Understanding Ponzi Schemes

Understanding Ponzi Schemes

Can Better Financial Regulation Prevent Investors from Being Defrauded?

New Horizons in Money and Finance series

Mervyn K. Lewis

A Ponzi scheme is one of the simplest, albeit effective, financial frauds to engineer, and new schemes keep coming forward. Despite this, however, people continue to invest in them. How are we to account for the seemingly never-ending lure of such schemes? In providing answers to this central question, this concise and well-researched book examines how Ponzi schemes operate, how they differ from pyramid schemes, Ponzi finance and other financial arrangements.

Chapter 11: Summary and conclusions

Mervyn K. Lewis

Subjects: economics and finance, behavioural and experimental economics, economic crime and corruption, economic psychology, financial economics and regulation

Extract

This volume has examined a number of aspects of Ponzi schemes; in particular, how they differ from other financial arrangements; whether the victims have only themselves to blame; what behavioural finance theory and psychologists would say on the topic; and the types of regulatory and other changes needed to protect investors and avoid repetitions. The analysis has been informed by case studies of 11 Ponzi schemes, those run by the eponymous Charles Ponzi, Bernard Madoff, Sir Allen Stanford, Kenneth Wayne McLeod, Allan McFarlane, Kautilya Nandan Pruthi, Jacqueline Bradley, Trendon T. Shavers, John M. Sensenig, Monroe Beachy and Timothy Moffitt. Seemingly very different in size, nature and longevity, the schemes nevertheless exhibit important commonalities. By way of conclusion, consider first the question posed in the subtitle to this volume: Can Better Financial Regulation Prevent Investors from Being Defrauded? One answer is that it needs to, and should, in view of the sad catalogue revealed in the case studies of warning signals and ‘tip-offs’ ignored and investigations shelved prematurely in order to tackle ‘quick and easy’ cases, imposing dreadful costs on those investors drawn in by the Ponzi scheme promoters. The investing public expects better from those whose job it is to police the financial markets.

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