Thou shall not Invest
The background behind Ponzi scheme/investment scams and how to identify them.
It was a normal August morning, nothing was out of place. The clear skies already showed signs that it was going to be a sunny day which made 69-year old Joseph Sloan reached for his old umbrella by the far-right side of his rickety bed frame, he sighed at the sight of it. The frame had been long due for a replacement but he hadn't been able to afford anything new since he retired from the steel factory where he worked until about nine years ago. "All is about to change," he told himself as he picked up the umbrella, stood up from the bed and tried to adjust his wool-pilled hat before his cracked mirror.
About two months ago, Old Joe as he was popularly called, had invested all he had into a "booming" venture. This venture which was founded by an Italian man who just arrived in the city few years ago was so successful that this new comer earned himself the nickname "cognoscente of business". The early investors into this venture had suddenly become rich because of the crazy returns they had gotten. Just the night before, Old Joe had overheard his neighbour boasting about how he made over 200% of the initial capital he put into the venture at the start, six month ago.
Today was payday for Old Joe, he was going to get his first cheque from this investment. He stepped out of his one-room apartment, hat on with his umbrella as a make shift walking stick making the words, "I am about to get rich" into a tune and humming it as he made his way down to the physical location of the venture to get his cheque.
He was still about a hundred metres away from the front door, when he noticed that a small crowd had gathered in front of the apartment that housed the venture. "I guess I am not the only one who is getting my pay cheque today," he thought to himself. A few metres closer, he heard muffled tears but he wasn't quite sure what was happening “people who were receiving cheques shouldn't be crying.” On arriving at the door, he asked the closest person to him to explain what was happening.
Amidst the tears, the person spoke but Old Joe could only make out two words from the statement the crying fellow made, "Money…lost." Wanting to be sure of what he just heard, he made his way into the building, there he meet a police officer putting books and papers into boxes and marking them as evidences. It was the police officer that explained that the "congnoscente of finance" whose real name was Charles Ponzi had just been arrested and taken away; he had been running a huge scam.
Huge droplets of sweat immediately formed on Old Joe's face. He staggered, almost falling to the floor littered with paper but the officer and the umbrella he held quickly came to his aid. Upon regaining his balance, he turned back to face the door unsure of where to go, his home or the river; life suddenly became not worth living anymore. Old Joe had been scammed, one of the first victims of what we’ll come to know today as the Ponzi scheme.
Charles Ponzi, the man who ran the scheme was a lowlife who had failed in his previous endeavours. He had been in and out of prison multiple times for various mischiefs and misdemeanors but he never ran out of schemes to make money for himself. Soon enough, he discovered that there was a price difference in postal coupon between his birth country of Italy and his current residence, the United States. He could buy these coupons at a lower price in Italy and sell at a profit in the US, but he lacked the capital to go into the business. Wanting to take advantage of the arbitrage, he went to banks to lend him money, but they refused him because they weren't convinced enough of his plan and also due to his criminal background.
Undeterred, he went to his friends with his plan promising them a whopping 50% returns on their investments after 90 days, which was later shortened to 45 days. Ponzi seemed convincing enough. His friends gave him the money, and true to his words, after 45 days, Ponzi returned their money with the interest earned. Those who invested $1000 earned $500 more. Boom! The new venture was on and money poured into it.
unknown to them, Ponzi wasn't buying any postal coupons like he claimed. Rather, he was paying the older investors with the deposit being paid by newer investors. To keep his venture running, he must continue to bring in new people who were willing to invest, this he did by paying those who brought new investors a certain commission.
But nobody on the outside knew this, all they had been told was that Ponzi had a venture that paid 50% interest on investments after 45 days. Although there were initial skeptics, they were soon won over when they began to see that the venture was indeed true to its word; people were actually making money. Old Joe was one of such initial skeptics, but he decided to invest when he heard the testimonies from those who had made a fortune from Ponzi's venture.
People began to notice a crack in this venture when financial astute people began to investigate the modus operandi behind it. They were certain that there was no way Ponzi was making those returns in a legal way. After a lot of investigations, they discovered that Ponzi was only robbing Peter to pay Paul. Seven months after Charles Ponzi began his scheme, a damning report was published about his venture in a popular newspaper about his tricks and deceits. The next day after this report was published, a crowd materialized in front of the building that had come to become a symbol of instant riches demanding for their money. As expected, Ponzi had no money to pay them as there were no new investors bringing new deposits; there were instant screams and tears. And just as the police led Ponzi away, Old Joe approached from a distance with his umbrella, coming for his cheque. The term Ponzi scheme had just been birthed.
Although the original Ponzi scheme crashed as far back as 1920, a lot of other variants have emerged since then, defrauding people of their money with the new ones being a little bit more sophisticated than the previous ones. The biggest one in history was pulled off by Bernie Madoff of Madoff securities, and when it crashed in 2008 it went down with about $60billion of investors’ money in it. Closer to home, we had the MMM episode in 2016 where people lost millions of naira. 2020 was another year of home runs for such schemes like Forsage to Tradera, where people's money vanished into thin air after the scheme collapsed. Identifying Ponzi schemes in their nascent stages isn't hard, you just need to look out for these few signs:
• They offer very high and consistent return.
• The assests in which you are investing is usually a complex, esoteric or unknown one.
• They compel you to bring new people. Usually, the more people you bring, the more your returns.
• The investment opportunity is usually a new one that just began.
• There is a sudden influx of ambassadors, telling you how much they have made in a short period.
Once you see all these signs in a particular investment venture, remember the warning, THOU SHALL NOT INVEST.
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This was such a compelling read. From start to finish. I loved it. I could pay good money to read stuff like this. 😍👏
Nice read!