Luckily, most of the pyramid schemes collapse very quickly
Throwback Thursday: The most notable pyramid scams. Source: shutterstock.com
PaySpace Magazine offers you a list of the most notable and large-scale pyramid scams.
John Law scheme
The John Law financial scheme is considered to be the first pyramid scam scheme in Europe, created by Scottish economist John Law between 1716-1720 in France. John Law wanted to live a different way than others since he was a child but he understood it required a large amount of money. John was a gambler, but card games hadn’t brought him wealth. Then he formed the idea to make money from financial and lending institutions (not in golden or silver mines). He offered to refuse metal coins and replace them with paper banknotes. Then Law moved to France where the Duke of Orleans supported his idea to form the bank that could issue banknotes backed by treasury and land.
But financial genius did not stop at that. In 1717, he established the “Mississippi Company”, also known as “Company of the West” or “Company of the Indies”. John Law boosted unprecedented demand thanks to his fame and manipulation of people skills while the real activity of the company remained unknown. He managed to cause a stir, and wealthy merchants purchased stocks, in addition to ordinary people. But it turned out the firm hadn’t had any real activity and didn’t generate profits. Anyone who held stocks started to get rid of them. John Law’s scheme failed and he fled to Italy.
«Ponzi scheme»
Italian immigrant Charles Ponzi created the first pyramid scam scheme in the USA in 1919, 200 years after the “Mississippi bubble”. Like John Law, he always wanted to be rich and developed his money-making scheme, whereby he was paying “profits” to earlier investors using later investors’ money.
One day, Charles sent a letter to a Spanish firm offering to put out an international magazine. The response came back quickly, and the envelope was full of international postal reply coupons which could be exchanged for stamps (to send a letter back). The coupon exchange rate was the main detail: you could get one stamp for one coupon in Spain while you could get six stamps for one coupon in the USA. That’s what gave Ponzi an idea on how to create a pyramid scheme.
An Italian entrepreneur promoted company stock through paid articles and advertisements. Ponzi claimed the company was engaged in the purchase and sale of goods all over the world (indeed it was too vague; one of the explanations of the firm’s activity was “buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage”) and promised a 50% profit within 45 days, or 100% profit within 90 days. People were very quick to believe these promises. Thus, as we said before, Ponzi was paying earlier investors using the deposits of later investors.
Like all pyramid schemes, this one collapsed very quickly. One of Ponzi’s mates (who borrowed money to support this scheme) sued him. All the entrepreneur’s accounts were frozen, but at least $2 million of investors’ money was gone. Charles Ponzi was sentenced to 5 years in prison.
«МММ»
MMM is the largest pyramid scam scheme in the entire CIS (Commonwealth of Independent States) history (and one of the world’s largest of all time). This scheme was organized by Sergei Mavrodi together with his wife and brother in 1989. Mavrodi promised a 1000% profit within a year. The firm’s motto was «Завтра дороже, чем сегодня» (Tomorrow it will be more expensive than today).
These were hard times for the USSR and due to the low level of financial literacy amongst people «МММ» gathered, according to different sources, between approximately 10 and 15 million investors. The fraudulent scheme lasted for over 5 years. Sergei’s total income was approximately $2 billion. Millions of investors lost their funds when “MMM” was declared bankrupt in 1997. After Mavrodi was arrested, executive authorities confiscated a number of trucks full of money. It took about a month to count the money.
Sergei was convicted of large-scale fraud in Russia in 2003 and sentenced to 4.5 years in prison. Nevertheless, he created new fraudulent schemes in 2011 and 2012. In 2016, Mavrodi created one more project called «МММ Глобал» (MMM Global) which offered to deposit Bitcoins at high-interest rates. Luckily, these schemes didn’t become as popular as МММ in the ’90s.
Bernard Madoff scheme
This pyramid scheme is considered to be one of the largest-ever (or even the largest) scam schemes. There were about 3 million victims (including a few large firms). The damage is estimated to be around $64.8 billion.
The creator of this scheme Bernard Madoff, unlike other financial fraudsters, promised investors a small but steady income. 12-13% profit within a year convinced a lot of large firms, celebrities, and officials to invest in his company called “Bernard L. Madoff Investment Securities LLC”.
The company survived for 15 years until investors (both people and firms) requested withdrawals of capital and interest (about $7B) in 2008. The company, of course, failed to pay out and the scheme collapsed. Madoff (who was turned in by his sons) was sentenced to 150 years in prison.
Wang Fengyou ant farms
Chinese entrepreneur Wang Fengyou invented an original way to make money in 1999. He offered people to invest in his company called Yilishen Tianxi Group. Investors bought a box containing “special” ants which had to be raised within 90 days under a specific scheme. The price of each box was $1500. Wang Fengyou assured investors that these ants had been used for traditional Chinese medicine production. Of course, it was a deception. This scheme promised a 32% profit within 14 months (in other words $450 every 14 months).
Millions of people invested their money in this company within 2 years. The Chinese entrepreneur made over $2 million. Wang Fengyou became a respected businessman and was even nominated for different prizes and awards. But pretty soon his pyramid scheme collapsed, and its creator was sentenced to death.
Lou Pearlman Ponzi scheme
The Lou Pearlman name is not widely known. But it’s hard to find someone who hasn’t heard about Backstreet Boys or NSYNC. There’s no doubt you have heard about these bands, but you may not have heard about Pearlman’s fraudulent scheme.
Louis Pearlman was an American record producer and manager of boy bands Backstreet Boys and NSYNC. In 1991, the fraudster created a couple of shell corporations, that existed only on paper. He then issued shares and placed them in the capital market. People and even large firms began buying these shares.
Since the scam scheme lasted for 20 years, this one is considered to be the longest-running Ponzi scheme in history. In the end, an investigation revealed the fraud. Lou was given a fine of $1 million and was sentenced to 25 years in prison. Shareholders of the shell companies lost about $300 million.
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