International Law

Business's Evil Twin : The Ponzi

Image by Renegade98 via Flickr

Robert FitzPatrick, of Pyramid Scam Alert, has a nice observation about the relationship between ordinary business and ponzi schemes, in the Times.

The US, though, is the centre of the Ponzi renaissance.

"These schemes by definition survive by bringing in new money. Now everybody is pulling money out while no new money is coming in they are all collapsing at once," said Robert Mintz, a former federal prosecutor and now a partner at McCarter & English in New York.

Mintz said in the instance of Madoff there were signs that might have alerted the authorities, but most of these schemes were difficult to detect until they fall apart.

FitzPatrick said the schemes were hard to detect because they so closely resemble legitimate ventures.

"The Ponzi scheme is like the evil twin of normal business. It can operate fluidly in a regular environment," he said.

And in a market where big promises were being made for returns on investments, it offers the promise that those returns can continue, said FitzPatrick.

One factor behind the rise of the Ponzi has been the rise of hedge funds, said FitzPatrick.

Lightly regulated, opaque and invested in complex derivatives few of their investors understand, hedge funds sound like scams themselves, he said.

Investors who have heard of the success of hedge funds are more likely to feel comfortable with a scheme that once might have given them second thoughts.

"The disguises have become better and better," said FitzPatrick. He added that what was happening on Wall Street had been raging on Main Street for some time.

He believes pyramid schemes (the poor man's Ponzi) have doubled over the past 10 years as people look for extra income to meet rising healthcare, education, food and housing costs. In the search for extra cash, practices that were once seen as illegal have been legitimised, he said.

Full post as published by Misleading Advertising Law on February 02, 2009 (boomark / email).