Friday, May 02, 2008

Ponzi Schemes 101

Welcome to Ponzi Schemes 101. Okay, class, we are ready to begin our exploration of Ponzi schemes--what they are, how to recognize them and what the legal and moral ramifications are for becoming an "investor". The first thing that people need to know is that there are thousands and thousands of people who are currently investing in illegal high yield investment programs and most of them haven't got a clue that it's illegal. Most of them look at the small picture--"I can more than double my investment in 60 days."

According to Wikipedia's definition, a Ponzi scheme--named after Charles Ponzi--is "a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business."

Charles Ponzi (aka Charles Ponei, Charles P. Bianchi, Carl and Carlo) was the most notorious swindler of his time in the early 1900s in the US, but his criminal activities started off in Canada when he forged checks for himself. After his return to the US, he became an immigrant smuggler, then was involved in IRC and stamp fraud, which he later lured others into participating in, promising them high returns for their investments. After a run of bad press and investigations into his Securities Exchange Company, Ponzi was forced to pay out some of his investors. This caused chaos and fear and more investors pulled out. Eventually, federal agents raided his company and shut it down.

This is basically how a Ponzi scheme works:

  1. An "investor" or admin advertises that he is willing to help you achieve high returns on a small investment over a short period of time. He lures you in.
  2. He will tell you that he'll invest your money in offshore investments, high yield investments, hedge trading or other investments, but he won't give you exact names of said "investments" and you'll have no way to confirm where your money has gone.
  3. He will tempt you with the promise that your money will see a high return over a short period of time, which could be a week, 2 weeks, a month, two months.
  4. Once you "invest" a small amount of seed money, you will usually see the return with little problems (on paper), but you'll be advised or tempted to keep some money in and let it grow.
  5. You might start taking out money, but usually in small amounts.
  6. Most people begin increasing their initial investments after they see it "work" once or twice. That's what the scammer is counting on.
  7. Your investment isn't being invested in legal "offshore investments" that gives that high of a return. It'll be in a regular interest bank account or other accessible place, and since the money from thousands of investors is pooled into that one place, the admin is making some minor interest.
  8. Your invested money will be used to pay off earlier investors and to pay the operator/admin. You invest $1000 and your money is going to someone else as their "interest earned" or to an admin so he can buy a fancy home or sports car.
  9. A Ponzi scheme will offer a referral bonus so that you will bring in new investors. Why? So they can pay off the people before that new person you bring in, including you.
  10. This scheme relies on people's yearning to make money the fast and easy way. If 10,000 people invest $1000 or even $100, that's a lot of money. Even in a bank, it would make some interest.

Why do Ponzi schemes fail?

  • These scams are destined to crash at some point. It is really only a matter of time.
  • They will crash because of many reasons, like the person or persons running it will eventually get greedy, take all the money and disappear.
  • Or the government will step in and close it down--without warning.
  • Or people will wise-up and start pulling their money out, at which time the company folds and the operators steal what they can and disappear.
  • Or because people become suspicious and less investments are received, which then causes payout problems.

How do you know if you're involved in a Ponzi scheme?

  • Are you getting an abnormally high return on your internet investment? Like 20% or more for short terms like 1 week or 2 months?
  • Will the operator of the scheme not give you specific details on where your money is invested, including the names of companies invested in, so that you can check it out? (According to Bill E. Branscum, a financial crimes investigator, "Any legitimate investment opportunity should have an offering circular with specific, detailed information about the company and the investment."
  • Were you told you'd get a referral bonus if you bring someone in?
  • Has the admin/operator been involved with any similar short-lived investment businesses?
  • Has anyone had problems getting their money out?
  • Do you make deposits by either e-currency, like e-gold, and INTGold, or third party payment processors like AlertPay, SolidTrustPay, CEPTrust, TriStarMoneyChangers and StormPay.

If you've answered 'yes' to any of these questions, then you are more than likely involved in a Ponzi scheme.

What are some of the signs that a Ponzi may be on the brink of collapsing?

  • Is there any sign that other investors have not received payment after they've gone through the steps to withdraw their money?
  • Have any of the investors complained of late or incorrect payments or transfers?
  • Has anyone been told there is a computer glitch, banking error?
  • Has there been problems with investors not getting their money for longer than 2 weeks?
  • Has the admin/operator ever suggested that he will limit members/investors?
  • Has the operator ever badmouthed a former investor who swears it's a scam?

Some Ponzi schemes you may have heard about:

  • Second Life, the virtual computer world, was recently scammed by a "Nicholas Portocarrero", who has refused to reveal his/her real identity. Portocarrero started Ginko Financial, a virtual bank which operated much like a real bank only in virtual funds that happen to be vital to the game of Second Life. When Ginko began to collapse, the virtual world was a buzz and it is thought that this was a virtual Ponzi scheme.
  • Ironically, there is another "Nick" that seems to be operating a Ponzi Scheme. Pathway to Prosperity (P2P) has received a lot of attention since it set up in February 2007. A Google search will bring up over 900,000 links, and many of them are complaints by former members and warnings that P2P is a scam. So I checked into it, using the above questions to see if it fit the Ponzi scheme profile. And it does. Not only that, it is run by a Nick Smirnow, which seems coincidental. I found one post by an investor in P2P and it seems the poor investor hasn't received his money in months. I found another very interesting article by someone who investigated Nick Smirnow and Pathway to Prosperity very thoroughly. He points out the similarities between an ad for P2P and one for InvestPlace, a huge scam that cost its members thousands of dollars when its admin or operator disappeared with all the money. Ironically, Nick is linked to that company too.
  • "In the fall of 1998, the SEC filed a lawsuit against Robert Cord, Funding Resource Group a/k/a FRG Trust; MVP Network, Inc. a/k/a MVP Network (Trust); FMCI Trust; Funders Marketing Company, Inc.; Fortune Investments, Ltd.; Winterhawk West Indies, Ltd.; IGW Trust; which were accused of violating various securities laws by engaging in alleged high yield investment schemes which were, in actuality, nothing more than elaborate Ponzi schemes. A criminal forfeiture seized various funds, real property, cars, boats and other property belonging to Robert Cord and his various entities. In connection with his role in running the scam, he pleaded guilty to mail fraud." Source: Crimes of Persuasion
  • According to, "Three con men have been ordered to pay almost $17 million in restitution and fines after they bilked dozens of British Columbians out of millions in a ponzi scheme. The B.C. Securities Commission also banned the men from public markets for life. Malcolm Stevenson and Daniel Byer, both of Abbotsford, and Preston Pinkett II of Virginia, violated B.C. securities laws with their fraudulent firm, International Fiduciary Corp. They promised investors a return of six per cent a month, or more than 72 per cent a year, by flipping bank notes and promising investors they could withdraw their money on short notice from a U.S. account."

Of course, as with all scams, you'll find those that will defend a company, regardless of the evidence in front of them. The truth will come when the Ponzi scheme closes down with no warning, usually within 3 years. My advice: do your homework--yourself. Check out any company that offers high returns. A legal company will be easy to find listed in any business directory and investment companies will be governed in some way, depending on the country.

According to the Ontario Securities Commission, "A company is generally required to put out a prospectus before it sells securities to the public. It includes information like:
• a history of the company and a description of its operations
• a description of the securities being offered
• a list of directors and officers
• financial statements
• a summary of the major risk factors affecting the company
• how the company will spend the money it raises by issuing the securities

Anyone who tries to sell you an investment or give you investment advice must be registered unless they have an exemption."

It's my belief that to be informed is far better than uninformed. In the end, Ponzi schemes will lure people in with its promises of easy money and each individual has to determine if they can continue investing, knowing that it is a Ponzi scheme, knowing that they're taking the next new investor's money, and knowing that they are involved in an illegal investment scam. Sure, $1000 might be no big loss to some, but what if you started investing more? And then more?

This is what Brenda Martin seems to have been involved in--a Ponzi scheme--and she spent over 2 years in a Mexican prison just for unknowingly investing in an internet investment scam. Has she set a precedent now? Will others find themselves in prison because they invested in a Ponzi? These are the questions to ask, and since I know people who are investing in similar programs, I am more than a little worried.

Comments are welcome as long as they are respectful.

~Cheryl Kaye Tardif is a freelance journalist and bestselling suspense author of Whale Song, The River and Divine Intervention. She currently resides in Edmonton, Alberta, Canada.


Nick Knight said...

Ponzi Math Doesn't Add Up for P2P
There are any number of articles to be found on the internet, if you dig deep enough, that claim Pathway to Prosperity is a scam or Ponzi scheme, and/or that P2P’s CEO, Nick Smirnow, has been involved in several previous internet scams that have bilked investors out of millions. I have read all that I can find, and the common element is that there is a distinct lack of hard proof to support any of these allegations. However, it also got me thinking, and the numbers just don't add up to P2P being a Ponzi scheme. Here's why.

Ponzi schemes are named after Charles Ponzi, an Italian immigrant to the United States who, in 1920, bilked thousands with an “investment” scheme he devised and marketed. The basic idea depends on new money coming in to pay earlier investors, with little or no actual income derived from the company’s “investments.” When not enough new money comes in to make the payments, the scheme collapses and disappears.

Now let’s look at how this translates to P2P. IF P2P were a Ponzi scheme, to be paying out what they are currently would require an astronomical number of new PAYING members each and every month. The average investor in these online programs starts with well under $1,000, and most often closer to the $100 minimum. To pay just one, double maxed member (two maxed out accounts) would require 300 - 400 NEW PAYING members every month. If you extrapolate that out and accept that there are even just 10 members who are double maxed (conservative estimate), that would require 3,000 to 4,000 new paying members every single month. Add in another (hypothetical) 10 members who have one account maxed out (again, a conservative estimate), each requiring 150 - 200 new paying members per month to support their payouts, and you are now in the arena of needing 4,500 to 6,000 new paying members every month, just to pay 20 members! Those very conservative estimates don’t even account for the hundreds, if not thousands, of non-maxed members making smaller withdrawals every month.

The member tally posted on the P2P website is the gross total of anyone who has ever registered at P2P, including accidental duplicates, and regardless of whether money was invested or whether they're even still in the program. Of that number, it has been stated that only about a third are actually active members (interview with Nick Smirnow on My Cash Forum). By that reasoning, out of the current “24,000” members listed, there are roughly only 8,000 active. This is further supported by the 7,440 members registered in the P2P private forum, which is only open to active members (those with current plans). Of those, if you accept that even a third are new in just the last month, that is still many miles short of the number needed to sustain a Ponzi.

Like I said, the Ponzi math just doesn’t add up for Pathway to Prosperity.

Nick Knight is an investor and businessman whose portfolio includes traditional investment vehicles such as income property, securities, and mutual funds, as well as out-of-the box income products such as P2P. Mr. Knight has been a member of P2P since October 2007.

Cheryl Tardif said...

Unfortunately, Nick, your math doesn't take into account that Ponzi schemes just like P2P appears to be have operated like this for years. Money in from new investors is money out to those that cash in--which easily explains why people aren't paid on time when they try to make a withdrawal.

Most investors leave a majority of their money in, rolling it over into new accounts, so trying to say that everyone is taking their money out at the same time is not an accurate analogy. In fact, that action is what brings down most Ponzis. Ponzis crash when a number of investors try to take large amounts out at the same time.

Regardless of Nick's admittedly biased view (he's a P2P member), I have my doubts that this company is legal. Otherwise, why wouldn't investors be told exactly how to legally claim their income on Canadian income tax forms? I know someone who has invested and she said no one had a clue how to claim it.

Why wouldn't investors know exactly where their money was being invested? Legal investment programs almost always show investors a detailed portfolio of investment companies--and you'll know exactly where your investments are going, names of companies, addresses, contacts, etc. If P2P is legal, why aren't they posting a portfolio or at the very least giving one to investors? The person I know who is investing in P2P said all she knew was that casinos around the world were one investment...she has no idea which casinos, where etc.

Why would the operator of this company (ironically also a "Nick") have any problems paying investors (which I saw proof of on their old public forums and on investors' blogs)? Why is money delayed sometimes for months? How can funds be misplaced during transactions, as happened with one investor who committed a large sum of money?

And why would any legal investment company use internet banking services that have been tied to illegal internet schemes in the past?

I asked an RCMP friend to check into this for me. He said P2P sounded like a scam, so he asked a friend who was familiar with online investing to check it out.

This is what his friend had to say:

"Run DO NOT Walk from P2P! Scam Scam Scam !!!!!! Bells are ringing … sirens are screaming !!!! Throw away the bottle of glue !!!!

This clown’s name is Nick Smirnow (one R not two) He is running at least 5 Internet Scam sites that I found. They are called HYIP... (HIGH YIELD INVESTMENT PROGRAMS)

Here are two good Sites:

From Nick's Site:

We diminish the risks normally associated with these types of investments by pooling your money and spreading the investments across a diverse range of global opportunities such as bonds, IPOs, finance & property, private equity funds, forex, co-investing in direct investments and private placement investment funds etc.

Look at these absolutely stupid numbers for a rate of return from his site:

"7 Day Plan" - You earn a Net Profit of 1.5% daily for the 7 days, on top of your initial investment, thus if you choose to make a withdrawal, you would receive a return of 7 x 1.5% = 10.5% PLUS your initial investment !!

10.5% a week..hell that is 546% + rate of return annually. If they really are investing in the stuff above they are REALLY LUCKY TO 7-9% a year let alone 10.5% a week. This is an impossible scheme. If they are paying people which they will for a while it will come crashing down since it is an all out Pyramid play.

If you ping, you get A Whois lookup reveals that this domain is hosted in Amsterdam, NL. .. The hotbed of the Nigerian bank and lottery scams.

This guy plays all the games guilt, patience, high yield etc etc etc. Ask this guy what kind of snake oil he is selling.

Greed is the only driving factor here."

I have to agree. P2P has all the signs of being a Ponzi scheme. I just hope that the people who blindly invested in it don't lose the shirts off their backs...or their homes.

Sorry, Nick, but your math aside, P2P just doesn't add up to be anything but an illegal Ponzi scheme.

Legion said...

After following this P2P scheme for quite some time its increasingly obvious that all we have here is nothing more than a typical Ponzi scheme preying on the gullable who shouldn't be trusted with their own money let alone give financial advice to others.

Time and time again the unstable and sometimes laughable arguments as to why P2P isn't a Ponzi scheme appear.
These mostly fall in to the range of.
a, P2P's been around for ages
b, P2P's paying
c, I trust this guy with my money because like minded annonymous internet posters do as well.

Not forgetting the classic 'prove its a scam' statements.

There are often two camps defending a ponzi- those that know full well its a scam and must perpetuate the lie in order to keep new victims coming in so they can get paid and those few naive folk who will believe the world is flat if enough people tell them it is.

When P2P closes which it will many will move on to the next HYIP in the hope of recouping past loses. Kind of like waiting for the three card monty man to appear on the street corner so they can play him again.

For those gullable P2P members who find this hard to read and can't or won't believe whats blindingly obvious don't say you haven't been warned. Maybe a few might pause for thought before gambling their life savings away after all thats all a ponzi is, just one big game its just that not everyone knows they are playing and many that don't can't afford to play in the first place.....

Onwards and Upwards.

thewesleysnipes said...

Working at mcdonalds is a scam. Because my friend said she didn't get paid. So Im not going to work at mcdonalds, even though i want too. And I'm broke, and my car is about to be repoed, and im about to live on the streets. Im not going to work at mcdonalds. Or any other fast food restauraunt because all of them are nothing but scams. You see this "ignorant statement." All of the above comments made about p2p are "ignorant" You're either basing on what someone else said, or you're so called past experience. Which all of it is judging it on the outside. You haven't even tried it. So if u think p2p is a scam, i think working at mcdonalds is a scam. Well you see that's crazy. So p2p is legit. Onwards and Upwards!!!!

Cheryl Tardif said...

Yes, Alfred, I see your "ignorant statement". I don't quite get your analogy though. If I was someone who was about to lose everything and end up on the street, I'd take that McDonald's job.

And of course I'll listen to people who've been in P2P or have had experience with the owner. That's the smart thing to do.

Thank you, Legion, for sharing your thoughts on this.

A good, solid company will have nothing to hide, and if they did what they promise and people were making tons of legal money, P2P would only have very happy people, now wouldn't they?

Also there would be a portfolio showing everyone exactly where the money was being "invested". And there'd be nothing to hide on the part of the ones running the show.

Put it this way, if P2P is still around in 10 years (under that same name) and people can show they've made thousands of dollars legally and the policing authorities determine P2P is legal, then I'd have more faith in the company.

But for now, it's far better (and smarter) to be safe than sorry. There are just too many scam artists out there. Healthy skepticism protects you from being taken advantage of. My advice to anyone thinking of P2P, do your homework. Ask questions. Ask for a portfolio and business statements from P2P, and get tax advice from your accountant.

And like any smart person looking at a business opportunity, always talk to those involved and find out how they're doing, but ALSO talk to those who are no longer involved and find out why.

The thing to keep in mind is this: money doesn't come easy; we all have to earn it by working hard and smart.

Comments on this topic are now closed.

Thank you all for your interest.

Cheryl Tardif said...

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tech3v said...

So i am one of the many (5) in my family that has invested in P2P. Like with Gambling at a casino I "invested" what I was willing to lose, over a year ago. Guess what after one excuse to another I have nothing to show for my menial $500 dollar investment. I am not bitter about this loss i chalk it up to a good learning experience. But for those who still defend p2p you are either VERY the perfect "mark" or just very trusting. Either way We have been had but again that is life at least I didn't invest the modest $25,000 limit some people I know have. By the way they have not gotten a cent back ;)

Cheryl Tardif said...

Comments are now officially CLOSED.

Thank you all for your interest in this topic.

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Thank you.