Stuff You Should KnowPonzi schemes. How do they work? And who's Ponzi? Join Josh and Chuck in this classic episode to discover how an Italian immigrant created a classic con that's still fleecing investors today.
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How d everybody. This is Chuck here on the Ranch and How Stuff Work Studios and welcome to Saturday selects April nine, two nine. We're going way back into the archive for this one, how a Pons Schemes Will Work. And honestly, I picked this one because I believe, I believe this is the very first instance of me doing my bad Italian accent. I think it started with this episode, if I'm not mistaken, and it has since become such a part of the show, and uh, I thought I might as well repost this select episode from where it all began. And not only that, but it's a really interesting you know, it's a really interesting I'm falling into it right now. Pons schemes, very very interesting topic and um we we we get into it here we men. Let you know how to be aware of him and in the history behind it, there was a real Pons you know that, all right? Learn all about it right now, everyone, How Pons schemes work. Welcome to Stuff you should know from How Stuff Works dot Com. Hey, and welcome to the podcast. I'm Josh Clark Chuck say Hi, Hi, welcome people. This is stuff you should know. Indeed, Chuck's got his um little jug of vodka. I got my Fresca and we were ready to go. All right, Chuck, No, I don't drink vodka wire Chuck, Chuck. Do you know how we have these web blogs? Now? There's like a stuff you should know, web blog, a k A blog. Yeah, sure, yeah, if you want to be all hit or whatever. I do know how we have that because I write on it every day. I know. I was just starting a conversation, Chuck layoff. Well, yes, sorry, Um remember that post I put up yesterday that you said like you read three times and still couldn't make heads or tails of Yeah, I didn't get it. Well, there's a there's a part of it, uh, kind of the crux of the whole thing. I don't know if that's the case or not, but anyway, there's an aspect of it. And it was about these um, these two artists and um, well one of them just goes by the name Arakawa, right, and his partner, and I don't think just artistic partner. I think I think that their life partners. Maybe her name is Madeline Gins, right, and they have been quite successful at creating this architecture. Um, that's intended to achieve immortality, right, how so well, the way these two have done it is um by through surprising, disturbing architectural choices. Right. Basically, their theory is that if you create or if you live in an uncomfortable dwelling, um discomfort or comfort leavest the laziness and sedentariness, and then that's ultimately what kills you. Holly unproven, but they designed their architecture based on that theory, so they keep you uncomfortable, and uh, it's unfamil Earlier, I think I know this. I think we actually have an article on this, Like the floors are undulating, undulating floors and uh yeah, I've heard of that. They also like um kind of moonscape floors, um angled like ceilings. That just it doesn't sound like a very pleasant place to live. Pretty interesting that this one guy and these things go for there there just to build them, they cost millions of dollars, but they have built several. Most of them are lofts in in Tokyo. And this one guy who lives in one with his family said that he's lost like twenty pounds and doesn't have hay fever any longer since he moved in there. Yeah. Um, but there their their whole firm is basically in jeopardy because they were heavily invested with one Bernard made Off, who you may may have heard. This guy's reach extends everywhere. We're talking Kevin Bacon, right, and there's a six degrees joke in there somewhere. Um, I imagine Kiras Sedgewick, since Kevin Bacon is in there, Jaja Gabor, Spielberg, Spielberg, and that's just like the tip of the iceberg, right, I mean, thousands and thousands of people were invested with this guy and it turned out he was a Ponzi schemer. That's right, it's a Ponzi scheme. Yeah, Chuck likes to say it like that in a tribute to the Italian immigrant Mr Charles Ponzi, who was running around in the twenties. And actually, yeah, you want to talk a little bit about Mr Ponzi. Yeah, I didn't know this until I read the article. Is pretty interesting, and you know, Ponce's all over the news, so it's kind of cool to get some background. Yeah. Oh, and also we should probably say thanks to all the people who wrote in and requested that we do this podcast, right, this one's for you, right. Bernie Madoff made off excuse me himself wrote in yeah he did. He's like, hey, can you tell everybody what I did? So, yeah, in the nineties, Charles Ponse. What he did was at the time there was if you want to send mail overseas, you would include what was called an international reply cupon well if you wanted to reply, right. But it's basically sort of like, uh, when you get something from you know, mag magazine and the postage is prepaid to return the card, you know, right, it's it's prepaid so that you get that back to say, hey, these people got that exactly right, So this is what you did back then. Uh. He had an idea. He said, hey, if I go over and buy these in a different country where they're cheaper, I can come back and sell them in the United States, right, And he could do this because these things were internationally recognized. There were same in any country, but apparently they went for different prices in different countries. Right, So it's not a bad business model, right, right, I would say so right. Uh. And things went pretty well at first. He got a lot of investors and made some pretty good money, but the return that he promised, which what was it again, It was a ridiculous promise. It was I think return in forty to ninety days. So yeah, that should have been a red flag right then. We'll talk about that later. But yeah, that didn't go as well as he thought. Um, but he kept getting investors and he just kind of kept this all quiet. So what he would do is he would payback some to the initial investors based on the money that the current investors were giving him, and just kind of kept going in a cyclical way until he had a lot of He started you know, taking a little money for himself too, and uh ended up having you know, millions of bucks off this in the nineteen twenties before it finally crumbled. Um as a big scam. Well, the reason he was found out was because somebody apparently calculated that, um, there would have had to have been about a hundred and sixty million of these things extant for him to be making the money he was making, and the problem is that there was only twenty seven thousand exactly. That's that's kind of what found him out. But what I got from this, what I got from reading about Ponzi schemes, is that, Um, Charles Ponzi didn't appear to be a huckster from the outset, like this is actually a legitimate business that he was trying to run. Sure, I think it was an act of desperation. Um, And well, we should probably talk about exactly how Ponzi schemes work. Right, they're pretty straightforward and simple. But I can't imagine that as they just get bigger and bigger, you start to eat a lot of role aids. Right. I bet that that was the original Ponzi scheme, and I'm sure he was nervous as it was going. What kind of scheme? Pons a scheme? Very nice, Chuck, So do you want to give some detailed explanation on how Ponzi schemes work? Yeah, it's actually pretty simple. What you do is you, um, you come up with a investment a shell sort of, and you get people to invest in your in whatever you're saying you're gonna invest in. In this case, and in the original Ponti scheme, it was these reply coupons, but nowadays it's usually like a stock thing. So you get these folks to invest and you take their money and essentially, UH use that first rung of people to attract other people to invest. And once you start getting other investors, you can pay back those initial folks and they can go on record and say, oh, yeah, you know, I made a great return. That's exactly right. And then that even more investors right, and more wrongs, and you just kind of it's sort of like robbing Peter to pay Paul the entire time, right, but you're pocketing like Ponzi did some for himself. Right. At a certain point you can start skimming off the top, right, And but it's not like it take the money and run proposition. It's the take of the money, stick around and pay people off as much as you can. The problem is is to like, people don't divest very easily. When they get a better and unbelievable return on something, they want to keep investing. Sure, So if you're like, no, no, you can't invest anymore, the people are going to start to get suspicious. So you've got your first wrong, you've got your second wrong, and then so on and so on and so on. But to sustain it, you have to keep adding more and more wrongs. But the more wrongs you add, more difficult it is to pay everybody back, so it's inevitable that collapses. But as some people will know they're investing in a Ponzi scheme, some of those first wrong people. Yeah and yeah, from what I understand, people can actually make money off Ponzi schemes. You get in early enough, and you're smart enough to get out while it getting is good because those are the people are gonna get paid first, so they can vouch and say this is a really great deal, right exactly? So yeah, sure, yeah, So the whole that's that's pretty much a Ponzi scheme. And if it sounds a lot like a pyramid scheme to you, you would be right. Uh, it's virtually the same structure. The one big difference is is that in a Ponzi scheme, you're not asked to do anything. You're just an investor. They just want your money. Uh. In a pyramid scheme, generally you have to do something like you are buying in uh to sell something? Sorry? Well no, actually, UM. On Amway site they have uh like on the f a Q section it's like, is am Way a pyramid scheme? And they're like where a pyramid model schemes? The wrong word to use and Actually, the pyramid model has worked for legitimate businesses Am Wai, Mary kay Um paper Chef, pamper Chef. That's another one. So yeah, So I mean it can work and it doesn't necessarily have to be illegal. That that that's the other distinction between Ponzi schemes and um pyramids models is that ponzi schemes are always fraud completely false because it's an investment, but the money's never invested. So it's so simple. When I read this, I was just like, it's the beauty is in its simplicity, Just like, give me a bunch of money and I will keep it and get more people to give me money. I'll give you a little bit, and it's just amazing how that works. Can you imagine being such an edgy, savvy investor that you actually knowingly invest in ponzi schemes? Who does that? I don't know. I bet there's some names on the on the Made Off List. Yeah, I'm bet I'll bet um. But no, he did everything alone. We'll get to him in a minute. Allegedly still more, he confessed, buddy, Well, we're certain things are still alleged at this point. All right, Well, we'll just go with it. You're such a c O A dude. But I appreciate the oh because that includes me. UM. So Ponzi wasn't the guy who came up with a scheme. He he did it so well that they named it after him. But the earliest one we know about goes back to, UH eighteen eighty early eighteen eighties in Boston with a woman named Sarah Howe. I don't think I know about this one, okay, So she actually actively and purposefully built a Ponzi scheme, although you know what, with it being forty years before Charles Ponzi showed up, she probably didn't call it that to herself. What was her name? How Sarah how the how scheme? Yes, if she were, if she did have enough foresight to know that it would eventually be called a Ponzi scheme, how would it sound in her head when she said, this is the kind of scheme that I'm carrying out. It's a scheme? UM? Anyway, Miss Howe basically put together a UM, a group of thousands of women investors and UH invested in women's UM Women's Liberty bonds, I think is what they were called. UH. That's supposedly what the investment was for. But no, it wasn't. She just basically carried out a Ponzi scheme um and she managed to rake in about half a million bucks before she was caught. Uh. And then another guy shortly after, about the turn of the century. His name was William Franklin Miller, and he also builked investors for about another half a million. And this is, you know, substantial enough to be remembered a hundred years plus later. But Ponzi was the first one, right, Ponsi was the first big one, I should say. Uh. And then you don't really hear about anybody in in the world of Ponzi schemes. I mean, I'm sure you can, but nobody huge doing it right now, well until Lou Pearlman. Is that where you're going? I was going to go to the Balkans first blist to Mr Pearlman. Okay, Yeah, this is one of my favorites, just because his associations are kind of funny. H Lou Pearlman, who I think you have to say his name like Lou Pearlman. That's how I got that impression as well. And he kind of looks like that kind of guy too. Yeah, he was. Uh, he kind of funded the boy band craze in the nineties. I know, you remember the Backstreet Boys because of the tattoo you have on your neck, and uh, in Sync was the other one. I don't know if you have a tattoo of instinctly, okay, I was covering all my bases. Uh. So he funded these bands. Uh, And it turned out in two thousand and six that he was running a big Poncey scheme. He had been for like twenty years, right, and a lot you know, in Sync and the Backstreet Boys were kind of funded on this Poncey schemes. I don't think funded kind of at all. I think they were fully fully funded, right, Yeah. And this this guy created the Backstreet Boys and in Sync and funded him with illegal money. So those yahoo's kind of oh ponce with their careers, yes they do. Yeah, well their careers past tense, right sure? Um, timber Lakes done well for himself. Was he in one of those who j T I don't know who that is? Shut up? Um? All right, Back to Albania. Yes, Albania. Basically a whole bunch of people were working this big Ponzi scheme, which from what I understand also, UH can extend the life of a ponzi scheme, h. Lou Perlman is an unusual animal, uh, and that he could carry it out single handedly for twenty years. Um. But in Albania, for a while a group of ponzi schemers UM had one set up that builked these investors out of two billion dollars before it collapsed, which is in Albania, that is thirty of their gross domestic product. That's huge, Like how to cripple a country? Yeah yeah, and yeah, so yeah, I think Albania is probably second world. Um. So, I think a hit like that is just ginormous. And that was a big problem when it happened. It was because when people found out, they started riding in the streets and fires broke out and people died. Yeah. Yeah, so that's the Albania, the old Albania ponzi scheme. And we should note that Lou Parliaman he went to jail or received a sentence of twenty five years for conning three hundred million dollars, and apparently every million he paid back they cut a month off the sentence, which seems really fair, I think so. But Pearlman three million dollars sounds like a lot, it ain't it was. And then two thousand and eight came along the big daddy dude, this guy Bernard made Off, one of the founders of Nasdak. Yeah, which is one reason why it works so well, because he was beyond legit He was beyond legit um. Although he his One of the other reasons he was so successful was that he was smart. First of all, like Sarah, how he used affinity fraud. An affinity fraud is where you are bilking. You're you're using the inclusiveness of a of a group to um against themselves, right, So he uh used his membership in a a uber wealthy, very exclusive Jewish country club down in Florida to prey on investors at for um. And you know, the affinity fraud happens a lot like and usually it happens with religious groups. Somebody comes in, it's like, hey, I'm a Lutheran two and I've got this great investment. Since he's a Lutheran, you know, he seems upstanding, you trust him, and then that's that. But made Off very much used affinity fraud, at least at first, and then news of his amazing returns got out. But as I was saying, the reason he was so successful is he didn't pull a Ponzi and say I'll get you fifty percent return in forty five days. You know, Uh, he offered reasonable I think eleven percent was the average returns over the long haul, right, That was the key. It was very believable. Well to an extent. Have you ever looked at our prospectus, the t row price prospectus or prospectus? Yeah, have you ever noticed, like if you look at it's like one year, three years, five years, ten years, and it'll be up at one year down, three years down, five years up. He was offering like a straight even kill eleven percent return. You couldn't lose, right, So that actually should have been a red flag, but it wasn't. Right um. And in two thousand one, Barons, the Financial rag they published a an article on him specifically was saying made Off can't be offering these returns mathematically speaking, this isn't possible. And no one listened. But chief among the people who weren't listening was the SEC. Yeah, and they've been under a lot of fire lately because they did not listen. They did not investigate, even when it was kind of handed to them, like hey, several times, actually they were like two or three formal complaints to them and they never followed up. Well. One reason why, and this is even another reason why he was successful, is he was also running a legit business alongside it, so he could sort of defer, you know, when he needed to pay people back and things were getting tight, he could pull a little money out of his legit business and do that, and apparently did so promptly if somebody wanted to um withdrawal. Yeah, they got to check like that. Questions asked, Like when Kevin Bacon was like, we're heading to Barbados and I need a million dollars because I'm gonna buy a hut on the beach, right, I'm trying to hide my wife from her shame for being in the closer right Yeah. Um so yeah, made off was very, very successful, to the tune of fifty billion dollars he made off with. I know he's got the perfect name for him. I should have been like, wait, what's your last name? No, I'm not investing. Every headline has already used that, so that's probably stale by now. Yeah, thanks for that. Chuck. So what can you do, Chuck? How do you stay out of a Ponzi scheme unless you're a very savvy investor who's totally unconscionable. Well, uh, there's a few things you can look for, um, And and it also should be noted that a Ponzi scheme is pretty much a one way street to collapse. There's really no way to pull it off in the long run sustainable unless I think a lot of people might start these and think, well, I can get out at a certain point, pay everyone back and make a lot of money. Um. But yeah, it's it's not a good working model in the end. Well, apparently the point to a ponzi schemers to keep it going until they die, Yeah, which is considered a big success because you live like a billionaire and then uh, at the end, you know, you die or you know, you off yourself. Speaking of that, did you know that um, after he was found out made Off was spending a hundred and sixty grand a month on personal security at its penthouse. Yeah. Do you know how many in Manhattan? Do you know how many bodyguards? That buys you? That's like Delta Force money? Yeah? Yeah, uh so yeah, some things you can look for. Um. The obvious of course is if it sounds too good to be true, it is. That's the oldest edge in the book, and it's true across the board. Uh So someone's making you promises on big returns, then you should probably turn around and walk away. Don't let anyone pressure you into doing well. Pressure. That's another point too, is I mean, it's usually going to be a high pressure pitch, like you have a very limited time window, maybe for as long as the person standing there, um, and you're made to feel like a jackass if you don't take them up on it. Um. But yeah, yeah, pressure is definitely one one of the factors. And even one like you said that uh like made off scam where he would not promise huge returns, that might make it a little more believable. But everything, like you said, fluctuates, So if it's a consistent even if it's a consistent like five growth for years, then that should be a red flag right there. And also you should um ask questions and and demand answers as well, because I mean, if you're just if you have a friend who has a friend that has this great investment and you cut him a check and it turns out to be a Ponzi scheme, Well, t s for you. That was a stupid thing to do. You should know what your money is being invested in. You should know who's investing it. You should and even if it's legitimate, you should be asking these questions if it's through any of the major brokerages, but not how many fees there are. Just just that's a good habit no matter what. Uh. And the other thing is um even if you're involved in a Ponzi scheme, even if you get sucked in, you should never it should never break you and leave you bankrupt. Excellent point, Chuck, because this is probably the most important important point. Well. And they always say diversification is a key to a good portfolio, and this is definitely true here. You should not invest all your money in one thing. You're just setting yourself up for for bankruptcy. And whether it's a Ponzi scheme or not. Because you do all real estate and you're just totally invested in real estate in two thousand and seven, you're in big trouble. I mean, even Donald Trump uh hit the lowest of the lows. At one point. We all forget I think he's lost a lot of his old edge that he used to have. He's made some had decisions like the TV show. Sure, no one needs to see that, you know. And if you if you do find yourself in a Ponzi scheme and you're not the type to take the law into your own hands with like a tire iron or anything like that, you could always contact the SEC. I don't know that they'll do anything, and they probably won't, but it's worth a shot anyway, right right, Oh, when we should Just as a sidebar here, I know that made Off did confess, but they are there's a SEC is still coming under fire because he's claiming that he acted alone and didn't have any help with this is which is really really hard to believe just because paperwork alone. First scheme this size would be huge, and uh, some people think out there that he probably had his family involved and then did everything he could to cover for them and take the hits but yet to come out well as even if they weren't involved, their salary came directly from the bilking of other people, even if they somehow we're just totally unaware of it, you know, it makes it kind of I don't know it puts it puts their own wealth in question, right. So yeah, so that's the Ponsi schemes. That was very good, Chuck. Thank you, Chuck. The last time I'll say that, are we Are we going to talk about our spoken word album? Yes? Yeah, and then maybe we'll talk about blogs and then listener mail stick around first, all right, So we do have a spoken word album, our first one, and it is about the economy and economics. Everyone knows that we are in the second Great Depression, and um, we just kind of decided to make a spoken word album about that. That's that's such a an off a slightly off kilter description. It's more like a guide, right, right, possibly a guide to the economy, that's what it's called. But it's very big, right, Like there's a lot of stuff in it, right, Yes, it's called the Stuff you should know, super Stuffed got to the economy, and it's got expert interviews. Josh and I get out of the studio, we go in uh around the working Farm, chicken farm, don't spoil it. And Jerry are awesome producer. She did excellent sound design and it's got more bells and whistles and it's it's definitely a cut above the silliness we do here each week. Yeah. Yeah, And you can find it by typing a super stuffed in the search bar at iTunes. It's three frankly chuck, and I think it's worth it. I think so. So if you want to get it, knock yourself out, get it a couple of times if you like support us, Yeah, because it blows up your computer after forty eight hours, so unless you keep downloading it fresh each time, and I'm paying for it over and over again, not sure at all. All right, So there was that plug that was plug the blog. Yes, we've been plugging the blog now. I hope you guys aren't sick of it yet. Um, but Josh and I blog a couple of times a day. He post once, I post once, and it's called stuff you should know. You can find it on the right hand side of our homepage at House of Works dot com. And we just cherry pick interesting news items and kind of like what we do here, except it may not be enough to flesh out a full show. So yeah, and a couple of times we've we've post sit on listeners suggestions like why don't you guys do this absolutely. Um, So yeah, keep keep the ideas coming. We love them. We do it keeps us from having to do any real research, is true, and you know what, that leads us to listener mail time. That's right, Okay, Josh, this is an installment of stuff we should know, stuff we should have known. No, it's not, because sometimes it's additional things. Quit saying that. This one is from Sarah, and Sarah wrote in UM about the word theory versus hypotheses. Sarah is a teacher, and we say all the time, someone's theory, someone's theory, and she says, we've been misusing it. She says, in the thinking Cap podcast you repleted, you repeatedly referenced theories about savantis um and left hemisphere damage, and scientifically speaking, these are not theories, their hypotheses. So her basic point is that a theory is not just an educated guess. It's uh something that a lot of detail and research has gone into to get to the point where you can call it a theory, like the theory of evolution, which is often dismissed as oh, it's just a theory, but a theory has actually got a lot to it. So Sarah wanted us to set the record straight, so we did that. Another little minor correction here. Josh said at one point we were the only country that uses UH the imperial system. I thought we got this out of the way with the bodies on Everest Podast. We did not officially U s Burma, Liberia and Myanmar. Myanmar and Burma are the same place. Okay, well do you have it ever since the junta? It's now me and mar look at you. So rich from Omaha, Joshua from you, Claire Wisconsin, Stephen from Newark, Delaware, and Jeanne or Gene Gene. They all wrote in and told us that, and I have one more and I like this one. Stephanie wrote in and told us that on our afrodsix podcast, we're talking about UH phallic symbol and fallacies, and we were talking about an oyster. Apparently there is a word for something that resembles the female geniti. Yeah. I was interested to hear this because we kept saying female genitalia. And I wish that she had written in before then. And we knew that phallus only represented the male genitalia, but I did not realize there was one for female Yannick y o n I see And she said, Yannick or Yanni is Sanskrit for the word womb vulva in place of origin. And she said she just want to tell us this because for one of the first times in her life she actually knew something Yonick. So thank you Stephanie for the Yeah, thanks Stephanie, Nick, I'm getting it. I'm processing it right now. So, Yanni, can I remember the famous tennis player, Yeah, I knew was actually a reference to female genitalia. I wonder if he knows that. I'm sure it's her time, truly. But now, so, if you want to point out that there are other words Chuck and I are unfamiliar with, basically, let me know that I shouldn't call my crackpot theories theories, but hypotheses instead, or just say hi. You can send us an email to Stuff podcast at how stuff works dot com. For moralness and thousands of other topics, visit how stuff works dot com. M hmm,
