Why do ponzi schemes work?

You would think that by now, investors would have heard about enough ponzi schemes so that there would be no new victims of fraudsters who put together now scams. Nevertheless, even today ponzi schemes successfully steal millions from new victims who sustain tremendous financial losses. A sterotypical example is a recent case from Texas, where a scheme represented as an investment into mortgages, extracting $22 million in payments from thousands of victims.

The reason that these investment fraud schemes continue to work is because humans allow the appeal of excess returns to distract them from performing even the most basic due diligence. True to form, this scam offered 30% returns on investments. The other factor common in many ponzi schemes is “affinity” relationships. Many scams are executed within church congregations, ethnic groups, neighborhood communities, and employer workforces. This element of the scam replaces actual due diligence with a follow-the-crowd mentality.

The third element common in most ponzi schemes is excess material trappings. The scammers will arrange to have excessively luxury vehicles, access to aircraft and affluent homes, and join exclusive clubs. This adds an element of legitimacy to the fraudster.

True to form, the randomly chosen scam listed above had all three elements.

“…the Wammel Group, guaranteed a minimum 30% annual return and that many victims were family and friends. Investigators say the men spent investors’ money for lavish expenses including paying $18,000 a month to rent a house in Frisco, pricey cars, jewelry and private school tuition. Prosecutors say Wammel used investment funds to pay for expenses related to a Rolls-Royce, a Ferrari and a Range Rover.”

When you are presented with a potential investment with outsized returns, vouched for by a distant friend, by a salesperson driving a luxury car, run. Or if you prefer to just lose a little money instead of your life savings, have us run a background search on the operation.

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