“Can’t you feel them circling…There are fins to the left…fins to the right…and you’re the only bait in town. There are fins all around…Can’t you feel them closing in.”--Jimmy Buffet
We are swimming in a sea filled with lying, cheating and stealing sharks. There are crooks to the right, crook to the left. Crooks all around.
In the ocean of lying, cheating, and stealing, the easiest type of predator to understand is the Ponzi schemer.
Ponzis are simple. They are investments in which there is no there there. They work like this: you give the Ponzi schemer your money to invest; he promises you good risk-free income from your money and delivers that regularly. Unbeknownst to you, however, the dividends you get are not from smart investments he makes. Instead, they come from the new money he gets from the next sucker. This goes on and on until something happens to dry up the flow of new money, such as a whistle blower or maybe just a downturn in the economy.
How do Ponzi sharks manage to sucker so many sophisticated wealthy investors?
More on the gullible investor coming in a later blog.
Some of the big Ponzis have a lot in common with other more complex financial frauds (accounting tricks, derivatives, subprime lending, etc.) For example, Ponzis, like other scams, can only work as long as the targets in the food chain stay gullible and greedy. That keeps the money flowing. If anything starts to stink, the whole deal blows up and takes down the Ponzi chief and everyone involved, together with a boatload of innocents as well.
Bernie Madoff is, of course, the biggest and most famous Ponzi shark of modern times. Bernie’s Ponzi was amazing, not only because of the enormous size of the theft ($65 billion) but because he shamelessly bilked close friends; relatives; the widows, children, and grandchildren of people who trusted him with the family’s savings; huge Jewish charities; universities; and even Holocaust survivor and Nobel Peace Prize recipient Elie Wiesel. The distinguished French financier, Rene-Thierry Magon de la Villehuchet, who lost $1.4 billion of his client’s money with Madoff, swallowed sleeping pills and slashed his wrists 11 days after Bernie’s arrest.
If there is any saving grace in the Madoff story (and there is not much of one considering the many innocents involved), it is that most of the people he bilked were immensely wealthy (some were billionaires) and all were irresistibly led to Bernie by a powerful instinct: greed. Still, the gullibility of the experienced and hard-bitten businessmen taken in by Bernie is shocking. In Bernie’s game, they were all playthings.[1]
Bernie was a big predator in the sea of lying, cheating, and stealing, but don’t forget about the other big and famous Ponzi sharks: Robert Allen Stanford, Scott Rothstein, and Marc Dreier.
Stanford ran pretty much the same scam as Madoff but with a Latin American and Caribbean twist, involving banks on a small island (Antigua), the political infrastructure of which he virtually owned. The idea was to sucker investors into believing that you could make more money for them than they could make any other way in good markets and bad, but, like Bernie, don’t tell anyone how you did it.
As it turned out, like Madoff, Sanford never actually invested any of the money people gave him. He used it instead to buy planes, houses, boats, designer clothing, jewelry, priceless artworks, as well as everything else it took to lead an amazingly luxurious lifestyle, to keep the Ponzi going, and to become the envy of his peers.[2] Stanford was finally brought to trial January 23, 2011, after faking a brain injury to avoid prosecution.[3]
Dreier was almost as shocking. Trading on the trust he had earned as a successful Wall Street lawyer, Dreier forged loan documents worth millions and actually went so far as to impersonate another company’s financial officer in the officer’s own Canadian offices to close a phony deal.[4] He kept the money entrusted to him and spent it on an incredibly lavish lifestyle, until his house of cards finally imploded.
Dreier’s story leaves one wondering: whom can you trust? Dreier had a flawless resume. He was a Yale graduate, went to Harvard Law School, and was well-connected to the financial and social elite in New York City. He was a highly respected Wall Street litigator. Then gradually he decided that he wanted more. More houses, more cars, and more boats than his legal fees were bringing in. He concocted a scheme to sell fake loans to hedge funds who were trusted clients. He sold loans worth many millions, financing a high-flying lifestyle until he finally tripped up.
On his way to prison, Marc Dreier mused about his lying, cheating, and stealing: “Many people are caught up in the notion that success in life is measured in professional and financial achievements and material acquisition, and it’s hard to step back from that and see the fallacy.”[5]
Another interesting Ponzi scheme was run by the now-disbarred Florida attorney, Scott Rothstein. Like Dreier and so many other Ponzi schemers, Rothstein was obsessive in his pursuit of glitzy material possessions. The nationally televised show American Greed documented his $1.2-billion exploits. For four years, Rothstein persuaded investors—mostly hedge funds and wealthy families in New York, Florida, and Texas—to buy stakes in what he said were payouts from settlements of sexual-harassment and workplace-discrimination lawsuits. The suits were all fake.
Before his scheme exploded, Rothstein was one of Florida’s most prominent Republican donors and sat on the state’s judicial nominating committee. Rothstein admitted in his trial that he had bribed judges, politicians, and cops.[6] When the scam started to crumble, Scott fled to Morocco. He returned when, some suspect, investors bilked by him threatened his family.
How do the Ponzi schemers pull off these huge cons?
Each Ponzi artist has a little different trick up their sleeve, but they all share a common m.o. They are all skilled liars. They are illusionists, actors, performers adept at convincing others that there is a wizard behind the curtain. They use the trappings of success as stagecraft. They look and act the part. They always have collections of fancy and expensive toys (yachts, cars, watches, etc.), belong to the best clubs, give tons of money to charities, spend lavishly on all kinds of bling and do everything possible to appear amazingly prosperous.
Second, they all come off as completely confident. Madoff loved to tell skeptics who said that his returns on investments were impossible that “I know what I am doing. If you don’t think so, take your money elsewhere.” Almost no one challenged him.
Another Ponzi trick is to play hard to get. Madoff used to tell people that he did not have room in his exclusive club for more investors, making them even more anxious to join. He would reject some people repeatedly, until he finally caved in and let them give him their money.
How many more Madoffs, Sanfords, Dreiers, and Rothsteins and other Ponzi magicians are out there in the American sea of lying, cheating, and stealing?
Next time: Lying, cheating and stealing in congress
[1] Most of my take on Madoff is based on two excellent Vanity Fair articles, Mark Seal, “Madoff’s World,” Vanity Fair, April 2009, and Hello, Madoff! What the Secretary Saw by Mark Seal and Eleanor Squillari, Vanity Fair, June 2009.
[2] Brian Burrough, “Pirate of the Caribbean, the Mystery of Allen Stanford,” Vanity Fair, July 2009.
[3] Washington Post, December 23, 2011.
[4] Bryan Burrough, “Marc Dreier’s Crime of Destiny ,” Vanity Fair, November 2009.
[5] Id.
[6] Karen Weise and Susan Nesmith, “Convicted Con Man Scott Rothstein Tells All!,” Bloomberg Businessweek.
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