including his sons, and attracted a premier roster of clients including showbiz husband and wife Kevin Bacon and Kyra Sedgwick. The scam came undone in 2008 when Madoff’s sons reported him to authorities. Madoff admitted to his sons that his firm was a Ponzi scheme when they questioned his desire to pay early bonuses while he was having difficulty paying clients. Madoff pleaded guilty to 11 counts of felony charges and was sentenced to 150 years in prison in 2009.