Ponzi schemes get a lot of attention when big ones go bust. Bernie Madoff, of course, got a ton of attention when his $20-billion con collapsed in late 2008. So did Allen Stanford, who was recently sentenced to 110 years in prison for scamming investors out of more than $7 billion over two decades.
But it turns out that the Ponzi industry is much broader and deeper than even the biggest blowups suggest. That's one lesson of a slim new book, The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims, from Boston University Law ProfessorTamar Frankel.
Losses from Ponzi schemes and other related frauds cost investors about $10 billion a year, according to Frankel, and victims range from ordinary people to executives at major financial institutions. One Ponzi scheme, in Romania, snared more than 2 million people.
In the basic Ponzi scheme, the con artist pays returns to old investors with cash from new investors — a system that collapses when investors stop pouring money in.
The people running the cons use remarkably similar tricks to lure investors, according to Frankel. "The tales that con artists tell investors are enticing in a consistent way," she says. "The narratives hide the truth in a consistent manner."
Here are four warning signs Frankel details in her book:
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