Ponzi schemes

The words Ponzi Scheme mean that a fraudulent investment operation was created and implemented; where returns were paid to its investors from “existing capital or new capital was paid by new investors” instead of profit that was earned by an individual or organization running an operation. In most cases people who operate Ponzi schemes entice new investors by offering higher returns than other forms of investments; such as “short term returns that are unusually high or unusually consistent.”

The Ponzi scheme was named after Charles Ponzi who became famous and notorious for first using this scheme way back in 1920. It is important to note that Ponzi did not invent the scheme but his scheme took in so much money and hurt so many people that he was the first to be known for this kind of scheme in the United States. His scheme was based on the “arbitrage of international reply coupons for postage stamps;” however, early on he diverted the money that was invested in them so that he could make payments to earlier investors and of course, himself.

Basically, a Ponzi scheme is an investment scam that is created by a person in order to take money from investors and later on, disappear with the money. Ponzi schemes can go into the millions and billions of dollars. The success of this kind of scheme depends on the personality of the person conducting the scheme. He or she is usually quite dynamic, successful, trustful and communicates smoothly and effortlessly with others.

Keep in mind that there are five basic elements of a Ponzi scheme:

1. A promise that an investment will give an above rate of return and an explanation of how the investment will achieve above normal rates of return,
2. Credibility from the person running the scheme, convincing more investors to invest in the scheme
3. Returning the investment money to some investors with interest
4. Later, the pattern of investment returns are broken
5. Instead of returning the investment money and paying the promised return, the person or persons escape with the money and start a new life.

Another famous Ponzi scheme is one that Sarah Howe conducted in 1880. She was a feminist who lived in Boston. She promised women 8% interest on a “Ladies Deposit.” She touted that it was only for women; giving many women a feeling of safety. Later, she took the money and ran.

Then there was a Ponzi scheme in Haiti that happened in the early 2,000s. These were government-backed schemes touted as “cooperatives.” Many people invested in this scheme because they sounded authentic and safe. As a result, 240 million was invested in this Ponzi scheme; which turned into a historic swindle where many were robbed of their savings, in an area of the world that is so poor.

Still another example of a Ponzi scheme came from a Scientology minister by the name of Reed Slatkin. He presented himself as a smart investment advisor for A-list Hollywood residents and corporate bosses. From his garage, he cheated the rich out of almost 600 million. He then gave the Church of Scientology millions of what he swindled from others. All of this occurred in the late 1990s. In 2,000 he was caught and put in jail.

Then there was Gerald Payne, minister of Greater Ministries International, based in Florida, who cheated his congregation out of 500 million. This occurred in the early 1990s where he offered his worshippers investments in gold coins. Later, he created an investment plan that would double a person’s blessings from what he or she would invest in his plan and then later funneled the money toward the “church’s fake precious metals investments.” Later, he was caught, but most of those who invested in his scheme, never got their money back.

To conclude, Ponzi schemes have been around for years and in some areas of the world continue to bilk millions and billions of dollars from unsuspecting people. Always remember the old saying, “If it sounds too good to be true; it is!…

The Enron story

Enron was born in 1985 from the merger of two companies specializing in the transportation of gas. At that time the energy sector deregulation including the gas market created a new competitive arena where companies fought aggressively for market shares. Then came along the need for trading and financial hedging tools.

Enron embarked on this new business in 1995 when they held a good market share, modernizing their methods in 1999 with the creation of EnronOnline, an electronic trading platform via the internet. Given its success, Enron extended its activity to the sale of electricity and also engaged in brokering many other products of all kinds: up to 1600 including metals, weather derivatives, communication products, wood, paper, water, etc …

In a few years, the company had become a major international energy trading player involved in a multitude of products. From a four billion turnover in 1989, they reached 100 billion in 2000, of which 90% came from their trading activities. Fabulous it seems, this is what we could tell by reading this story: deregulation may allow all this profit.

The CFTC indirectly supported this business by granting an exemption from monitoring and control of these activities, also known as a loophole, which is a flaw introduced in the legislation that promotes some market practices that could be abnormal or even fraudulent. The CFTC (U.S. regulator of the commodities markets) and the U.S. Congress under both Reagan and Clinton, were fervent adherents of the free markets with minimal government intervention. Hence they created such loopholes that experts called the London, Dubai or Enron loopholes.

In 1992, the president of the CFTC was Wendy Gramm, whom Ronald Reagan liked to call his favorite economist, took the decision to exempt Enron energy derivatives transactions from the CFTC supervision. Enron will greatly benefit from this situation, including by manipulating the markets until its final collapse.

The following year, Wendy Gramm resigns to join the Board of Directors of Enron. In 2000, a law supposed to regulate the markets, the Commodity Futures Modernization Act law, consecrated the Enron loophole: in the case of the energy and metals markets, the law exempted Enron from virtually all control by the CFTC of their OTC transactions (which do not pass through the regulated markets ), but also of their transactions on their electronic platform.

Even after the fraudulent bankruptcy of Enron, a number of deregulated electronic platforms were allowed to continue to operate until the bursting of the sub-prime bubble: there were up to eighteen in the United States, twelve of which were specialized in the energy market.

Enron’s profits were made possible by the combination of three mechanisms:
– use of sophisticated financial processes,
– manipulations to make unprofitable assets profitable,
– accounting concealment using offshore companies in banking and regulatory paradises as well as off-balance sheet operations.

In total Enron had over 3,000 subsidiaries in banking, tax, regulatory and legal havens to remove unprofitable activities from their consolidated balance sheet. JP Morgan was sentenced to pay a fine of $135 million for this fraud. JP Morgan was lending money to one of these offshore subsidiaries in order to buy a futures contract on gas or oil to be delivered several years later but paid immediately.

For its part, Enron passed control of an equivalent amount of oil or gas to another clandestine company managed in a secretive way by a subsidiary of JP Morgan. But no one delivered anything: it was in fact a disguised loan with no interest. Enron recorded the entire contracts with subsidiaries as a sale by artificially inflating its turnover. Between 1997 and 2001, seven such operations were found, involving a total of $2.6 billion. And there were many other similar frauds.

Why Enron executives engaged in such a large fraud? The most convincing answer is that they did it simply because they had the opportunity to do so, thanks to new mechanisms of the economy and financial markets that appeared at the time. Fraud was integrated as a means of management or as a permanent adjustment variable rather than at the margin.…