The Ponzi scheme puzzle : a history and analysis of con artists and victims

250 Pages·2012·1.418 MB·English

by  Frankel, Tamar

THE PONZI SCHEME PUZZLE
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THE PONZI SCHEME PUZZLE
A History and Analysis of Con Artists and Victims
Tamar Frankel

1
Oxford University Press
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Library of Congress Cataloging-in-Publication Data
Frankel, Tamar.
Th e Ponzi scheme puzzle: a history and analysis of con artists and victims/Tamar Frankel.
p. cm.
Includes index.
ISBN 978-0-19-992661-9 (cloth: alk. paper) 1. Swindlers and swindling. 2. Investment
advisors—Corrupt practices. 3. Corruption—Prevention. 4. Self-consciousness (Awareness) I. Title.
HV6691.F73 2012
364.16′3—dc23 2011051887
1 3 5 7 9 8 6 4 2
Printed in the United States of America
on acid-free paper
To my husband, Ray, and my children, Anat Bird
and Michael Frankel
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CONTENTS
Preface xv
Acknowledgments xvii
Introduction 3
1. Con Artists At Work 15
A. Th ree Stories of Ponzi Schemers 15
1. Charles Ponzi 15
2. Bernard Madoff 18
3. Gregory Bell 20
B. Th e Basic Design 22
1. Drawing Att ention to the Off er 22
a. High Returns at No Risk 22
b. Stories to Satisfy Investors’ Curiosity 25
c. Con Artists’ Stories Are Exceptional
and Creative 28
C. Gaining Trust and Concealing the Truth 29
1. Words Can Be Used to Signal Trust 29
a. Words Can Denote Trustworthiness 29
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CONTENTS
b. Signals to Raise Trustworthiness 32
c. It Depends on How You Say False Th ings:
Specifi c Promises with Vague Roles 34
d. How a Story Is Told Can Signal Truthfulness 35
e. Refusing to Provide the Details of a Scheme
Need Not Undermine Trust 36
2. Familiar Transaction Businesses and Forms
Seem to Make Verifi cation Superfl uous 38
3 . H iding Fraud by Actions: Prompt Payments
Th at Spell Trustworthiness, Low Risk,
and Much More 39
D. Hiding the Vulnerable Part of the Story:
Secrecy and Costly Verifi cation 41
1. Concealing the True Nature of the
Ponzi Business 41
2. Use of Justifi ed Secrecy 42
3. Stories Th at Are Costly to Verify 44
4. Details Th at Hide the Truth by D rowning It 48
a. Details Can Hide the Truth 48
b. Complexity Helps Hide the Truth as Well 49
E. Con Artists’ Deceptive Friendship
and Seeming Vulnerability by Age and Naïvety 52
1. Deceptive Friendship and Love 52
2. Deceptive Weakness of Age and
Seeming Naïvety 55
a. Old Age Can Deceive 55
b. Naïvety Can Deceive 56
2. Selling Th e Stories 57
A. Advertising 57
1. Th e Importance of Advertising 57
viii
CONTENTS
2. Where to Operate and How to Build a
Reputation 58
3. Showing Generosity 59
4. Entertaining 61
5. Att racting Att ention by Engaging
in Att ention-Drawing Confl icts 62
B. Recruiting Helpers 63
1. Cooperation, Competition, and
Congregation Among Con Artists 63
2 . Birds of a Feather Flock Together 65
C. How Do Con Artists Approach Th eir Victims? 67
1. From Family and Friends to Institutions
and Affi nity Groups 67
a. Introduction 67
b. Ethnic and Religious Affi nity Groups 70
c. Religious Institutions 74
d. Hybrid Institutions and Overtones 75
2 . T echnology Has a Growing Impact
on the Growth of Ponzi Schemes 77
D. Th e Sales Force 79
1. Collecting and Distributing Information 79
2. Paid Sales Force 80
3. A Pure Sales Structure: Pyramid Schemes 82
3. Con Artists’ Behavior Seems a “Normal
Usual Behavior” 8 5
A. Humans Have a Natural Ability to Pretend,
Lie, and Infl uence Others 85
1. Humans—and Even Primates—Have
the Innate Ability to Lie Convincingly 86
2 . Signs of Misleading Signals 87
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