1

Ethics Paper

Jada R. Thomas

School of Business and Technology, Florida Southwestern State College

ACG2021: Financial Accounting

Professor Martin Tawil

May 21, 2021

As google states, a Ponzi Scheme, named after the infamous Charles Ponzi, is a form of

fraud that lures investors and pays profits to earlier investors with funds from more recent

investors. It is important to know that Ponzi Schemes are different from Pyramid Schemes. Also

known as a “rob Peter to pay Paul” financial scam, it goes back more than a century and

surprisingly was not invented by Charles Ponzi. While Ponzi Schemes take skill, it is also based

on trust. Investors must trust you in order for them to give you their money and allow you to take

full control of their investment. Trust required building relationships and the only thing that

would allow someone to break their trust with a longtime friend is greed. Operators of Ponzi

schemes have stolen of dollars from friends, family, charities, and even crippled entire islands.

Charles Ponzi born in 1882, was in and out of jail in his early years for forging a bad

check, and smuggling immigrants across the border. These crimes would be nothing compared to

his later work. Continuing to work odd jobs to support his family, he came across a way to make

a profit by exchanging international reply coupons (IRCs) from one country for more expensive

ones in another country. According to Biography.com, Ponzi would get someone to buy IRCs

from another country and send them back to the united states and sell them for more than he paid

for them resulting in an extremely high profit. Ponzi then became greedy and sought out

investors whom he promised 50 precent in 45 days. Soon after Ponzi realized this goal was

unattainable and began to pay older investors with money from new investors in a vicious cycle

now known as the Ponzi Scheme. This scam made him very rich, and he was able to buy many

luxurious things considering he was making $250,000 a day. By 1920 his scheme had caught the

eye of The Boston Post and an investigation has begun to dig deep into his investment returns.

He was arrested on August 12, 1920 and charged with fraud. He spent the rest of his life in

prison after owing over 10 million of dollars.

Robert Allen Stanford also known as Allen Stanford was an American Businessman who

conned thousands of investors out of 7 Billons dollars. He started his career as a salesman and

booker and rose through the ranks to an investment manager handling over billions of dollars in

assets. After that failed, in 1991 he founded Stanford Financial Group in Antigua, an island in

the Caribbean region, and shortly after because the islands largest employer. He became one of

the richest men in America with a net worth of 2.2 billion. Investopedia.com states, that Stanford

largely influenced Antigua. “He developed much of the land, started a newspaper, a cricket

stadium, and employed many people.” His poor investments and scamming had a detrimental

effect on the Island and let the country in shambles. Investors thought their money was going

toward CDs also known as Certificates of deposits, but he was funding his lavish lifestyle and

ended up economically destroying the island of Antigua.

Tom Petters, was a former American businessman and CEO of Petters Group Worldwide.

This company was a front for a $3.65 billion dollar Ponzi Scheme. Petters and co-conspirators

have been laundering money for ten years. According to the US Attorney’s Office for the District

of Minnesota, PCI, owned solely by Petters, was used for fraud from day one. Petters inflated

and falsified purchase orders in an effort to obtain more money from investors, which, in turn, he

used to pay other investors as well as himself.” Investors were given forged documents showing

their money was purchasing goods and used to resell to large retailers such as Sam’s Club and

Costco. Petters went as far as signing promissory notes ensuring that investors would receive

their funds but he used money from new investors and sometimes even their own money to repay

them. Petters shortly after, began to involve his office manager to assist by fabricating purchase

orders and transferring funds. Petters began to buy and operate new company in order to keep the
 4

money coming in from new investors to repay the old investors. He purchased companies like

Fingerhut, Polaroid, and Sun Country Airlines. After 10 years of scamming, his office manager

Deanna Coleman reported the crimes and she agreed to work with police by wearing a wire in on

one of their conversations. On October 3, 2008, Petters was arrested and charged with ten counts

of wire fraud, three counts of mail fraud, one count of conspiracy to commit mail and wire fraud,

one count of conspiracy to commit money laundering and five counts of money laundering. He

was soon after sentenced to 50 years in federal prison in the longest imprisonment term for

financial fraud in Minnesota history.

Bernie Madoff, Operator of the largest Ponzi scheme in the world, was a hedge fund-

investment manager and former chairman of the NASDAQ stock market. After briefly studying

law, he and his wife founded Bernard l. Madoff Investment Securities. He was particularly good

at penny stocks which were low priced shares that were traded over the counter. After building

relationships with the rich and wealthy businessmen in New York and Palm Beach Florida and

charmed them into becoming investors. With their good reviews he attracted more rich and

wealthy investors. According to Brittanica.com “He exploited an air of exclusivity to attract

serious, moneyed investors; not everyone was accepted into his funds, and it became a mark of

prestige to be admitted as a Madoff investor.” Madoff became so powerful and well respected,

that when Financial Analyst, Harry Markoplos questioned his credibility and reported evidence

to the Securities and Exchange Commission (SEC) they still ignored his allegations. Even

companies like JPMorgan Chase bank ignored possible signs of money-laundering. Madoff

supposedly deposited the funds into the JPMorgan Chase bank which some say inclined them to

turn a blind eye to the money laundering because It is estimated that they made over 400 million

dollars from Madoff’s scheme. Feeder funds kept his scheme going until 2008 when the market
 5

crashed, and he was unable to repay the debt. In March 2009 he pleaded guilty to various counts

of fraud after having stolen anywhere from 50-65 billion dollars.

In Conclusion, Ponzi Schemes have been around for more than 90 years. In the recent

years, we have seen a sharp increase in the amount of money being stolen. In the case of Charles

Ponzi, 15 million dollars was stolen but in the most recent high profile Ponzi Scheme, Berne

Madoff is estimated to have stolen 50-65 billion dollars over a 40-year period. When evidence

about possible Ponzi Schemes are brought forward it is crucial for companies to consider the

facts. In the case with Bernie Madoff, billions of dollars could have been saved if claims made

by Harry Markoplos would have been taken seriously. Ponzi schemes will be around forever, so

don’t ignore the signs.

References

A&E Networks Television. (2020, June 26). Charles Ponzi. Biography.com.

https://www.biography.com/crime-figure/charles-ponzi.

Chen, J. (2021, May 19). Allen Stanford. Investopedia.

https://www.investopedia.com/terms/s/sir-allan-stanford.asp.

Encyclopædia Britannica, inc. (2021, April 25). Bernie Madoff. Encyclopædia Britannica.

https://www.britannica.com/biography/Bernie-Madoff.

Hayes, A. (2021, May 19). The Bernie Madoff Story. Investopedia.

https://www.investopedia.com/terms/b/bernard-madoff.asp.

Tom Petters Case Summary. The United States Department of Justice. (2015, May 1).

https://www.justice.gov/usao-mn/tom-petters-case-summary.