Running head: THE LIFE OF LUXURY 1

The Life of Luxury: An Analysis of Ponzi Schemes in the United States

Daniel J. Sweeney

First Colonial High School

THE LIFE OF LUXURY 2

Abstract

This paper discusses Ponzi schemes and the destruction they cause. The author introduces the

paper by explaining the origin of Ponzi schemes and explores the Madoff scheme, the world’s

largest Ponzi scheme. All other Ponzi schemes that are in the paper are compared to the Madoff

scheme. The author also discusses the negative effects that these schemes have on the

communities across the world, psychologically and economically. Ponzi schemes are a

dangerous form of fraud; often, they are difficult to detect and dismantle. Lastly, the author talks

about legislation, regulatory agencies and court cases in relation to Ponzi schemes, all of which

aim to stop and prevent this form of fraud from occurring.

THE LIFE OF LUXURY 3

The Life of Luxury: An Analysis of Ponzi Schemes in the United States

Billions of dollars have been stolen and used to fund the exuberant lifestyles of white-

collar criminals. Ponzi schemes have been created by thieves to systematically drain large sums

of money from the global economy. A Ponzi scheme is “[a] type of investment fraud in which

investors are promised artificially high rates of return with little or no risk; original investors and

the perpetrators of the fraud are paid off by funds from later investors, but there is little or no

actual business activity that produces revenue” ("Ponzi Scheme," 2018). The phrase “Ponzi

scheme” was crafted by a schemer in the 1920s, Charles Ponzi. The origins of Ponzi schemes

are unclear, but Charles Ponzi was the first to amass fame and fortune from using the method.

Ponzi, an Italian immigrant to the United States, scammed people into investing into his scheme.

He claimed that the high returns were a result of postal stamp exchanges from different

countries; however, there was no investing occurring at all (Darby, 1998). The largest Ponzi

Scheme was run by Bernard Madoff, collecting over fifty billion dollars. The New York City

based scheme was on a much larger scale than Charles Ponzi. Whereas Ponzi collected most of

his investors in Boston, Madoff found investors from all over the world. From the time of Ponzi

to Madoff, many laws and agencies were created to stop fraud. Although Charles Ponzi’s

scheme was stopped in a year, but it took authorities a decade to stop Bernard Madoff (Monroe,

Carvajal, & Pattillo, 2010). Just as every Ponzi scheme has in common, they both offered high

rates of return with little to no risk. Additionally, they were able to live a rich and luxuriant

lifestyle due to the fact that they stole mass amounts of money through the creation of elaborate

schemes that went unnoticed for a substantial amount of time. The global economy has been

weakened by the creation and management of Ponzi schemes, as well as depleting the overall

trust within communities everywhere.

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Economic and Social Effects of Ponzi Schemes on Society

Ponzi schemes greatly affect the integrity of the economy, as well the psychological state

of those involved. A plethora of negative effects accompany and follow Ponzi schemes. The

economy is hindered from growing, while individually, those victimized could lose their entire

life savings. Psychologically, those involved can become distressed, among other hardships.

Victims of Ponzi schemes, especially, can become physiologically damaged.

Psychological Effects

Within in a community, a level of trust has been established. Fraud thrives off that trust,

using it against those that are victimized. Although, the level of trust is significantly depleted

after fraudulent acts occur. Ponzi schemes cause people lose faith in financial institutions all

around. Having an entire life savings stolen can make people emotionally unstable, even leading

to suicide. Maureen Ann Ebel, a senior citizen, was victimized by Madoff. She lost her entire

life savings due to his deception. Ebel experienced weight loss, insomnia and paranoia due to

the traumatic event. Maureen Ann Ebel said, in response to the Madoff scheme, “[t]he SEC, in

its total incompetence and negligence, has let a total psychopath steal from me” (Orden, 2009).

Alternatively, the perpetrators of Ponzi schemes also become emotionally unstable when being

faced with consequences. For example, Bernard Madoff’s son, Mark Madoff, committed suicide

shortly after the Madoff scheme was discovered by authorities. Mark was criminally involved

and fully aware of the Ponzi scheme created by his father. A community is significantly

weakened by untruths, such as fraud (D. Henriques, personal communication, October 29, 2018).

Economic Effects

Ponzi schemes affect the local, national and global economy. The local level is

influenced the most. The money stolen by the schemer is detrimental to the economy because
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there is no money actually invested. Therefore, a large sum of money that would have been

invested into the economy, which would have stimulated growth, disappears (D. Henriques,

personal communication, October 29, 2018). For example, Ponzi schemes in Bengal, India have

negatively impacted the entire economy of India. For years, Ponzi schemes have been running

rampant in Bengal. Studies have discovered that the schemes have caused “money loss,

credibility loss, and leakage to financial systems.” The schemes have resulted in millions losing

their money in which they worked their whole lives for. The credibility of institutions within

India are being questioned, especially financial institutions. The most devastating factor about

the schemes in India is the lack of growth of the economy. Millions of dollars, which could have

been invested in the economy, stimulating growth, vanished due to Ponzi schemes. The lack of

growth greatly affected the financial status of the government as well. India, which is

developing, is not a wealthy country. Meaning, any strain on the economy has major impacts.

Many poor villagers were completely stripped of their money as a result of the schemes in

Bengal (Bhuin, 2015). Overall, Ponzi schemes have similar effects on every economy (local,

national and global). The variation lies in the wealth established in the economy along with how

fast the economy can recuperate from such a loss.

Aftermath of Madoff

On December 11, 2008, Bernard Madoff was arrested. At that time, many were pulling

their investments from Bernard L. Madoff Invest Securities, Madoff’s Ponzi scheme investment

firm. He was arrested by authorities on the suspicion of creating and operating the world’s

largest Ponzi scheme. There has yet to be another Ponzi scheme that has reached the magnitude

of Bernard Madoff’s. Once arrested, numerous lawsuits followed, fighting for the rights of the

victims whose money was in jeopardy. Bernard Madoff was found guilty and sentenced to more
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than 150 years in prison. Hundreds, even thousands, were affected by Madoff; billions of dollars

were stolen from investors. In response to the calamity, the United States government started the

Madoff Victim Fund, which is responsible for giving payouts to the victims of the Madoff

scheme. Still today, payouts are given to the victims of Madoff; however, the government is

incapable of completely reconciling the damage done by Madoff (Maglich, 2013). Following the

dismantling of the Madoff scheme, there was no major legislation created to combat Ponzi

schemes. As for the regulatory agencies, steps were taken to ensure that another Madoff scheme

was impossible. Ultimately, the steps taken were minor and there were not any additional

regulatory agencies created to fight against Ponzi schemes. The U.S. Securities and Exchange

Commission is credited with making changes in relation to their detection strategies; however,

Ponzi schemes are still a major source of fraud in the United States. (D. Henriques, personal

communication, October 29, 2018).

Madoff’s Allocution Plea

Bernard Madoff, a master of his craft, caused unfathomable destruction. During his

allocution, Bernard Madoff explains his Ponzi scheme from his perspective. An excerpt of his

court testimony follows:

...I am actually grateful for this opportunity to publicly speak about my crimes, for which

I am so deeply sorry and ashamed. As I engaged in my fraud, I knew what I was doing

[was] wrong, indeed criminal. When I began the Ponzi scheme I believed it would end

shortly and I would be able to extricate myself and my clients from the scheme.

However, this proved difficult, and ultimately impossible, and as the years went by I

realized that my arrest and this day would inevitably come. I am painfully aware that I

have deeply hurt many, many people, including the members of my family, my closest
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friends, business associates, and the thousands of clients who gave me their money. I

cannot adequately express how sorry I am for what I have done. I am here today to accept

responsibility for my crimes by pleading guilty and, with this plea allocution, explain the

means by which I carried out and concealed my fraud. (United States of America v.

Bernard L. Madoff, 2009, 67-68)

Bernard Madoff is currently housed in a United States prison. He will remain there for

the rest of his life.

Victims

Everyone can be affected by fraud. Of course, those that take the proper precautions and

know what to look for are safer than those that are ignorant to the tell-tale signs. Senior citizens

are one particular group that are victimized. One specific reason that Ponzi schemers target

seniors is due to the fact that they have had a longer time to amass their fortunes. Meaning, they

are more likely to invest large sums of money in comparison to younger age groups ("Financial

Fraud," 2015).

How are People Victimized?

Schemers victimize a wide variety of people through multiple means. Ponzi schemes are

based upon an element of deception, which is vital for the scheme to function as intended. As

mentioned above, anyone can fall victim to fraud. But, schemers often target people based on

the following factors: “person's age, finances, educational level, gender, race, culture, ability, or

geographic location” ("Financial Fraud," 2015). Additionally, the internet has made the process

of victimization more widespread. The internet has become much more accessible since the

Madoff scheme. Therefore, gathering a large victim pool is not as tedious as in the past (D.

Henriques, personal communication, October 29, 2018).

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Prevention Methods

The most obvious method of preventing Ponzi schemes are laws. The United States has

enacted numerous laws regarding the issue of Ponzi schemes, including the Securities Act of

1933, Securities Exchange Act of 1934, and numerous others. In addition to laws, there are

many regulatory agencies including the Securities Exchange Commission (SEC), White Collar

Crimes Division of the Federal Bureau of Investigations, and Internal Revenue Service (IRS);

however, other forms of law enforcement are often involved in the dismantling of Ponzi

schemes. There are multiple signs, according to the SEC, that help in the process of detecting

Ponzi schemes. Those signs include “high investment returns with little or no risk, overly

consistent returns, unregistered investments, unlicensed sellers, secretive and/or complex

strategies and fee structures, no minimum investor qualifications, issues with paperwork, and

difficulty receiving payments” ("Ponzi Scheme," n.d.).

Legislation and Court Cases

There are numerous laws in the United States that have the sole purpose of defining

fraud, making the act of committing fraud illegal. Also, they establish a punishment for

committing such acts. While fraud still occurs, even though doing so is illegal, the laws in place

ensure that perpetrators will to be tried and punished. In the United States, regulatory agencies

enforce the enacted legislation. Once discovering Ponzi schemes, schemers are then tried,

courtesy of the United States Department of Justice (DOJ). If found guilty, the DOJ will

sentence them to a punishment that is fair and just for the crimes committed. Additional action

in the United State Justice System usually follows the dismantling of Ponzi schemes, as victims

begin filing lawsuits. Unfortunately, much of the money invested in Ponzi schemes is not

returned to the investors ("What We Do," 2017).

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Laws

There are numerous laws in the United States relating to Ponzi schemes. The Securities

Act of 1933 and Securities Exchange Act of 1934 are the most prevalent in Ponzi scheme cases

(D. Henriques, personal communication, October 29, 2018). Security is defined as “[a] security

is a fungible, negotiable financial instrument that holds some type of monetary value”

("Security," 2018).

Securities Act of 1933. Congress addressed securities fraud by passing the Securities

Act of 1933. This act has two main goals. The first, requires that investors receive financial and

other important information regarding the securities that are for public sale. The second, restricts

any “deceit” or “misrepresentations” with the securities. In order to ensure these two objectives

are carried out, securities that are sold in the United States must be registered. The registration

forms contain the following: “a description of the company's properties and business, a

description of the security to be offered for sale, information about the management of the

company, and financial statements certified by independent accountants” ("The Laws," 2013).

The Securities Act of 1933 established more transparency, leading to a decline in fraudulent

activity ("Securities Act of 1933," n.d.).

The Securities Exchange Act of 1944. This act allows the U.S. Securities and Exchange

Commission to have jurisdiction over securities in the United States. This act gives the SEC the

“power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies

as well as the nation's securities self-regulatory organizations” ("The Laws," 2013). Also, this

act prohibits certain actions when exchanging securities. ("Securities Exchange," n.d)
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Each of these laws are commonly violated by perpetrators of Ponzi schemes. Bernard

Madoff was charged for violating these two laws, as well as numerous others. The securities

fraud statutes focus on fraud and are usually violated by schemers.

Regulatory Agencies

Regulatory agencies enforce the laws that have been established. A few of these agencies

investigate and dismantle Ponzi schemes. While a few specialize in fraud and Ponzi schemes,

other agencies still play an important. The SEC, FBI White Collar Crimes and IRS are the main

agencies credited with discovering and stopping Ponzi schemes.

Securities and Exchange Commission. The SEC specializes in securities fraud,

meaning that they handle Ponzi scheme cases. This agency protects people who have invested in

the securities markets. They not only enforce the law, but also focus heavily on publicizing

prevention methods ("What Is a Ponzi," 2014).

FBI White Collar Crimes. The White Collar Crimes division of the Federal Bureau of

Investigations are also an integral part of taking down Ponzi schemes. This division of the FBI

concentrates on white collar crimes, which includes fraud. Just like the SEC, they investigate

and dismantle Ponzi schemes ("Ponzi Schemes," n.d.).

Internal Revenue Service. The IRS has also been known for discovering Ponzi

schemes, especially through auditing. This agency enforces the law, as well as assisting victims

in recovering their stolen money. The IRS regularly audit individuals as well as businesses

throughout the United States. This allows them to find any financial discrepancies, such as a

running Ponzi scheme ("Help for Victims," 2018).

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These agencies are the main regulatory agencies involved in stopping Ponzi schemes.

Other agencies assist, but these are the main three that are responsible for protecting the public

from Ponzi schemes.

Recent Cases

Ponzi schemes occur throughout the United States frequently. Hundreds of Ponzi

schemes have occurred just in the last decade. The following cases are all recent Ponzi schemes

that have occurred in the United States. Each scheme is different. Schemers each hide their

illegitimate business practices in a multitude of ways. While each scheme is different, they all

follow the basic structure of a Ponzi scheme.

Arthur Adams. The total amount of stolen money from Adams Ponzi scheme is

approximately 85 million dollars. Adams business, Madison Timber Properties, LLC., began as

a legitimate practice. In 2004, Adams began his Ponzi scheme. Adams started the scheme after

gathering people to invest in his business. From an external point of view, Adams appeared to

be running a timber harvesting company; however, internally, there was a significantly profitable

Ponzi scheme. Rather than running the business correctly, he used the investment money to

create a Ponzi scheme. Much of the money stolen was spent as gifts for his children and other

third parties. Adams is credited with running the largest Ponzi scheme in Mississippi (Maglich,

2018).

Dawn Bennett. This Ponzi scheme was created by Bennett and ran out of her business,

DJB Holdings LLC., which was started in 2010. Shortly thereafter, she began fraudulent

business practices consistent with a Ponzi scheme. Bennett is a former financial advisor; she

lured her previous clients to invest in her new business. Her new business was having financial

difficulties. In order to solve the financial issues facing her business, she solicited old clients to
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become investors. Interestingly, this Ponzi scheme was run by woman which is atypical

(Maglich, 2018).

Merril, Ledford and Jezierski. Kevin Merrill, 53; Jay Ledford, 54; and Cameron

Jezierski, 27; are credited with running Ponzi schemes their businesses. Their businesses include

the following: Global Credit Recovery, LLC., Delmarva Capital, LLC., Rhino Capital Holdings,

LLC., Rhino Capital Group, LLC., DeVille Asset Management LTD., and Riverwalk Financial

Corporation. This team of schemers amassed approximately 345 million, which is large sum of

money. The schemers were able to do so because of the elaborate system of businesses in which

they created (Maglich, 2018).

The cases described are currently making their way through the legal system. The

schemers have been arrested for fraud and are being tried for their crimes. All Ponzi schemes

will come to an end eventually, whether the schemer is caught, or the scheme runs out of

investors.

Comparison

The United States was the home of the world’s largest Ponzi scheme. Ponzi schemes

occur in the United States, as well in other parts of the world. The major difference between

where these elaborate schemes occur are the laws and enforcement agencies that regulate Ponzi

schemes. The standing laws and active enforcement agencies vary in effectiveness from region

to region. In fact, many areas are lax on the legislation regarding fraud such as Ponzi schemes.

Virginia vs. New York

While legislation in each state differs, federal laws rule supreme in the United States.

Most laws regarding fraud, especially Ponzi schemes, are federal laws. Meaning, the laws in

Virginia mirror that of those in New York; however, there is a major difference between the two
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states. Ponzi schemes have and do occur in both states. New York City, which is a major

financial hub for the East Coast. Bernard Madoff built the world’s largest Ponzi scheme in New

York City. Wall Street is in New York City, which is where the stock market is located. For a

fraudulent investment firm, an aura of legitimacy is present from being near Wall Street. In

Virginia Beach, Virginia, a Ponzi scheme occurred from 2009 to 2018. Edward Lee Moody, Jr.

owned an investment firm known as CM Capital Management. He was able to collect millions

from his investors. Moody’s scheme accumulated around 4 million dollars of illegitimate money

("Virginia Beach," 2018). This Virginia scheme is small in comparison to many of those that

occur in New York. There is a reason why the world’s largest Ponzi scheme occurred in New

York City. Virginia has been victimized by larger schemes, but usually, New York has the

largest (Kagen, 2018).

United States vs. Albania

Ponzi schemes have made their mark on the United States in a number of ways. While

Ponzi schemes have occurred throughout the world, they thrive in a poorly structured economic

system, maximizing their effectiveness. Albania was cluttered with pyramid schemes in the

1990s. Pyramid schemes are similar to Ponzi schemes, although they differ in one aspect.

Pyramid schemes “promise consumers or investors large profits based primarily on recruiting

others to join their program, not based on profits from any real investment or real sale of goods

to the public” (Valentine, 1998). Ponzi schemes offer investors high returns for nothing in

exchange, while pyramid schemes offer higher returns to those that recruit more investors. The

country of Albania was infested with pyramid schemes, resulting in almost half of the GDP

coming from the schemes. Approximately two-thirds of the Albanian population invested into

the pyramid schemes. The size of the United States economy is much larger than that of
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Albania. The economy of Albania was growing in the 1990s; much of the population was new to

the modern financial markets and practices. Eventually large companies began failing and the

government took action to stop the schemes; however, many of the schemers fled and were never

tried for their crimes. The fall of the schemes collapsed the entire country of Albania. Riots

began, leading to a decline in the government's control and ultimate failure. Anarchy set in and

nearly 2000 people were killed in the chaos. In the United States, the court system, regulatory

agencies and current legislation are all more advanced than those in Albania. The schemes grew

overwhelmingly compared to the size of Albania’s economy. The United States has one of the

world’s largest economies, which is why the world’s largest Ponzi scheme did not collapse the

entire economy. While the U.S. has a stronger safety net in terms of discovering and dismantling

illicit schemes, both countries have been infiltrated by schemes that went unnoticed for years. A

strong internal system, financially and regulatory, helps in preventing and eliminating fraudulent

schemes. As seen in the United States, as well in Albania, these schemes are resilient and

destructive by nature (Jarvis, n.d.).

Conclusion

A Ponzi scheme is a lie. Overall, these illicit schemes are devastating. They have

negative effects on the communities in which they take place. Safeguards have been put in place

to prevent and stop these schemes; however, they still persist. While the frequency has declined,

the issue of Ponzi schemes in the United States is still evident. A little over twenty years ago,

the largest Ponzi scheme was centered in New York City. The scheme was approximately worth

fifty billion dollars, which is larger than the entire economy of some countries (Monroe,

Carvajal, & Pattillo, 2010). A few changes have been made to ensure that a scheme never
THE LIFE OF LUXURY 15

reaches that magnitude again, but smaller schemes still occur regularly. Fraud is an epidemic

that grows exponentially. Changes must be made within the United States government to stop

these schemes from materializing into an agent of mass destruction (D. Henriques, personal

communication, October 29, 2018).

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