Embezzlement

Finance Allah Shmoop What are Ponzi and pyramid schemes Think

about those old movies you know the ones with the

scam artist The con men work in their mark The

grift the con the flim flam the hustle the bamboozle

While we're here to let you in on a little

inside dope we've got two scams you'll need Teo you

know lies up to the Ponzi scheme and a pyramid

scheme First let's talk Ponzi schemes And to start there

was actually a guy named Pansy Charles Ponzi He was

a con man during the nineteen twenties You know the

time of flappers and speakeasies and folks doing the Lindy

hop on top of flagpoles People were making money on

Wall Street hand over fist and in Florida land deals

And for a while with Mr Charles Ponzi you know

who had a very particulary investment structure But he didn't

actually invent the hustle Different con artists had used it

And authors including Charles Dickens had described the scheme for

at least seventy years before Ponzi gave his name to

the setup Well a Ponzi scheme works like this The

fraudster attracts investors by offering up big guaranteed return on

their investment For instance the actual Ponzi promised fifty percent

profit in forty five days and one hundred percent return

in ninety days He claimed that he was using some

kind of postage arbitrage to reap these returns In actuality

he just used new money coming in to pay off

old investors Well Ponzi got initial investors to give him

some money He used that money to help find new

investors and those new investors then gave the fraudster their

money And then he used the new influx of cash

to pay off the initial investors and kept going And

it all went well for a while But eventually it

stopped It became impossible to find new investors quickly enough

to pay off the old ones and make him go

away Eventually the whole thing blew up Well the most

famous Ponzi scheme in history isn't actually the one perpetuated

by Charles Ponzi It was run by this fine gentleman

named Bernie Made off he ran a multi billion dollar

Ponzi investment scheme disguised as a successful money management business

He was a respected figure on Wall Street for decades

and use this high profile respectability to rope in nearly

five thousand clients Well victims have made off included actor

Kevin Bacon and Nobel Prize winner Elie Weisel and pitching

great Sandy Koufax Well the scam would work like any

Ponzi scheme Kevin Bacon deposits a million dollars Madoff takes

a cut for himself then uses that money to pay

off other investors That only works as long as there

are new investors coming along to get involved Eventually though

Ponzi schemes run out of new blood and Madoff scam

eventually blew up in two thousand eight when the financial

crisis spooked Investors who asked for their money back and

well made off just ran out of money to pay

off the clients And ultimately while sixty five billion dollars

went up in smoke okay onto a pyramid scheme A

pyramid scheme involves your three bedroom two and a half

bath Victorian style pyramid being listed on Zillow and well

this guy's your realtor You called our bluff It's actually

named after the shape of a pyramid The Egyptians are

in no way involved And yes you geometry nerds Out

there we realised this image is a triangle and not

a pyramid Three D rendering is expensive around here from

up there with us The idea is the same So

you started the top with one person He gets money

from each of the people he recruits They finds two

people They pay him money for the right to recruit

other people into this pyramid scheme They also get money

for recruiting people So each of them finds two people

Same deal These new recruits pay money upward and so

on It keeps going and going just like Fonzie scheme

Well the pyramid goes as long as there are new

people to come onboard until it stops But eventually a

number of people available for recruiting runs out The people

on the bottom can't find anyone new stupid enough to

contribute money to this thing The people on the high

levels make money and disappear but well the people on

the bottom we have the largest group They're out of

luck and pretty much out of money The problem with

pyramid schemes While some legitimate companies have very similar structures

they're called multi layered marketing companies or MLM So you

probably heard of him Avon Party Light Herbalife Yeah those

guys You know your friends who sell candles or makeup

or nutritional Shake those air All ml EMS one level

recruits people on other levels with money moving upwards to

the top and it's all legal The difference Well theoretically

riel products are eventually getting sold to really customers A

classic illegal pyramid scheme just has money moving up and

not much value sent out or moving down But just

as in some of those old movies it's not always

easy to tell the good guys from the bad The

Bernie Madoffs of the world can look like legitimate Wall

Street players but turn out to be Ponzi scammers And

the new Invisible Lipstick product you're so excited about selling

can turn out to be a you know pyramid scheme

You have to be careful because well it really all 00:04:47.628 --> [endTime] can blow up in your face Hey