The Classics Never Die. Ponzi Schemes

[Sittingduck]

Article from the Financial times. According to the author hundreds of schemes still exist in the US with 59 being uncovered last year worth $2.4B. The highly educated are often the victims.

Just received a notice that some of my MegaCorp pension was squandered on a Ponzi scheme to the tune of 100's of millions. Even pension managers don't seem to understand "If its too good to be true - it is".


https://www.ft.com/content/000a2dc6-e322-11e6-9645-c9357a75844a

 

[Mo Money]

Just finished the book "The Wizard of Lies," about Bernie's little swindle. It took me only three days to tear through about 350 pages. Couldn't put it down. HBO has released a movie version.

A central theme of the book is that the liar (Ponzi con artist) succeeds largely because the victim (like the pension fund manager in the example you mention) also lies -- to himself. The victim often suspects, but ignores the evidence (i.e. he lies to himself) because he wants the miraculous returns to be real.

A weakness in human nature that will forever be exploited...

 

[Sittingduck]

in my former employer's case, the pension fund is well funded and has a value of around $19B. I think they got into trouble trying to beat the market in an effort to lower future contributions.
They even invested in some dubious gas fired power plants that failed. A big pool of money sitting around is too tempting to leave invested in the "usual" investments. They got greedy and it is going to cost them more in the long run as well as a Dept of Labor investigation.

 

[38Chevy454]

My single word explanation: Greed

 

[H2ODude]

On a personal level, I just could never trust ANY "investment firm" with our money. Locally there are ads on TV for free investment plan analysis if you have x assets, some guy whose written a book. Others too. I just am not sophisticated enough to be able to do the due diligence on one of these stand alone investment firms to ever trust there wasn't a Bernie lurking. Well, there's that and the fact I wouldn't ever pay someone a % to manage our money. I'll just stick to large known entities like Fido and mutual funds.

 

[Chuckanut]

This is not surprising.

A few years ago the leaders of Michigan required public employee pension funds to guarantee bonds in an scheme to get movie studios to make their movies in Michigan. The result? The pension funds lost millions.

You can't make this stuff up.

Here is an almost 1.7 milllion dollar loss:

At a time when Michigan's public sector employees' retirement plans are underfunded by tens of billions of dollars, the state is tapping those funds to pay the bills of a Michigan movie studio that defaulted on its own bills.

Michigan Motion Pictures Studios, which is being celebrated in the local media for having made the movie, "Oz: The Great and Powerful," in Pontiac, has missed its last three payments on $18 million in bond obligations. The movie opens across the nation today.

Under a deal made in 2010 by then-Gov. Jennifer Granholm, the State of Michigan Retirement Systems is on the hook for those missing payments.

The below loss was $420,000.

The movie studio is in default of that payment," explains Terry Stanton, communications director for the Michigan Department of Treasury. "But the bonds will not be in default, since the State of Michigan Retirement Systems is obligated to make those payments.

The money will come out of the retirement funds of public school and state employees, police and judges.

 

[marko]

Just finished the book "The Wizard of Lies," about Bernie's little swindle. It took me only three days to tear through about 350 pages. Couldn't put it down. HBO has released a movie version.

A central theme of the book is that the liar (Ponzi con artist) succeeds largely because the victim (like the pension fund manager in the example you mention) also lies -- to himself. The victim often suspects, but ignores the evidence (i.e. he lies to himself) because he wants the miraculous returns to be real.

A weakness in human nature that will forever be exploited...

But the brilliance of Bernie's scheme IIRC was that the returns promised were not crazy...he promised and delivered (for a while) about an 8% return and made it hard for you to become a client.

 

[Mo Money]

Right. He pretended to not want any other investors, and in keeping with that theme, he told his clients to stop telling others he was investing for them. This helped keep his scam below the radar. His returns were not stupendous, they were just dependable and relatively boring, year in and year out.

You can read the book or see the movie, but it IS amazing how many red flags emerged over the decades, and were ignored. Easily the absolute WORST dupes in that tragic story were the regulators at the SEC. They were advised repeatedly (like, 3 times in writing) that experts thought the returns were the equivalent to a baseball player having a >.900 batting average. The SEC could have made a single phone call to check out whether the assets were actually traded, but they just never got around to it. They were understaffed, underfunded and undertrained, but they truly would have discovered it with a single phone call they were told to make, but never made.

 

[brett]

Ponzi schemes are very much alive where we live...and thriving.

They tend to take two forms, often a combination of both.

The first is affinity fraud. You invest because someone in your church or social group invests. No checks, you invest without investigating because you rely on a friend, associate, etc. Blinder full on.

Second is simply greed, stupidity. You invest because you are foolish enough to believe that you can obtain 15-40 percent returns while you initial investment remains 'guaranteed' safe. You typically see a return for first year, two years, however the ultimate goal is to get you to invest more. Those first returns are not, of course, from interest/earnings but simply from you own capital investment.