[container section_title=’Container’ fullwidth=’no’ bgtransparency=’0′ top=’20’ bottom=’20’ innerbottomshadowsize=’0′ bordertop=’0′ borderbottom=’0′ collapse=’false’][column type=’12’ last=’1′][title textshadowcolor=’#8224e3′ fontsize=’21’ th_height=’10’ th_margintop=’5′ th_bgtransparency=’0′ th_bgpattern=’3′ animation=’default’]Ponzi, Madoff and Cryptocurrencies: The Same Old Story[/title][text transparency=’0′ fontsize=’15’ fontfamily=’Muli’ animation=’default’]On September 11, 2008, ” the Jewish Bond ” (as the Jewish bond, as Bernard Madoff was nicknamed) was arrested in his New York apartment on suspicion of a billionaire fraud against his customers by use of the “Ponzi scheme” (hereinafter, the ” scheme “).

Bernard Madoff was a real point of reference in the world of finance; he came to assume prestigious positions such as the presidency of NASDAQ (the index of the main technological titles of the American stock exchange) or that of adviser to the New York City Center and with his arrest, he crumbled, “like a house of cards”, all his empire built over 40 years of career on Wall Street.

With the ” Maddoff ” scandal, the “Ponzi Scheme” – that is a financial fraud through which the fraudster, convincing investors of the goodness of an investment, actually non-existent, creates a “chain” by which the first investors entered the scheme are remunerated for their investment through the subscriptions of the last ones entered in the same (1) – has received great media coverage and has been the subject of several studies and research.

The main objectives of this article are: first of all to explain the genesis of the Scheme and its peculiarities; investigate the topic by discussing the Madoff case and investments in cryptocurrencies and highlighting the ways in which an investor can identify/prevent fraud.


The Schema owes its birth to Carlo Ponzi, an Italian who in 1907 moved to Montreal (Canada) and started working as an employee at Banco Zarossi, a bank aimed at Italian immigrants.

As the National Commission is well described by the Company and the Stock Exchange in Italy (the ” CONSOB “) into your site web in 1918, following the bankruptcy of the bank and after several judicial misadventures, Ponzi learned of a system used in the correspondence international via which, when sending a letter abroad and wanting to receive a reply, an International Reply Coupon was inserted inside the envelope (international response voucher, hereinafter “IRC”). Using the IRC, the recipient could send the reply by purchasing only the minimum postage for sending mail abroad.
In particular, the International Reply Coupon, it could have been changed with a stamp in progress in the country of issue, therefore, if in the country of issue of the IRC the tariff was different, a condition occurred that could have made possible a risk-free profit (so-called Arbitrage ).
In the post-war period, high inflation in Italy made postage in Italian lira less expensive than postage in American dollars; Ponzi had sensed the deal by discovering that the international response vouchers were sold for the equivalent of 6 cents of Italian lire and could be converted into higher-value American stamps (1).
He then began to send money to an agent in Italy who bought the vouchers and sent them to the United States where Ponzi exchanged them for American stamps; these were then resold drawing a legal profit, on paper, of 400% (1).

During a speech delivered in Boston on 10 August 1920, Ponzi himself exemplified the situation:
“(…) I take a dollar, with today’s exchange rate I get 18 Italian lire which is enough for me to buy 60 international response vouchers in Italy which I then convert in the United States for 3 dollars (…) ” (1). In order to manage this business, Ponzi set up the Securities Exchange Company in Boston, promising potential investors a rate of return of 50% in just 90 daysthen he began to raise the first capitals convincing them of the effectiveness of this system, involving about 40,000 people and cashing about 15 million dollars.

Ponzi’s exploits soon became very popular and attracted the curiosity of many newspapers including the Boston Post, who decided to hire one of the most famous financial analysts of the time: Clarence Barron (former Dow Jones President and de facto director of the Wall Street Journal ). Barron, after careful analysis, brought to light the scheme that guided Ponzi’s “money-making machine”.

In particular, Barron attested that Ponzi would need 160,000,000 IRC to guarantee what he promised; the problem was that there were only 27,000 in circulation; in light of these claims, investors besieged the office with the return of only $ 2 million, the Securities Exchange Company and Ponzi regained the confidence of the investors by preventing them from asking for the return of the invested capital.

The financial miracle did not escape even the managers of the post office which on July 28, 1920 (with effect from August 15), changed the postal conversion rates for the first time since the post-war period, making the arbitration of Ponzi no longer convenient even on a theoretical level ( 1).

On August 13, 1920 Carlo Ponzi was arrested and federal agents did not even find a good international response, thus leaving investors in the deepest despair.

A few days before his death in Brazil (1934), Ponzi declared to an American journalist: ” (…) I gave the inhabitants of Boston the best show that has ever been seen in the area since the landing of the pilgrim fathers! It was worth fifteen million green bucks to see me put up the whole hut! (…) “.

Therefore, in light of what has been highlighted so far, Ponzi would have used the ” credibility ” born from the initial and legal investment in IRC – which was successful – to develop, then, a real fraudulent scheme which will then be defined as “Scheme Ponzi “.

Indeed, Carlo Ponzi was inspired by William Miller, an accountant from Brooklyn known as ” 520% Miller “. Miller, in 1899, founded a company called ” Franklin Syndicate ” which promised its investors weekly returns of 10%, thanks to the inside information that Miller had in relation to the most profitable businesses of the time. William Miller defrauded investors for about $ 1 million (about $ 25 million today) and was sentenced to ten years in prison.


The elements that characterize a “Ponzi Scheme” are:

  1. Deposit by investors,
  2. Marginal or no business activity by the fraudster or his company/fund;
  3. Marginal or zero return from business (if any);
  4. Investors are repaid with the cash flows from the latest investors who entered the chain.

Analyzing the above elements, it emerges, as in the Ponzi case, that the fraudster actually invests the victims’ capital in a regular business , using it to attract a greater number of victims and to subsequently transform it into a “Ponzi Scheme” in which the money paid to investors is nothing more than a distribution of capital – ” rob to Peter to pay Paul ” (stealing from Peter to give to Paul).

As the “chain” lengthens and therefore the number of investors (victims) increases, the returns for the last investors decrease more and more and when there are no longer people interested in investing, the ” Ponzi scheme ”will collapse and the scam will be manifest.

Therefore, the “Ponzi Scheme” is not based on highly sophisticated financial systems but is mainly based on the ability of the promoter (defrauder) to convince potential investors and to make the investment as attractive and credible as possible.

In detail, as behavioral finance shows, our decisions are exposed to numerous perception errors and behavioral traps, including:

  • Risk perception and risk appetite: very subjective factors influenced by multiple variables. In this regard, it is appropriate that an investor is not persuaded by experiences made by friends/relatives or by past returns as, the perception of others of the risk may not coincide and the past returns may not be repeated;
  • Instinct and thought shortcuts: the so-called ” heuristics ” are mental “shortcuts” that simplify a problem by facilitating the decision. In this sense, estimating the probability of an event happening may seem very easy but, in reality, shortcuts often lead to making mistakes and even when the probabilities are known, numerous traps can lead to errors of perception;
  • Optimism and Overconfidence: making too optimistic forecasts or trusting one’s evaluation skills too much can lead to underwriting high risk investments even when one is strongly averse to losses;
  • Framing effect: the so-called “ framing ” is the way in which information is represented, it can divert the reader’s attention to the information deemed relevant and distort his attitude towards risk;
  • Fear of regret and herding behavior: in anticipating regret for any wrong decisions, individuals can choose not to change their portfolio even when it would be desirable ( immobility ), or they can imitate ( herding behavior ) the most common behaviors in order to share with others the responsibility for a possibly wrong choice. After making a decision that has proven to be wrong, individuals tend to attribute responsibility for their choices to others to reduce “regret” (so-called attribution bias ).

Therefore, an attractive investment proposal, with out-of-market returns, catches and is attractive for:

  • the easy money: the desire of potential can lead to rash decisions also very cautious person and / or with little savings;
  • the confidence in the crook or those offering the investment;
  • the flock effect (so everyone fans);
  • the tendency to rely on emotions if pushed to decide in a short time.

In light of what has been described so far, the main red flags are listed below, the partial or total coexistence of which could define an investment as a potential “Ponzi scheme:

– investments with high returns with minimum or zero risks;

– investments with always positive returns ;

– investments not registered with the supervisory authorities;

– non-licensed financial advisors ;

– investment strategies are represented as complex and secret ;

–   irregularities in the documentation;

–   difficulty in collecting the proceeds of the investment.


The “Ponzi Scheme” and the “Pyramidal System” are very similar due to the ” Sant’Antonio chain ” element present in both fraudulent schemes but in reality, they differ in the following elements:

  • Involvement of the participants: in the “Ponzi scheme” the participants believe they have invested in a real title and are not aware of being involved in a fraudulent scheme instead, in the “pyramidal system”, although the organizers tend to hide the true nature of the system, participants are generally aware that they are responsible for recruiting new members and know that new members are a source of profit for existing members ;
  • Level of involvement: in the Scheme, the investors are no longer involved after their initial investment, while in the “Pyramid System” the participants have a more active involvement since they are asked to recruit new participants;
  • Source of remuneration for investors/participants: in the “Ponzi Scheme” investors are convinced that they are remunerated by the investments made instead, in the “Pyramid system”, they are aware of being remunerated on the basis of the participants recruited;
  • Duration of the fraud: the “Ponzi Scheme” can last many years before collapsing, provided that there is a sufficient number of investors instead, the “Pyramid System” has a very short duration conditioned by the speed with which the participants request the earnings promised.

Finally, it should be noted that very often the ” Pyramid systems ” are disguised as multilevel marketing activities ( MLM ) in which, unlike the actual MLM, the most substantial part of the revenue that allows financing the consideration promised to the participants, not results from real economic activity (i.e. the sale of goods or services). The promotion, in fact, is based on the promise of obtaining an economic benefit that depends on the entry of other consumers into the system.

In addition, it should be noted that in Turkey the “pyramid system” is prohibited:


Below are some of the most well-known cases in the media and which have generated the most serious (estimated) financial losses for the victims. As a comment and integration of the graph, the following is highlighted:

– the period between 2008 and 2009 is a period in which different schemes have been discovered because, as already underlined previously, a “Ponzi Scheme” is detected when there are no more subscribers and investors ask to repossess their capital.

This circumstance, between 2008 and 2009, occurred mainly as a result of the financial crisis when many investors needed liquidity;

– the “Madoff case” represents, as already highlighted above, an emblematic case of the “Ponzi scheme”, in terms of the value of losses and duration. Bernard Madoff was the architect of the biggest fraud of all time, whose loss to investors was USD 17.3 billion (USD 65 billion also considering the agreed false returns). Madoff, a former Long Island lifeguard, entered the brokerage business in 1960, founding Bernard Madoff Investment Securities, a company that ranged from securities trading to the development of electronic trading platforms for shares and derivatives. The mechanism put in place by Madoff was simple: the money paid by those who last entered his prestigious investment fund – which had also attracted retired Jews to whom he guaranteed a fixed annual yield of 10% – were used to liquidate the first ones that they asked to go out. The “castle of paper” built by Madoff on the basis of false balance sheets collapsed due to the financial crisis of 2008 which prompted an unexpected number of customers to ask for the return of the liquidity invested until reaching the figure of USD 7 billion of divestments. Madoff, in the face of these requests, was no longer able to honor the remuneration of the promised interests.

Although it is difficult to trace all the names of those who fell into Madoff ‘s trap, as well as the exact size of the capital entrusted to the financier, some important names emerge: in Italy among the defrauded there are Unicredit, with direct exposure of 75 million and an indirect one of 805 million through the Pioneer Alternative Investment Management (specialized in hedge funds), Banco Popolare (with 8 million direct exposure and 60 million on the funds distributed by the group), Ubi Banca (which suffered losses for 60 million) and Mediobanca (whose exposure was around $ 670,000).

At banks they have also added the hedge funds and the private investors.

The biggest scam in Wall Street history ended on June 29, 2009, when the federal district court in Manhattan handed the former president of Nasdaq a 150-year sentence (the maximum possible) – well beyond the 12 years requested by the defense attorney – which Madoff is serving in a maximum-security penitentiary.

As an addition and comment on what has been reported so far, it should be noted that doubts had already arisen between 1999 and 2001 regarding the work of the Madoff company.
In particular, competitors could not explain how ” the Jewish Bond “, despite the market trend, managed to produce constant returns in the order of 10% per year.

In particular, in this context the unheard investigative activity carried out by Harry Markopolos ( Forensic Accountant and Fraud Investigator ) was inserted, who, speaking with Frank Casey (the one who commissioned the investigative assignment to Markopolos, at the time manager of Rampart Investments Management ), stated:

” (…) at the bottom of the page, a chart of Madoff’s return stream rose steadily at a 45-degree angle, which simply doesn’t exist in finance. Within five minutes I told Frank, “There’s no way this is real. This is bogus ”As I continued examining the numbers, the problems with them began popping out as clearly as a red wagon in a field of snow. There was a stunning lack of financial sophistication. Anyone who understood the math of the market would have seen these problems immediately. A few minutes later I laid the papers down on my desk. ” This is a fraud, Frank ” I told him (…) “.

[“ (…) At the bottom of the page, a graph showed how Madoff’s returns had risen steadily at a 45 ° angle, which is simply impossible in finance. After five minutes I said to Frank, “There is no way this is real. This is false”. As I continued to examine the numbers, problems began to emerge as a red wagon in a snowfield. There has been an extraordinary lack of financial sophistication. Anyone who understood the mathematics of the market would immediately see these problems. A few minutes later I laid the sheets on my desk and said “this is a fraud, Frank” (…) “].

Harry Markopolos from 2000 to 2005 persistently reported this conduct, with very detailed reports, to the SEC that he did not take any action until the outbreak of the “Madoff case” in 2008.


As we have seen so far, a “Ponzi scheme” can be hidden behind every type of investment, just think that initially Carlo Ponzi had camouflaged his scheme behind an investment in postal vouchers and a few decades later Bernard Madoff created the “swindle of the century ”Disguising it behind“ high yield ”equity investments.

Therefore, the problem is not the object of the investment (postal vouchers, cryptocurrencies, or other financial instruments) but the reliability of the intermediary/promoter.

In light of the digital metamorphosis that the financial system is going through, it is physiological that the fraud sector is somehow updating itself on what are the new technologies and new financial instruments.

In July 2019, the journalists in Italy made a very interesting interview with ” Klaus “, the invented name of a former promoter of a cryptocurrency trading company and current collaborator of both Italian and judicial authorities.

Klaus described the situation of the crypto world both nationally and internationally, and the method by which ” many companies” and many foreign companies are cheating many savers.
In particular, like any self-respecting “Ponzi Scheme”, contact with the victims takes place through friendships/acquaintances and in some cases even the victims are hooked by ” holy men and healers ” who propose, as a solution to their problems, investments in crypto. Once the victim is hooked, the promoter camouflaged by a trusted friend, proposes the purchase of a package of cryptocurrencies of variable value, in the order of ” 10, 20 or 30 thousand euros “, with the promise that in a few months the capital would have doubled/tripled. These perspectives are supported both by documents showing the growing trend of cryptocurrencies and by ” unreal ” photos published on social networks in which the luxurious lifestyle of phantom investors is shown following investments in cryptocurrencies.
Subsequently, once the package has been purchased and the agreed period of duration of the investment is awaited, the victims discover the scam since the purchased cryptocurrency package is not convertible into current currency.
Therefore, the fraud described by Sole24 journalists is nothing more than a “Ponzi Scheme” where “(…) strong profits are promised to the victims as long as they recruit new investors, who are themselves victims of the scam. Klaus believed it, also attracted by the promises of stratospheric gains, which would have rained from the sky in the form of not manna but of cryptocurrencies convertible into euros of which, he, like everyone else, has never seen neither shape nor color (…) “.


As we have seen so far, the “Ponzi Scheme” is a fraud that exploits the non-knowledge / hope and at the same time the trust of the victims. In fact, the victim very often does not know (or pretends not to know) a specific product and enticed by easy money, he trusts the promoter with whom he has in the meantime established a relationship of trust.

Therefore, in addition to paying attention to the presence of the aforementioned red flags, in order to mitigate the risks deriving from the knowledge and trust factor, it is necessary to:

  • fully understand with whom you are entering business and
  • whether the deal could actually guarantee the level of risk and the expected return.

In this regard, to deal with information deficiencies and to evaluate the trust of the counterparties, one could turn to specialized companies to carry out a Background Check activity in order to receive useful information aimed at both understanding the risks of the transaction and identification of any red flags about the integrity of the counterparty.

Lastly, with specific reference to online trading, by consulting financial regulators’ websites, it is possible to check whether or not a specific person is authorized to carry out these activities and if it has already been reported for financial abusiveness.


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