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Greed can make people do silly things, like believe they can cheat odds or gain incredible return on investments even when the whole world is in a financial crisis. We tend to forget that if it sounds too good to be true, it probably is. America has been home to the some of the most large-scale Ponzi schemes in history, orchestrated by crafty con artists who continue to bring down gullible investors with outlandish promises.
5. Charles Ponzi
Ponzi schemes acquired their name from the notorious Carlo (Charles) Ponzi, who was one of the first’s to scam people by making promises of extraordinary returns on investment. Ponzi promised clients 50 percent profit within 45 days or 100 percent profit within 90 days, by buying discounted postal reply coupons (IPRCs) in other countries and redeeming them at face value in the United States as a form of arbitrage (taking advantage of a price differential between two or more markets and capitalizing on the imbalance).
Ponzi emigrated from Italy to the US in 1903, with $2.50 in cash after having gambled away the rest of his life savings. He worked various odd jobs for fourteen years, until in 1917, he discovered a way to make himself and investors rich. In 1919, Ponzi established a firm called The Security Exchange Company. Ponzi contended that he could pay a small amount for IPRCs in weak-currency countries and then redeem them at a substantial profit in the United States. He promoted this idea through his company. Bank interest rates at the time were only 5 percent.
Investors loaned Ponzi their money and within a short time he increased the promised return on 45 day notes to 50 percent. By July 1920 he was taking in $1 million a week. People were mortgaging their homes and investing their life savings. But the glory days soon ended when a financial writer from the Boston Post started a series of articles questioning Ponzi’s money-making operation. To cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only 27,000 actually were. He was eventually charged with 86 counts of mail fraud and sentenced to five years in federal prison. Though he was released after three and a half years, he was immediately indicted on 22 Massachusetts state charges of larceny. He was sentenced to an additional seven to nine years in prison and ended up serving seven.
4. Lou Pearlman
He was manager of popular boy-bands such as Backstreet Boys, O-Town, Take5 and NSYNC in the 1990’s, but on May 21 2008, Lou Pearlman was sentenced to 25 years in federal prison for running a Ponzi scheme that lasted over twenty years. Cheating banks and investors of over $300 million, many of his victims were elderly people. The investors were enticed into investing in Trans Continental Airlines Travel Services Inc. and Trans Continental Airlines Inc., both which existed only on paper. These companies were part of a pyramid scheme that had been running for years. Pearlman had fabricated financial statements from a phony accounting firm Cohen and Siegel, to secure bank loans. U.S. District Judge G. Kendall Sharp gave Pearlman the chance to cut his prison time, by offering to reduce the sentence by one month for every million dollars he helps a bankruptcy trustee recover.
3. Nicholas Cosmo
The CEO of investment firm Agape World Inc. was recently arrested on mail fraud charges. Over 1,500 investors are believed to have lost more than $370 million through Agape World. Using superior methods of persuasion, Nicholas Cosmo promised returns of 48 percent to 80 percent a year, and investors paid a minimum of $20,000 for high-yield “private bridge” loans. (A bridge loan provides an immediate cash flow. The loans are usually short term with a relatively high interest rate, backed up by some form of collateral such as real estate or inventory.) These can be compounded by issuing small business grants to companies in name only but never actually giving any money.
Cosmo paid investors partial returns, represented to be profits from interest-generating loans. He persuaded the investors to invest additional funds in Agape and AMA (Agape Merchant Advance LLC). For an investment of as little as $1,000, investors were told they were buying packages of mortgages of 10 to 20 percent annual returns. Cosmo actually used over $200, 000 of the investor’s money to pay off a court order from a prior conviction. (Just a small discrepancy investors chose to turn a blind eye to.)
The Agape investors were mostly middle-class people who worked hard for their money, who got a little greedy and jumped on a tempting opportunity that came back to bite them right in the butt.
2. Reed Eliot Slatkin
Co-founder of EarthLink, an Internet service provider (ISP) company, Reed Elliott Slatkin cheated investors of over $600 million. Slatkin was an ordained Scientology minister and many of his victims were members of the Church of Scientology, including many Hollywood celebrities. American greed at its finest, Slatkin had raised approximately $593 million since 1986, from over 500 wealthy investors. He manufactured fake statements to show his investments were overseas in the fictitious NAA Financial brokerage firm. Creditor claims were approximately $255 million. He funneled most of the money to the Church of Scientology and their related entities. On September 2, 2003 he pleaded guilty to mail fraud money laundering, and obstruction of justice, and was sentenced to fourteen years in federal prison. Let’s just say, he would never be eligible for pardons Canada or anywhere else in the world.
1. Bernard Madoff
Responsible for possibly the biggest fraud in Wall Street history at his June 29, 2009 Bernard Madoff will face a possible life sentence in prison, and up to $170 billion in restitution. Madoff had begun his Ponzi scheme sometime in the early 1990s. From the beginning of the scheme, he admits to have never invested any of his clients’ money Instead- he deposited the money into his business account at Chase Manhattan Bank. He admitted to false trading activities masked by foreign transfers and false SEC filings. He was paying clients through the Chase business account, claiming the “profits” were the result of his own unique “split-strike conversion strategy”.
Financial analyst-whistleblower Harry Markopolos claimed that it was mathematically impossible to deliver what Madoff was promising his investors. Not to mention the fact that his three-person accounting firm with one active accountant was handling such a high volume of accounts. It took Markopolos about five minutes to make an initial assessment of the fraudulent nature of Madoff’s high investment returns. In four hours, he was able to work out the detailed math calculations, which revealed nearly twenty years of foul play; one of the biggest Ponzi schemes to hit Wall Street.