Ponzi Schemes and How To Avoid Them
The promise of easy returns with little to no risk has always been an attractive proposition. However, it's important to approach such promises with caution and scepticism, as there is no such thing as a guaranteed, risk-free investment or opportunity.
We’ll review the five of the largest Ponzi schemes in history before discussing how you can recognise them.
5 Largest Ponzi Schemes in History
Bernie Madoff orchestrated one of the most infamous Ponzi schemes in history. He operated it for several decades, defrauding investors out of an estimated $65 billion. Rather than invest client funds, Madoff would deposit them in a bank account with Chase Manhattan, and would pay withdrawals from the same funds or other clients’ funds. The scheme allegedly started as early as 1964, when Madoff started his asset management business, and ran until 2008 when it ultimately collapsed.
Sam Bankman-Fried founded the cryptocurrency exchange FTX in April 2019. The exchange quickly grew in popularity and became one of the largest in the world. However, in November 2022, FTX collapsed under customer withdrawals and filed for bankruptcy. The US Commodities Futures Trading Commission has estimated customer losses at more than $8bn. While Sam Bankman-Fried has denied accusations of wrongdoing, several of his close associates have pleaded guilty to criminal charges.
Allen Stanford, a former financier and sponsor of professional sports, ran a Ponzi scheme that lasted for over 20 years. Through his company Stanford Financial Group, he offered fraudulent certificates of deposit (CDs) to investors yielding market-beating returns. Stanford allegedly claimed that his certificates of deposit were as safe as, or safer than, U.S. government bonds. The scheme collapsed in 2009, with estimated losses of $7 billion.
Ruja Ignatova, also known as the "crypto queen”, was the mastermind behind one of the largest cryptocurrency scams in history. She rose to prominence for creating a fraudulent cryptocurrency called OneCoin. In public, she promised investors immense returns, even as she called her project a “shitty coin” in private. In 2017, her scheme unravelled when she disappeared, leaving behind a trail of deceit and an estimated $4.4 billion in losses.
The term "Ponzi scheme" itself is named after Charles Ponzi, an Italian-born swindler who operated a fraudulent investment scheme in the 1920s. Ponzi promised investors high returns by buying discounted postal reply coupons in other countries, and redeeming them at face value in the United States. But in reality, he used funds from new investors to pay earlier investors. His scheme eventually unravelled, resulting in losses of around $20 million (which would amount to hundreds of millions today).
Please note that the estimated losses mentioned are approximate figures and can vary depending on different sources and the timing of the calculations.
How to avoid becoming a victim
Whilst each Ponzi scheme is unique, it also shares defining characteristics:
The promise of market-beating returns, with little to no risk.
Secrecy around how these returns are generated. Bernie Madoff staffed his asset management firm with friends and family, and claimed he generated returns through a proprietary “split-strike” investment strategy.
A charismatic leader who seduces new and existing investors. Sam Bankman-Fried fooled regulators, investors and the media by creating a carefully curated image. He self-styled himself as a vegan who slept often on a bean-bag in his office, and shared his apartment with friends. And in a Forbes.com interview, he claimed he “just wanted his wealth to survive long enough to give it all away”.
If you’re looking to open a brokerage account, take time to review and compare brokers through a comparison service like Trustedbrokers.com. Focus your search on companies that are regulated and licensed in your home country to ensure your investments are protected. Importantly, you should never invest more money that you can afford to lose. By the same account, It is also advisable to diversify your investment across platforms, companies and asset classes.