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Unmasking Ponzi Schemes: How to Protect Your Investments from Fraud

Are you in a Ponzi/pyramid scheme right now? Are you being ripped off without even knowing it?

Summary

• Some Ponzi schemes are perfectly legal and supported by the government

• Remember: Those who have the money, make the rules

• The key to avoiding a Ponzi scheme: get educated

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More than likely, you’ve heard of Bernie Madoff, the head of the largest Ponzi scheme in recorded history. If not, you’d better read up on him.

Madoff was sentenced to life in jail for his Ponzi scheme, where he eventually died at 82 years of age in April of 2021. He pleaded guilty to defrauding investors of $65 billion, obliterating many people’s investments, life savings, retirement plans, along with their hopes and dreams. While making himself very rich, he destroyed his client’s lives.

What is a Ponzi scheme?

While most people have heard of Madoff, only a few people actually know what a Ponzi scheme is. This is a big problem. Due to this lack of financial education, millions unwittingly have their pockets picked in legal and illegal Ponzi (pyramid) schemes. In other words, while people may feel sorry for Madoff’s victims, or scoff at them for being rich people who lost money, many fail to realize they are currently being scammed in the same manner.

The Ponzi origin story

Here’s a brief history of Ponzi schemes, named after Charles Ponzi, an Italian immigrant to America who found an ingenious way to make money.

Ponzi (1882- 1949) hatched his scheme in Boston in the days after World War One, his gimmick was the “International Reply Coupon”, a way of pre-paying foreign postage.

Because of a currency exchange quirk, Ponzi's Coupon—bought at a low price overseas—could be cashed in for a higher amount in the United States.

Ponzi told investors he could double their money by buying and selling the coupons, and it worked…at first.

The money came in, Ponzi paid big profits, and MORE money came in from investors, up to a million dollars a week (and that's in 1920 dollars).

But after a newspaper revealed that there weren't enough coupons in the entire world to support Ponzi's scheme, his fraud was exposed.

He hadn't been investing in coupons at all, only paying off his early investors with fresh money from his later ones.

Many of his customers went into bankruptcy, and Ponzi went to jail.

The dark truth about Ponzi schemes: why even smart investors get duped

Many people think of Ponzi schemes as illegal endeavors pulled off by shady figures, but the reality is that not all Ponzi schemes are illegal. In fact, some of the biggest Ponzi schemes, bigger than even Madoff’s scheme, are not only legal but also supported by governments.

As the old saying goes, “Those who have the money, make the rules”.

Let’s take a look at some of the biggest legal Ponzi schemes out there.

1. Social Security
   For Social Security to work, money is taken from young people and given to the old. The problem with Social Security is it will soon fail as all Ponzi schemes do, sometime around 2040 (by Robert Kiyosaki’s estimate). This is why most young people expect to see aliens from outer space before they ever see a Social Security check.

2. The Stock Market
   The reason so many investors feel investing is risky is because most investors know the rug can be pulled out from under them in a split second. Most early investors are waiting for the price of a stock to go up, due to new investor money coming in, and then grab their profits and run.

   With today’s algorithmic and High Frequency Trading (HFT), the stock market is even more of a Ponzi scheme. HFT involves giant investment houses, with the capital to buy and operate multi-million dollar computers, capable of performing thousands of trades a minute, trading against hapless amateur investors, day trading while the big houses are trading in milliseconds. Talk about suckers.

   Most capital gain investors, investors who are betting a price of something going up, such as a stock, property, gold, or collectibles are participating in a Ponzi scheme. Early investors win and late investors lose.

   This gets especially troublesome when you think about the fact that most people investing in 401k plans for their retirement. The reason successful investors think that the stock market will crash is because it is only propped up by 401k money. As large generations retire and pull out their money, there won’t be enough to replace it in smaller generations.

   Robert Kiyosaki digs deep into this in his book with pension expert Edward Siedle, “Who Stole My Pension?: How You Can Stop the Looting.

3. Taxes
   Taxes are taken and given to friends and family of bureaucrats and politicians. The problem with taxes is that money is taken from the efficient to be managed by the inefficient.

4. Pension plans
   Most pension plans are legal pyramid schemes. Pension plans depend upon younger workers contributing to pay off retiring workers.

   One reason why so many pension plans are in trouble is because the plans are underfunded. That means if new workers do contribute, or the stock market does not suddenly gain 20 percent per year, the old guys are toast.

   The PBGC, Pension Benefit Guaranty Corporation, the insurance company for these pension plans, is also broke.

   Retirement is a fiscal-cliff for baby-boomers who participated in legal Ponzi schemes.

   Again, for more information, read “Who Stole My Pension?: How You Can Stop the Looting".

Network marketing: not a Ponzi scheme

For some, most traditional businesses such as IBM are the true pyramid schemes.

When you think of a pyramid, you see most people at the bottom and only one person at the top. In business, that person is usually the CEO. Only one can make it to the top. It is a win-lose, dog-eat-dog, climb up the corporate ladder, with only one seat at the top.

Network marketing is the opposite. It is an upside down pyramid, with the point at the bottom and the base at the top. The entire business is designed to bring as many people up to the top as possible. Rather than dog-eat-dog, a network marketing business only works when you help your friends and family to the top. Unfortunately, many people quit long before they rise to the top. After they quit, they go back to the real pyramid scheme, back to their daytime job, often at the base of the pyramid, looking up the ladder at someone else.

Robert Kiyosaki’s experience with Ponzi schemes

Robert’s first introduction to a true rip off (an illegal Ponzi scheme) occurred when he was in his twenties. A friend invited him to a “party” where he was told to bring a thousand dollars. Like a fool, he did. Within an hour, he turned his thousand dollars (which was a lot of money, back then), to the host of the “party.” Robert was told he could make $50,000 but only if he brought sixteen more people, each with a thousand dollars, to the “party.” If anyone failed to bring in sixteen more people, the pyramid collapsed. Needless to say, the pyramid collapsed and someone walked off with Robert’s thousand.

But even then, Robert didn’t learn his lesson. While in his forties, he met a “Hedge Fund” manager who was a so-called “Golden Boy.” He had the magic touch. Again, a credible friend told Robert about him and invited him to a “party” to meet him. The people at the party were affluent, intelligent and successful. They were excited about the returns this “Golden Boy” was delivering.

Now smarter and wiser, Robert did not jump in. Instead he did his “due diligence,” which included flying to Florida to visit their corporate headquarters and meet their staff. Needless to say, their quarters and staff were stunning.

During their presentation, they showed both Robert and Kim Kiyosaki their “Wall of Fame,” their photos with celebrities, accolades from charities, and their civic awards from politicians. They also stressed their Christian faith and dedication to Jesus.

The only thing that caused some discomfort was later that night over dinner. The men were heavy drinkers, and they were not with their wives but instead with their young, attractive assistants. After they were blind drunk, they began screeching and hollering obscene things. Their call was loud, gross, embarrassing, and drove diners out of the restaurant.

In spite of the doubts surrounding their values, the Kiyosakis decided to give them the benefit of the doubt and started with the minimum $50,000 investment.

Like clockwork, the envelopes arrived showing impressive returns—on paper. After six months, Robert and Kim began discussing increasing their capital basis to $100,000.

Thank God they didn’t. A few days later, while walking past a newsstand, Kim saw the “Golden Boy” on the cover of Barrons. He was sitting on the beach on a beach chair, under an umbrella, with the headline, “Would you trust your money to this man?”

The Kiyosaki’s answer was, “Yes we did.”

It took a number of years, but they eventually got back about $28,000 of their $50,000.

Are you caught in a Ponzi Scheme?

Still, that wasn’t the last con. Most con men, like Ponzi, Madoff, or "Golden Boy" are very convincing, intelligent, charming people. They’ve succeeded because they’re capable of conning otherwise smart people. They have friends who believe in them and encourage you to believe in them. They have to be convincing, or their Ponzi scheme would never work in the first place.

So, look deep inward and ask yourself, "Am I in a Ponzi scheme?"