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Ian: Hey everyone, you are listening to “Coffee with Gringos.” I'm Ian Kennedy.
Paige: And I'm Paige Sutherland.
Ian: And today, we're going to be talking about Ponzi schemes. And so, basically, a Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with the money, and the investments that are received from more recent investors. So, basically, it's a scheme that makes the investors, or the victims, believe that they're getting profits from investing in product sales or services and they have no idea that the money is actually coming from other investors like themselves. It's really just one big trick to make a lot of money and not really produce anything as a company. Ponzi schemes are something that we've seen for a long, long time so we thought we would go into the history of Ponzi schemes and talk about some of the most famous ones that have existed. So, listeners, as always, if you get lost go online and check out that audio guide and transcript online. So, Paige—Ponzi schemes. We have heard about some really big ones in recent years, we've seen a list of them that go back for hundreds and hundreds of years, so tricking people into giving you money for some fraud, for a false investment is nothing new. One thing I think we all think about is why is the name even Ponzi scheme? Where does that name come from?
Paige: Well, Ian, funny you ask. Ponzi is actually a person—Charles Ponzi—who was born in Italy, and he came to the US and made quite a name for himself. This was in the 1920s, so this is when people were sending mail more and the idea was, he told investors that he could buy, basically, these postal reply coupons so when you sent a letter, you would send something so someone could reply back to you. And so, he said, “Hey, I can take advantage of international currency exchanges and buy it cheaper abroad and then sell it and get a profit.” So, he told investors all about this and he said, “In the first forty-five days I can get you fifty percent of your profit back, and then in the first ninety (days) I'll get you one-hundred percent.” So, he told all these investors this, they all ate it up, loved the idea, invested and they got their first money back. But really what he was doing was just giving money that he got from other investors and giving it to them and spreading it out. So, he wasn't really making any money, he just was using their money to continue the scheme. But obviously, what happens at Ponzi schemes is eventually someone catches on to the scheme, and it collapses. So, it was actually a reporter in the Boston area who discovered that the scheme was fake and then the government came in and it stopped. But since it was in the twenties, he was kind of the first kind of con artists to do this type of scheme, so that's why they named it after him. And since the original Ponzi scheme, it's been happening time and time again. Even up until now, there's probably a lot going on, but we're going to talk about some of the famous ones that we know about or have been known pretty internationally. The big one, to start off, Ian is going to talk about Bernie Madoff. Tell us a little bit about that.
Ian: Yeah, so the Bernie Madoff Ponzi scheme, is known as the biggest Ponzi scheme in history. It's a name that a lot of people have probably heard. He had a very successful investment firm, in which he used this to sort of mask the real operations of what he was doing in order to pull off this huge Ponzi scheme. Throughout the nineties and the early 2000s, Bernie Madoff was getting a lot of investors to invest in his Ponzi scheme idea using his connections using his firm's reputation, he was able to lure a lot of really wealthy investors, even some famous people, to really get them to buy into his investment strategy. And what was interesting about Bernie was he was a really well-respected guy on Wall Street and he was able to get a lot of these investors based off of word-of-mouth referrals. He was known as someone being pretty humble and modest when talking to these people and this really made them trust what he was saying. It was reported by an anonymous reporter or someone within the firm, they reported these actions in like 2007-2008, that something strange was going on. He was investigated and they found out that, he was charged with eleven federal crimes, and he was sentenced to one under fifty years in prison with restitution of $170 billion, which is incredible. And according to the original charges, his firm had liabilities of $50 billion and it is thought that he brought in over $65.8 billion of these investments from almost five thousand clients, over this time. There must be some psychology to this. People don't seem to understand that if something sounds too good to be true, then it probably is. Even though these basically con artists, these guys that run these Ponzi schemes, they're promising things that they don't exist in regular economy or business, really, and they do seem too good to be true and it just goes to show that people can still be really easily duped by a good idea, even in modern-day.
Paige: Absolutely. I mean, when I was reading up on this, it seems like a lot of what makes it a successful Ponzi scheme is that they never share exactly what they're doing. They're very, they must be very charming smooth talkers. They say the normal thing of, “Oh, I can't tell you because then the competitors will jump in on this and you won't get as much of a profit and it won't work.” And it seems like the way they go about it is they kind of attract the right people so that it attracts the other right people. So, it's kind of this, you get this famous, rich person to invest and then everyone goes, “Oh, if he's investing in this then it must be true so, I’ll invest.” And it seems like they pitch it as this golden opportunity. Like you have to jump in on it now. If you miss out, you're, you'll regret it. So, it's almost like it convinces people to buy that trendy new product because everyone else is doing it without really reading into what they're buying.
Ian: You're right. It's the fear of missed opportunity and, like you said, it's, “You want to get on it now. You want to get on it now while it's still cheap. It's going to get more and more expensive. It's better to invest now.” And that's a way to convince people to jump on to something without asking too many questions.
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Paige: There was this case I was reading up on, Mutual Benefits Corporation, and pretty disgusting the Ponzi scheme that they had. They basically were buying health insurance at a discounted rate from people who were dying. So, people who had AIDS, cancer, or terminal illnesses, very elderly people, and then they would sell shares of their death benefits to investors so that these investors would be able to cash out once these people died. But the problem with death benefits is you have to die within a certain range for you to actually get that benefit and so, the scheme was that they would lie to investors saying these people were dying in weeks and they would have doctors sign forms saying that these people were dying, you’re going to be able to cash in really soon. And that wasn't the case. A lot of people were living longer and so these benefits weren't able to be obtained. People weren't profiting from it. But this scheme went on for about ten years before it collapsed and it seems like it was like $1.25 billion, thirty thousand investors, so it's definitely a pretty big scheme, but the takeaway for me is it's really like you're trying to make a profit on people dying, and people are investing in that. It's just pretty gross. Anything to make money, I guess.
Ian: Making money off of sick people, that’s about as low as you can go, I think. It goes to show these Ponzi schemes are definitely shameless in the way they raise this money.
Paige: But, what about you, Ian? You said you found one based in Chile that made some news?
Ian: Yeah, so our Chilean listeners, especially probably have heard this name before but I'm going to mention Alberto Chang Raji. He's also known as the “Chilean Madoff” because he had one of the largest securities investor frauds in Chilean history. So basically, for those who don't know, Alberto Chang, he was a Chilean businessman. He’s responsible for the biggest financial fraud of the biggest financial frauds in Chile in which he was doing a pretty similar investment strategy as Bernie Madoff was doing. Chang would promise payments of interest and so, these payments though would be required to be paid with cash regularly, like, almost every month. These payments were coming in from these investors and what Chang was known for was he gave a bogus, fake story to a lot of investors in Latin America and in Miami, actually, in the US talking about how he left Chile in the nineties to go study at Stanford University and here he met Larry Page and Sergey Brin, who are the co-founders of Google, and that he became a Google investor early on, and that he was basically this tech guru. This is what he was trying to explain to all these investors, and so Chang's company here in Chile, known as Arcano Group, ended up being investigated in 2016 whenever they defaulted on paying their liabilities. It was found out that in 2016, that he basically fled Chile. He knew that this was all going to collapse. Apparently, they reported that he first went to the United States, but then he was later found in the small European island country of Malta, basically hiding out since all his assets were frozen in Chile and started this big international arrest warrant to, obviously, bring him back to Chile and make him pay for these crimes. But, it's amazing the amount of money that he was able to raise. The company had over $120 million in liabilities from over one thousand people, these investors, so it happens everywhere not just these famous ones like Madoff we’ve heard in the US. I'm sure there are many, many, many others that we could point out that are very similar to this. Basically, giving a false story of promises, of things that you're going to deliver and, you know, it's really just a cover-up to make a quick buck and run away to your European island.
Paige: What was funny is I read an article about an interview of Madoff while in prison, and he was basically saying his clients are stupid. If they looked into the details, they knew that what I was promising wasn't possible. So, it's just kind of funny that he's just like yeah, it was pretty easy to dupe these people.
Ian: Part of me feels bad for these people that they lost their investments. They're not going to get their money back, a lot of people who probably earned that money the hard way. But again, a part of me too has to say, how naive can you be? How can you not talk to somebody who really knows finances either? If you're not an expert, how do you not consult somebody about whether this sounds fishy or if it sounds legitimate? And like I said earlier, I always think if it sounds too good to be true, then it probably is. And so, if you see these big numbers of alright, you're going to get these high-interest returns in this period of time—I don't know. You have got to really see if it seems legitimate or not.
Paige: I can see how you could be duped early on because they do give you a return. They give you a reward to think it's working and if you have friends that are like, “Look, I just made five grand in the first month.” And then I hear that from my buddy and I'm like, “Oh, that's legitimate.” But I think, later on, it’s going to collapse. I'm shocked that these schemes can last as long as they do. It feels like it could only last a couple of months before people realize that it's all just made up. It just shows that these people are really successful and swindling people if they're able to pull it off for a decade or so.
Ian: I think we can see too the real importance of using word-of-mouth marketing to make these Ponzi schemes successful. Word-of-mouth marketing is the best form of marketing. You trust your friend or your family or your colleague more than some company trying to advertise to you. So, like you said if your best friend or if someone close to you is telling you about this great opportunity and you obviously trust these people, then it's going to be a lot easier to get you to buy into it. And so, I think these Ponzi schemers, they have a real talent for really encouraging that word-of-mouth marketing and really making those investors feel comfortable and make them think that they are getting a bigger reward than a risk.
Paige: Absolutely. So, listeners as you heard it happens everywhere around the world. These people are talented and. Be careful, if it's too good to be true, as Ian said, it probably is.
Ian: Don’t fall for it. Don’t fall for their tricks.
Paige: So, again, listeners if you get lost, check out that audio guide and transcript online. Thanks for listening.
Ian: We'll see you next time.
Paige: “Coffee with Gringos” was brought to you by Dynamic English, where you can learn English simply by using it. If you’re interested in taking classes or just want to learn more, go to our website at dynamicenglish.cl. Thanks for listening.
Key Vocabulary, Phrases & Slang:
1. to lure (verb): to tempt or attract someone to do something.
a. The man lures investors by telling them false promises.
2. abroad (adjective): in a foreign country.
a. He promised to turn investments abroad into profits in their own country.
3. to eat (something) up (phrasal verb): to completely believe something.
a. The people eat up all the lies he tells them because they think they will get rich.
4. to catch on (phrasal verb): to realize or find out.
a. Sooner or later, people begin to catch on to the lies that they are being told.
5. con artist (noun): a person who cheats or tricks others by persuading them to believe something that is not true.
a. The con artist was able to get all of their money without them realizing it.
6. to mask (verb): to hide; to cover.
a. They used the story of dying people to mask the truth of the scheme.
7. word-of-mouth (adjective): sharing of information by talking about something to someone, usually recommending something.
a. Ponzi schemes are so successful because of word-of-mouth marketing.
8. restitution (noun): the act of giving something stolen back to its owner.
a. He was ordered to pay $5 million in restitution to the investors.
9. liabilities (noun): a financial debt for which one is responsible.
a. The scheme was discovered once the company couldn’t pay its liabilities to the banks.
10. to dupe (verb): to trick, cheat, or deceive.
a. Con artists are masters at duping people out of their money.
11. charming (adverb): pleasant; attractive.
a. He was such a charming person that they didn’t expect him to do anything wrong.
12. smooth talker (noun): someone who can persuade someone to do something due to their impressive speaking skills.
a. Being such a smooth talker, he was able to get them to invest without even questioning the idea.
13. to pitch (verb): to sell.
a. They pitched the investment idea to the listeners.
14. trendy (adjective): popular; fashionable
a. People don’t want to miss out on a trendy new product or investment.
15. to read into (phrasal verb): to investigate or research something.
a. It’s important to read into any investment you are offered.
16. to cash out (phrasal verb): to convert an investment into money.
a. He cashed out the investments and ran away to a tiny Caribbean island to hide.
17. takeaway (noun): a key fact, point, or idea to be remembered.
a. The takeaway is to always be careful with your money and investments.
18. bogus (adjective): fake.
a. The bogus story he told was enough to convince the investors to give him more money.
19. to flee (verb): to run away from a place or situation of danger.
a. After fleeing the country, he hid on the tiny island away from the police.
20. assets (noun): valuable property owned by a person or company.
a. His assets were frozen and he was wanted for arrest.
21. naïve (adjective): showing a lack of experience, wisdom, or judgment.
a. The people were so naïve to think they could receive such promises.
22. fishy (adjective): suspicious; not normal.
a. Something seems fishy about this guy trying to sell us this idea…
23. grand (noun, slang): a word used to refer to a thousand US dollars.
a. He lost almost one hundred grand to a Ponzi scheme.
24. to swindle (verb): to trick someone into giving their money or possessions.
a. He swindled the poor man out of all of his financial savings.
25. to pull off (something) (phrasal verb): to be successful at something.
a. He was able to pull off the biggest Ponzi scheme in history.