Think Bernard Madoff, Charles Ponzi and J. Arthur Brown and you’ll no doubt think fraudsters, white collar con-artists and investment scams. Through his Ponzi-styled investment scheme, Madoff managed to swindle over $65 billion from literally thousands of well-meaning investors over a remarkable period of thirty years. Having turned his wealth management business into a Ponzi-shaped investment sham, he set about using age-old scam artist techniques to defraud would-be investors of their hard-earned money, pulling off the largest investment fraud the United States has ever seen. While Madoff adjusts to the reality of spending the rest of his life in a dark and lonely place, one can’t help but wonder about the hapless victims of his atrocious crimes. Although one would be forgiven for thinking that the victims of investment fraud are less financially astute and somewhat lesser educated than the average investor, you’d be entirely wrong. Just ask Kevin Bacon and Steven Spielberg.
Whilst Spielberg and Bacon suffered financial losses at the hands of Madoff’s deceit, they’re not the only high profile victims of fraudulent schemes. Zsa Zsa Gabor, Eric Roth, John McEnroe, Robert de Niro and Uma Thurman are just a few of the famous people who’d most certainly like to forget their experiences of being duped by clever con-artists. And while many believe that the Bernie-Madoff-type scam artists of this world are academically gifted, the reality is that they’re just better students of human behaviour and habits. Rather than prey on the financially illiterate or those with less-than-average intelligence, investment scamsters ply their deceitful trade amongst a surprisingly impressive profile of investor.
Research shows that the average victim of fraudulent investment scams is an optimistic, married man in his latter 50s who has a higher-than-average knowledge of financial matters and a deep confidence in his own judgement. Poignantly, these victims also have a deep-seated belief that investments scams are atrocities that only happen to others. More humorously, research shows that women tend to fall victim to investment scams less often because they ask too many questions, proving there’s nothing quite like an over-curious, over-cautious, ever-questioning female to throw a smooth-talking scamster off his slippery sales tack.
With a superfluity of investment scams ranging from winning the Spanish lottery to selling fictitious plots of land Masterbond-style, it’s the Pyramid and Ponzi schemes that are the overwhelming masters of entrapment. In a Ponzi scheme, the central fraudster collects money from new investors and uses the money to pay purported returns to early-stage investors, rather than actually investing the money. This type of scheme requires a steady stream of incoming cash in order to stay afloat. Unsurprisingly, the Ponzi-type scheme tends to collapse when the fraudster can no longer attract new investors, or when too many investors try to exit the scheme.
A Pyramid scheme, on the other hand, operates on a business model which involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment, product or service to the public. Like the Ponzi scheme, it is a non-sustainable business model that is destined to collapse because it is simply impossible to enroll the number of participants that the model relies on. Most Pyramid schemes run along the concept of eight participants, each tasked with ‘recruiting’ an additional eight participants to form the next rung of the Pyramid. A cursory glance of the numbers should be enough to cast doubt on the viability of any Pyramid scheme:
1 8 (Where each of the 8 participants must recruit 8 additional people into the scheme)
2 64 (Where each of the 64 participants must recruit 8 additional people into the scheme, and so on)
4 4 096
5 32 768
6 262 144
7 2 097 152
8 16 777 216 (One third of South Africa’s population)
9 134 217 728
10 1 073 741 824 (More than three times America’s population)
11 8 589 934 592 (More than the total number of people in the world)
The exponential nature of the business model is the very basis for its non-sustainability and even the most basic mathematical calculation will expose this fundamental flaw. The reality, however, is that these schemes are packaged as highly sophisticated multi-level marketing businesses and touted to unsuspecting investors who neither question their credibility nor investigate the truth behind their sales pitches. Blinded by promises of lofty inflation rates and guaranteed double-digit returns, many investors jump at the opportunity to make a quick buck rather than pay attention to the alarm bells that should be tolling somewhat loudly.
Besides for promises of unnaturally high returns, investment scamsters come armed with a quiver full of unethical marketing tactics. Guilt-framed degrees and diplomas together with a list of unpronounceable credentials? Check them out. Trying to convince you to invest by assuring you that your friends, community or Church members are invested? Don’t be so sure. This is a deceptive tactic called social consensus which tricks you into believing that everyone’s doing it so it must be legitimate. A once-in-a-lifetime opportunity but you have to take advantage of it right now? No ways. There are few deals that are so time-sensitive that you aren’t permitted sufficient time to do your own investigations and obtain a second opinion. Guaranteed investment returns of impressive proportions? Be suspect of anyone who guarantees that an investment will perform in a certain way. All investments carry some degree of risk.
Genuine long-term wealth is created by time in the legitimate investment markets and by regularly reviewing your investment plan to make sure you’re achieving the appropriate investment returns. There’s absolutely no doubt that unscrupulous investment scamsters will always abound, especially in times of economic down-turn. Rather than adopt an ‘it’ll never happen to me’ approach to investment scams, our advice is to stay on guard, ask questions, check credentials and if you think it sounds too good to be true, it probably is.
Categories: Lifestyle Financial Planning