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December 18, 2008
Ponzi schemes strike in U.S., Russia and Colombia


Financier Bernard Madoff’s alleged $50 billion fraud case has made headlines worldwide.

News of what may be the largest Ponzi scheme in history — a $50 billion fraud case alleging wrongdoing by former NASDAQ chairman Bernard Madoff — rocked U.S. and foreign investors.

Similar fraud cases recently emerged in other world markets as well. In Canada, for example, many farmers lost thousands of dollars to fradulent pigeon-meat businessman Arlan Galbraith. In Colombia, up to 500,000 investors face losses thanks to Ponzi schemes.

Daniel Kaufmann is the director of the World Bank’s Global Programs and Governance and writes at the “Global Governance” blog about worldwide Ponzi schemes and their relationship to the global financial crisis.

Ponzi Schemes in Russia, Colombia and the US: from Mavrodi to Murcia to Madoff

Very recently we witnessed political and social unrest in Colombia due to the implosion of the DMG pyramid scheme (named after the scammer, David Murcia Guzman).  And now we got Madoff in Wall Street.  These cases today show how difficult it is sometimes to learn from the past.  Especially when past events are far way in space and time…

I have received articles from experts in Colombia who found parallels with the analysis I made long time ago on the Mavrodi’s MMM pyramid scheme collapse that inflicted major pain on so many Russian citizens in 1994.  The focus of my old article was particularly on the MMM Russian case.  But there were other such financial collapses caused by pyramid schemes at that time–including in Romania, and of course the tragic case of Albania, in which 2,000 citizens died during the civil war that ensued.

Pyramid schemes in the financial sector are known as ‘Ponzi schemes’ – after Charles Ponzi who scammed many Bostonians almost a century ago.  A Ponzi scheme fraud occurs when the money of fresh investors, attracted by the promise of ‘fantastic’ dividends, is used to pay the previous investors.  The first group of investors to enter the scheme gets high dividends, the word spreads about the high payoff to those early investors, fresh investors are attracted, until everything falls apart because the much broader group of latecomers cannot be compensated by the eventual cap in the number of new investors attracted into the scheme.  It is literally a house of cards, with no actual investments, but based instead, on an unrealistic expectation of ever growing cadres of new ‘investor’ cohorts to pay the previous cohort.  When such perennial growth fails to materialize, it becomes impossible to pay returns to the previous investors that had already joined relatively late in the game.

So the DMG debacle in Colombia is nothing new.  The similarities with past events are obvious.  Even in the present, Colombia does not stand alone, as we now face in the US what is arguable: the largest ‘pure’ Ponzi scheme caused by an individual.  This is the case of Bernard Madoff, former chairman of Nasdaq stock market.  Madoff himself seemed to have acknowledged (even bragged?) that his fraud was a Ponzi scheme (a big lie…), estimated at about US $50 billion!

That is the blatantly obvious part.

But at the same time, and much less obvious, and with little media coverage, is the issue of the link between the financial and mortgage markets disaster (that started months ago in the US), on the one side, and pyramid schemes, on the other.

Even if less obvious, some of the characteristics of the actions and schemes promoted by some of the main actors in the real estate, mortgage and financial markets contain some Ponzi scheme elements.

To read more, see the original post.

The views expressed by contributing bloggers do not reflect the views of Worldfocus or its partners.

Photo courtesy of Flickr user jenn_jenn under a Creative Commons license.

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RE: Your article PONZI Dated DECEMBER 19, 2008.


Carlos Ponzi effected a PYRAMID scheme. Madoff is incorrect he organized his particular business model on an existing PYRAMID scheme. Reporters and Madoff along with all editors that quote “PONZI” scheme are actually deflecting this great crime to another group.

When a GREAT CRIME is committed perception is directed to a one particular group. Let’s look at the sound bytes HOLLYWOOD, MAFIA, ORGANIZED CRIME, La Cosa Nostra, Black Hand, PONZI, Ponzi Scheme, Italian , Italian-American.

Review this headline example:
Madoff claims he perpetrated “PONZI” scheme see article below.

CORRECTION; the correct name of this scam is “PYRAMID”. The current financial demise of the USA is a reverse or upside-down Pyramid scam.

“Ponzi schemes(sic) are also known as pyramid schemes”
-Mitchell Zuckoff.

The greatest PYRAMID scheme in history is the FEDERAL RESERVE.

“Behind every great fortune there is a crime” — Balzac

“Reverse Pyramid Scam”


Fractional reserve banking is a Ponzi scheme, perhaps the only legal one in existence. The seeds of global banking’s destruction were planted in the beginning. Fractional reserve banking is, in the long run, not sustainable, because when the music stops everyone has to stop dancing but there aren’t enough chairs. Perhaps all these minor Ponzi schemes will wake the world up to the overarching scam perpetrated on humanity by central banks: This thing we call “money” is really DEBT.

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