A Ponzi scheme begins with a simple promise.
“You promise a certain amount of money to investors. But when you don’t have that amount to give them, you find some others,” Tamar Frankel, a professor of law at Boston University and author of The Ponzi Puzzle.
“You take the money from them, you promise them, and you give it to the [first investors.]”
The scheme gets its name from Charles Ponzi, an Italian businessman who operated in Canada and the U.S. in the 1920s, Frankel says.
“Fraud is evil, because it’s unfair, because it takes advantage of other people,” said Frankel.
But it’s become much more notorious in the past decade.
WATCH: 16×9 investigation The Billionaire and the Bank
In the wake of the 2008 financial crisis, Allen Stanford was charged with operating one of the biggest Ponzi schemes in U.S. history. Amassing more than $7 billion from roughly 21,000 clients in more than 100 countries, Stanford was only outdone by Bernie Madoff, who bilked investors to the tune of over $18 billion.
An investigation by 16×9 uncovered how Toronto Dominion Bank in Canada allowed Stanford to funnel billions of investor money into his Toronto accounts that went to fund his lavish lifestyle.
Allen Stanford collected billions in certificates of deposit, advertised as safe investments with approximately three per cent higher return than similar investments.
But like many Ponzi schemes it wasn’t just the allure of the return, but the man behind the investment.
“Usually the con artist … is a very charming person, a very smart person, and also has no feeling of [empathy],” said Frankel. “They have such fantastic stories about the investment. People are attracted to it.”
Stanford led an opulent lifestyle. At the height of his empire he owned several big boats and private jets; invested in cricket teams and owned several mansions, including a massive 18,000 square foot castle in Florida.
Jordan Maglich, a U.S. attorney who publishes ponzitracker.com, says one of the tell-tale signs of the classic Ponzi scheme is a “secret” formula for making money.
“A lot of the time you have a person who has figured out this secret or exotic way to make a lot money that only they know, and they are not willing to tell you how they do it,” Maglich said. “There is often very little or no legitimate business or investing. It’s simple paying old investors with new investor funds.”
In 2003 Charles Hazlett, a former broker who worked in Stanford’s Miami office, says he began asking questions about how Stanford was making its money.
“All they told me was something like it’s 20% stocks, 15% bonds, 10%…but they didn’t give me enough,” Hazlett told 16×9. “My client wanted more information.”
Maglich calls Ponzi schemes “a lagging indicator of the financial world” where the massive returns promised by fraudsters are more believable against the backdrop of a booming economy.
“A lot of the time people are making these investments not thinking they are risky,” he said. “People view these investments as safe. When the economy starts going south, you’ll start seeing people, as the economy gets worse, try to pull out their money from what they consider their safe.”
But eventually every Ponzi scheme collapses.
“As the scheme expands you have these promises [of] returns to a growing number of people,” said Maglich. “The only way you can support making those distributions every year is to keep increasing the number of money and investors coming in … when you are required payments are more than you have in the bank it collapses.”
Watch 16×9 Saturday at 7 p.m. for the full investigation.
*With files from Gil Shochat
© 2016 Shaw Media