Home > Exclusive Articles, Leadership > Four Ponzies: How the Ponzi is the Victim of the Investor

Four Ponzies: How the Ponzi is the Victim of the Investor


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by David Bush
HR Performance Article & Bio

For several years I have been writing about the great pyramid scheme, the origin of which is generally attributed to Charles Ponzi, which explains why it is popularly known as a Ponzi Scheme. I have been fascinated by the way in which apparently competent professionals seem to engage in massive denial when confronted with a financial deal that appears to be too good to be true. In much the same way, many employers have hired people with fraudulent credentials who have caused harm to the company.

 

The SEC website explains the Ponzi or Pyramid scheme as follows:

 

Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period—and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons. Decades later, the Ponzi scheme continues to work on the “rob-Peter-to-pay-Paul” principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.

 

The three Ponzi schemes I began this writing project with were local to the Philadelphia area and the people who conducted these schemes were quite diverse. Mark Yagalla, a Philly resident form Waiverly, PA, profiled in a Philadelphia Magazine story from 2001, stole millions from his hedge fund investors in a Ponzi-scheme, and spent much of it on lavish gifts of houses and sports cars for Playboy Playmates Sandra Bentley and Tishara Lee Cousino. David Burry was an entrepreneur who created a business that sold candy to organizations who used for fund raising purposes. He claimed to be making a sweet profit on a regular basis. He hoodwinked the congregation of his church, family members and others to support a lavish life style that included a Chadds Ford Mini-Mansion, a Helicopter, two Mercedes and a summer home in Stone Harbor. I learned about him when I rented that Stone Harbor home for the summer of 1999. The third Ponzi was John Bennett. I had met him through mutual friends long before he was known for his pyramid scheme. “Philanthropist Laurence S. Rockefeller believed in John G. Bennett Jr. So did singer Pat Boone, Philadelphia Mayor Edward Rendell and former Treasury Secretary William E. Simon, as well as an array of institutions ranging from the University of Pennsylvania to the Nature Conservancy to the National Museum of American Jewish History.” This quote is from a Time Magazine article entitled, Too Good To Be True. “Bennett promised the organizations and individuals he approached a 100% return on their contributions within six months, thanks to anonymous donors who would match their gifts.” Fortunately, the damages were not allowed to grow to the level of those in the current headlines because an accounting professor did not believe that it was legitimate. Perhaps I should have finished the project sooner and I might fantasize that I could have saved fortunes, but I seriously doubt it. The forces that make these schemes succeed are primarily the result of the people who lose their money.

 

The three Ponzis described above are a very diverse group. We have a 23 year old investment whiz who attempted to live a fantasy derived from the hit movie, Pretty Woman, about a successful investor and a hooker with a heart of gold. He was a short kid who invested in high school and couldn’t get a prom date. He later dropped out of Wharton because he was making so much money with his hedge fund. He was not the originator of the pyramid scheme however. His mentors, a wealthy adult couple who referred their rich friends to him, insisted that he create a Ponzi in order to cover their losses when the market went south at the end of the go-go 90s. Bennett had a career in human services and non-profits and had become an authority in fund-raising. He maintained a low key life style so as not to arouse suspicion. Berry claimed the candy business was great and used an affinity group built around his church congregation and family members.

 

All three found people who were eager to join an exclusive group and were grateful for the opportunity to make more money that the average bear. All of these people were willing to trust because others told stories about the great returns (ROI) and these guys were quite likeable and the value proposition was making more sense than the stuff of the investment prospectus. After all, who doesn’t like chocolate , pretty girls and money.

 

Now we have a fourth Ponzi: Bernie Madoff and the missing half billion dollars. Mr. Madoff may have been conducting a Ponzi for many years or only recently since the market turndown prevented him from keeping up the promised performance. Stay tuned.

 

It is speculated, that like the others discussed above, Bernie Madoff is a bright man who is too optimistic, too confident and believes that he can always overcome adversity. However, it is more important to understand the investors who should have known better but didn’t. Let’s face it, the relevant discipline to use here is psychology and not economics. These people allowed their social needs and relationships to keep them in an ENRON that they could have walked away from at an earlier time. These individuals told themselves that they were special because they had been accepted by Bernie Madoff’s investment club and they were made fearful that if they violated any norms , like asking too many questions, they would be asked to leave. Had any one of them been so fortunate to have been asked to leave, he or she would still have a fortune intact. The first lesson: Be careful what you wish for. The second lesson: Keeping your principle intact trumps earning higher interest rates. Lesson 3: Most people have become careless about details and misrepresent themselves. Lesson 4: many of us are naively trusting.

 

A recent article on resume fraud illustrates this perfectly. Research on leadership indicates that most of us care most about the leader’s trustworthiness. Yet, despite frequent warnings about the level of resume fraud, it is reported that only 25% conduct background checks on the accuracy of resumes. Thus we see WSJ headlines about winners of prestigious prizes , such as entrepreneur of the year, being outed as a fraud, as having fake companies and counterfeit Ph.D. degrees. Is there an excuse for hiring frauds? No. We all have a responsibility to take the needed steps to assure the integrity of the staffing system and of the procurement system where we work. We cannot afford to have our people managers accused of enabling the bad guys. Failure to assure employee integrity can rapidly lead to the demise of one more formerly successful American employer. HR professionals do not wish to stand accused of that crime.

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