Speaker 1: Welcome to tech Stuff, a production from I Heart Radio.
Speaker 1: Hey there, and welcome to tech Stuff. I'm your host,
Speaker 1: Jonathan Strickland. I'm an executive producer with I Heart Radio
Speaker 1: and a love all things tech, and very recently I
Speaker 1: did some episodes about earth Link, the Internet service provider,
Speaker 1: and I talked about how there was a connection to
Speaker 1: an investor who was later arrested and charged on counts
Speaker 1: of fraud having run a Ponzi scheme, and I very
Speaker 1: briefly covered what a Ponzi scheme is, But today I
Speaker 1: thought we would explore this a bit further because the
Speaker 1: Ponzi scheme is alive and well many decades after it
Speaker 1: first appeared, and often these days we see it used
Speaker 1: in combination with a technology that grabs a lot of attention,
Speaker 1: that being cryptocurrency. So in this episode, we're going to
Speaker 1: explore where of the Ponzi scheme comes from and how
Speaker 1: it works in general, and we'll learn about cryptocurrencies and
Speaker 1: a little bit about what makes them tick from a
Speaker 1: very high level, and then we'll learn how these two
Speaker 1: things came together, kind of like a Reese's Peanut buttercup
Speaker 1: and just as evil. Now, fans of stuff you should
Speaker 1: know might be aware that way back in two thousand nine,
Speaker 1: which was, you know, one year into us doing podcasts
Speaker 1: at all, they did how Ponzi schemes work. It gave
Speaker 1: birth to the phrase it's a Ponzi scheme. And so
Speaker 1: I apologize to those longtime fans who also listened to
Speaker 1: my show, because there's gotta be some overlap between those two,
Speaker 1: right anyway. I know I won't be as entertaining as
Speaker 1: Josh and Chuck, but then there are two of them
Speaker 1: and there's only one of me. However, I will give
Speaker 1: it the old college try. Now. The term Ponzi scheme
Speaker 1: gets its name from a specific man, Charles Scheme. Wait, no,
Speaker 1: I'm sorry, I read that wrong, Charles Ponzi. He would
Speaker 1: be investigated and charged for fraud in the nineteen twenties,
Speaker 1: but the actual method pre dates Chuck Aino by several decades,
Speaker 1: and earlier example of the scheme that Ponzi used was
Speaker 1: the method of choice for one Sarah how in Boston
Speaker 1: in eighteen seventy nine. Even this was not the first instance.
Speaker 1: There were at least two other cases of very similar schemes,
Speaker 1: one in Madrid, Spain, and another in Berlin, Germany, both
Speaker 1: perpetrated by women, and the general idea is much much older.
Speaker 1: But let's explore the story of Sarah How. I'd love
Speaker 1: to tell you all about Sarah How, but historical records
Speaker 1: of her are scant. There are no known photographs of her,
Speaker 1: there are no sketches. Few details are about her past.
Speaker 1: At least a few verifiable details will get to that.
Speaker 1: We do know that in eighteen seventy seven she was
Speaker 1: working in Boston as a fortune teller, so we can
Speaker 1: assume a few things. Now. Pardon me, because I am
Speaker 1: a skeptic. So if you believe in stuff like astrology
Speaker 1: or fortune telling, you're likely going to find what I
Speaker 1: have to say pretty irritating. But people who are really
Speaker 1: good at doing stuff like reading fortunes or doing astrology
Speaker 1: readings tend to be very good at making quick judgments
Speaker 1: about people. And they also tend to know what sort
Speaker 1: of things are part of the commonly shared human condition.
Speaker 1: There's a practice that's called cold reading, and here's how
Speaker 1: it works. You've got your fortune teller or your mentalist
Speaker 1: or whatever, and they spout out a bunch of general
Speaker 1: information towards their mark. Often they are actually addressing a
Speaker 1: group of people, because that increases the odds of getting
Speaker 1: a hit if you're talking to more than one person.
Speaker 1: But the whole goal is to cast a wide net
Speaker 1: so that something that the person ends up saying ends
Speaker 1: up being perceived as relevant, and you make the mark
Speaker 1: do most of the wreck for you. You don't have
Speaker 1: to know anything about that person. As long as you
Speaker 1: get close enough to something that is relevant to that
Speaker 1: person's life, they're likely to do the rest of the
Speaker 1: work for you. So here's kind of an example, you know,
Speaker 1: just as hypothetical. Uh, let's say that the mentalist or
Speaker 1: fortune teller says, I, since you have experienced great happiness
Speaker 1: but also suffered great loss, and I'm picking up on
Speaker 1: a name. It might start with the letter J or
Speaker 1: maybe are. The vision is hazy, and meanwhile you're waiting
Speaker 1: for your mark to fill in the gaps. And people
Speaker 1: tend to be people pleasers, and they want to believe
Speaker 1: in these sort of things, and so they become willing participants.
Speaker 1: So you might have a mark, say I had an
Speaker 1: uncle named Jason, or my sister's name is Rachel or whatever,
Speaker 1: and to the market seems as though you as the
Speaker 1: fortune teller have divined something you couldn't possibly have known,
Speaker 1: but in fact they're the ones who are providing you
Speaker 1: with all the information, and you just go from there.
Speaker 1: And on a similar note, astrological readings tend to follow
Speaker 1: a similar approach by giving out a very general message
Speaker 1: that can apply to nearly anyone. A fun test to
Speaker 1: do is to take a horoscope for a day and
Speaker 1: see if you can figure out which of the horoscopes
Speaker 1: belongs to which sign. That you mix them all up
Speaker 1: so that way you can't see the sign matched with
Speaker 1: the horoscope. You're just getting the messages, and then you
Speaker 1: have somebody else who has an undoctored version of the
Speaker 1: document to see if you can actually match it up.
Speaker 1: And if you do it as a double blind, really
Speaker 1: like if the person who is recording your answers does
Speaker 1: not have access to those answers right away, you're probably
Speaker 1: going to find out that your success rate is about
Speaker 1: what chance would suggest. Double blind tests that try to
Speaker 1: match people with horoscopes show that there's not really any
Speaker 1: correlation there, but hey, what do I know? I'm a cancer.
Speaker 1: There are also warm readings. This is where you start
Speaker 1: already knowing something about the mark perhaps through the help
Speaker 1: of an accomplice. But the reason I even bring this
Speaker 1: up is that Miss How must have had a decent
Speaker 1: knack at reading people, which would come in very handy
Speaker 1: when it came time to fleece them. Later, in eighteen
Speaker 1: seventy eight, How launched the Ladies Deposit Company, which was
Speaker 1: ostensibly a bank. How recognized an opportunity. Unmarried women who
Speaker 1: had no guardian had difficulty establishing an account at traditional
Speaker 1: banks because it was a pretty darn patriarchal society and
Speaker 1: unmarried women were second class citizens. And I should also
Speaker 1: mention that at this time, if you weren't white, you
Speaker 1: had an even more difficult time accessing the basic functions
Speaker 1: of society. Even How, when she was making the Ladies
Speaker 1: Deposit Company was only catering to white unmarried women. Essentially,
Speaker 1: white men had access to everything, and everyone else was
Speaker 1: dealing with an enormous amount of opposition. So How opened
Speaker 1: up a bank that would accept deposits from unmarried women
Speaker 1: and and them alone. And honestly, if How had the means,
Speaker 1: she might have been able to have a successful business
Speaker 1: without the need for trickery. But How was making an
Speaker 1: outlandish promise to her clients, She claimed that deposits would
Speaker 1: see an eight percent interest rate, meaning that depositing money
Speaker 1: with HOW would see an eight percent return on that
Speaker 1: money over time, and she said that if you were
Speaker 1: to deposit on in her bank by years ind you
Speaker 1: would have an additional nineties six dollars earned through interest,
Speaker 1: and she promised that early investors would get the first
Speaker 1: three months of that interest paid in advance. Now that
Speaker 1: interest rate was significantly higher than what banks in the
Speaker 1: general industry were able to offer, and when pressed on
Speaker 1: how she could offer such high interest rates to her clientele,
Speaker 1: she claimed that her bank had the fine anential backing
Speaker 1: of Quakers who were supporting it as a charity for women,
Speaker 1: and her spiel worked, and she advertised all around the Northeast,
Speaker 1: gathering clients all along the way, and a lot of
Speaker 1: the women, when they received their advance would immediately put
Speaker 1: that money into their account with HOW in order to reinvest.
Speaker 1: Historians estimate that she managed to get between two hundred
Speaker 1: fifty thousand and five hundred thousand bucks in eighteen seventy
Speaker 1: nine that would be worth millions of dollars in today's money. Eventually,
Speaker 1: investigators uncovered what was really going on. But it was
Speaker 1: pretty tricky to do because How was strict on our
Speaker 1: policy of only serving unmarried women, which cloaked her from
Speaker 1: most investigations. As this was a male dominated world, reporters
Speaker 1: were nearly always men, and they weren't allowed inside house establishments.
Speaker 1: How claimed this was to protect her customers, these delicate
Speaker 1: unmarried women, which society perpetually viewed as being helpless and
Speaker 1: just a potential victim, perpetually a potential victim. And that
Speaker 1: really showed how clever How was. She had identified a
Speaker 1: target population right for exploitation and at the same time
Speaker 1: figured out how to exclude people determined to investigate her.
Speaker 1: But here's what was really going on. How would bring
Speaker 1: in a round of investors who would give her money
Speaker 1: to deposit into accounts. She then would seek out a
Speaker 1: second round of investors, and using money from that second round,
Speaker 1: she would pay out the advanced interest to her first
Speaker 1: round of investors. Then she would seek out a third
Speaker 1: round and use that money to help pay out the
Speaker 1: second round, and so on. The scheme required How to
Speaker 1: constantly seek out more investors to pay out dividends to
Speaker 1: her earlier investors, and meanwhile, the clock was ticking. She
Speaker 1: was helped out considerably by the fact that many women
Speaker 1: would reinvest their money into the scheme. They were doing
Speaker 1: so because to them it seemed as though they were
Speaker 1: getting an incredible interest eight so more money in the
Speaker 1: account would mean more money and interest down the road.
Speaker 1: Their money would be making more of itself. But in reality,
Speaker 1: this cash was largely going to fund How's new lavish lifestyle,
Speaker 1: while she kept reaching for more investors to keep the
Speaker 1: whole show going strong. She was also helped by the
Speaker 1: fact that the banking industry at the time was largely
Speaker 1: free of regulation, making it something of the Wild West.
Speaker 1: But for money schemes, it was an environment that allowed
Speaker 1: for exploitation with less risk of oversight, and so there
Speaker 1: was opportunity for the enterprising scammer. But How's scheme eventually
Speaker 1: was laid bare, and the press absolutely tore her to shreds.
Speaker 1: And by tore her to shreds, I mean they didn't
Speaker 1: just point out the fraud, but they disparaged How beyond
Speaker 1: what the facts could support. They claimed she was illiterate,
Speaker 1: They said she was uneducated, They said that she was
Speaker 1: hideous to look upon. In fact, How was clearly very
Speaker 1: well educated and witty, and the fact that earlier accounts
Speaker 1: of How never brought into account her looks tells us
Speaker 1: that she was probably, you know, pretty ordinary looking. Not
Speaker 1: only that, but the reports on How began to fabricate
Speaker 1: an entire history of this mysterious woman, complete with salacious
Speaker 1: and frankly racist overtones. So we don't know much about
Speaker 1: How's history. The history that was published was fabricated. I
Speaker 1: won't go into the whole thing here, but to call
Speaker 1: it a smear campaign would be going lightly. Yes, How
Speaker 1: had pulled a fast one, but it seems to me
Speaker 1: that the media was more upset that a woman would
Speaker 1: find such success in what was generally considered to be
Speaker 1: a man's domain than the fact that she did so
Speaker 1: through underhanded methods. In other words, the misogyny was thick here, folks.
Speaker 1: How stood trial for accepting money under false pretenses because
Speaker 1: she had claimed that this was an extension of the Quakers.
Speaker 1: She served three years of a prison sentence, she got out,
Speaker 1: then she did the whole thing all over again. And
Speaker 1: while I don't condone crime at all, part of me
Speaker 1: admires the hell out of a woman who, when faced
Speaker 1: with a society that actively resisted the efforts of women
Speaker 1: to play a part beyond just being surviled two men.
Speaker 1: She rejected that notion and decided to go her own way.
Speaker 1: But the fact that she was targeting other women certainly
Speaker 1: takes the romance out of it, doesn't it. I mean,
Speaker 1: if she were targeting like fat cat businessmen who were
Speaker 1: accustomed to putting the screws to the little guy, this
Speaker 1: would be almost a robin Hood like story. But with
Speaker 1: how it was more like I rubbed from the poor
Speaker 1: and give to myself. She was caught a second time
Speaker 1: and decided to give up the practice, and she went
Speaker 1: back to fortune telling. She lived out the remainder of
Speaker 1: her days in relative obscurity and modest living, still fooling
Speaker 1: people into believing she had some sort of mystical insight
Speaker 1: into their fortunes. It's more like she had a pretty
Speaker 1: regular insight into their wallets. But the heart of this
Speaker 1: scheme is the idea that you get people to pour
Speaker 1: money into what you're claiming is an investment, but in
Speaker 1: fact there's nothing there, and then you use the money
Speaker 1: from subsequent rounds of investors to pay out the dividends
Speaker 1: to the first round of keeping most of the money
Speaker 1: for yourself and to convince people to back something without
Speaker 1: thinking too much about it, you gotta do a few
Speaker 1: fairly simple things. First, you need to promise a lucrative
Speaker 1: return on your investment, and it has to be high,
Speaker 1: but not so high as to be completely unbelievable, but
Speaker 1: you can definitely stretch believability quite a bit. This taps
Speaker 1: into a particularly common human trait. It's called greed, you know,
Speaker 1: the desire for more. Second, you just need to be
Speaker 1: really picky about your clients. Now, this is helpful for
Speaker 1: a couple of reasons. For one thing, by limiting who
Speaker 1: can participate can reduce the chance that someone's skeptical is
Speaker 1: going to catch onto you. For another, by restricting who
Speaker 1: can participate, you create a sense of exclusivity. And people
Speaker 1: love to feel like they are special. They want to
Speaker 1: be part of that exclusive club. There's this rush of
Speaker 1: sarahtonin when you get the sense of acceptance as you're
Speaker 1: brought into the fold of an otherwise exclusive group. You
Speaker 1: made it, you merited inclusion. And then there's the old
Speaker 1: fomo or fear of missing out. People also really hate
Speaker 1: the idea that they were unable to pounce on an opportunity,
Speaker 1: and I feel this one a lot. I can't tell
Speaker 1: you how many times I felt low because I discovered
Speaker 1: too late something that I could have participated in but
Speaker 1: I missed out on. So Hey, if you're trying to
Speaker 1: manipulate me playing upon my fomo works, I'm just kidding.
Speaker 1: Don't manipulate me. I'm onto you. So using these psychological
Speaker 1: tactics and leveraging aspects that most of us share, hucksters
Speaker 1: can gather or an entire population of marks, and through
Speaker 1: careful management in selection, the fraud fiend can keep things
Speaker 1: going for quite a while, at least until the scheme
Speaker 1: grows too large to support it and the whole thing
Speaker 1: crashes down. Because ultimately that's what happens with these schemes.
Speaker 1: They can't work perpetually. You will eventually hit a point
Speaker 1: of saturation where it is impossible to maintain the scheme
Speaker 1: any longer. So you might live high on the hog
Speaker 1: for a while, but eventually you will need an exit strategy,
Speaker 1: perhaps a literal one, if you plan to escape prosecution.
Speaker 1: Sarah how clearly had at least a feel for all
Speaker 1: of this, as her version of the scheme took advantage
Speaker 1: of some of the very limitations that otherwise held her
Speaker 1: and other unmarried women down. She prayed upon affinity, meaning
Speaker 1: she was targeting a group of people who had something
Speaker 1: in common. If you remember my episode about earth Link,
Speaker 1: that investor, or, that scam artist was largely targeting b
Speaker 1: who belonged to the Church of Scientology. Again, affinity. So
Speaker 1: she took the restrictions of society and then turned those
Speaker 1: to her advantage, at least temporarily. But again, it's not
Speaker 1: called a how scheme. It's called a Ponzi scheme. So
Speaker 1: who was Ponzi? Well, despite my habit of mixing up
Speaker 1: people who share similar names, Ponzi was not the guy
Speaker 1: in Happy Days who wore a leather jacket, kicked jukeboxes
Speaker 1: or jump sharks. He was a different person, and I'll
Speaker 1: talk about him more after this quick break. So Charles Ponzi.
Speaker 1: He was born in Italy in the early eighteen eighties,
Speaker 1: while Sarah Howe was serving time in the joint for
Speaker 1: her first foray into financial fraud yea for alliteration. He
Speaker 1: immigrated to North America in the early nineteen hundreds. He
Speaker 1: worked a series of odd jobs and occasionally he got
Speaker 1: in trouble for petty theft, and his dreams were much
Speaker 1: less petty, but still involved plenty of theft. Ponzi himself
Speaker 1: was reportedly a man of small stature, standing only five
Speaker 1: ft two. Reportedly, he knew no English when he first
Speaker 1: traveled to the United States. He learned it through immersion,
Speaker 1: like many other immigrants. Even if he hadn't already shown
Speaker 1: a habit of dipping into criminal activity beforehand, he probably
Speaker 1: would have found it really challenging to stay on the
Speaker 1: straight and narrow because America is in fact a country
Speaker 1: made up of immigrants, but the America of the early
Speaker 1: twentieth century had a pretty nasty xenophobic streak going through it.
Speaker 1: Communities of immigrants, like those from Ireland or Ponzi's home
Speaker 1: country of Italy, were frequently the subject of scorn and suspicion,
Speaker 1: which in turn would become something of a self fulfilling prophecy.
Speaker 1: And when there are very few avenues for legitimate prosperity
Speaker 1: open to you, there isn't much choice but to explore
Speaker 1: the illegitimate pathways. So sure, Ponzi already had a history
Speaker 1: of larceny, but I think even if he was as
Speaker 1: innocent as can be. Before he arrived in America, he
Speaker 1: would face realities that created a lot of, let's say,
Speaker 1: incentives to dip into crime at any rate. That's moot speculation,
Speaker 1: because we know he definitely dove into some illegal activities.
Speaker 1: He would spend three years in prison after being caught
Speaker 1: forging checks, and he spent another two years in prison
Speaker 1: after being caught in an operation that was smuggling Italian
Speaker 1: immigrants illegally across the Canadian border over to the US,
Speaker 1: but that did very little to deter him from a
Speaker 1: life of crime. Rather, his determination to pull a scheme
Speaker 1: was taking shape, largely influenced by his experience working for
Speaker 1: a crooked bank back in Montreal, Canada. The bank was
Speaker 1: essentially following the same practice Sarah Howe had made famous
Speaker 1: decades earlier, paying out extravagant dividends to customers by taking
Speaker 1: money from later rounds of depositors. Ponzi isn't managing that
Speaker 1: particular bank, but he did work there and apparently picked
Speaker 1: up some tricks along the way. In nineteen nineteen, he
Speaker 1: hit upon the heart of his scheme, which involved something
Speaker 1: called international reply coupons or i r c s. And
Speaker 1: here's how they worked. Let's say you immigrated to America
Speaker 1: from Europe and you have family back on the continent.
Speaker 1: You're struggling to attain the American dream. In the meantime,
Speaker 1: your family writes to you to stay in touch, and
Speaker 1: because you're still getting up on your feet, your family
Speaker 1: encloses an I r C in their letter to you.
Speaker 1: The I r C is a coupon for return postage,
Speaker 1: which allows you to write back to your family without
Speaker 1: having to purchase your own postage, thus saving your money,
Speaker 1: so you can, you know, try and prosper. But there
Speaker 1: was a possible disparity in the value of the I
Speaker 1: r C because the cost of the I r C
Speaker 1: was dependent upon the country of origin. So let's say
Speaker 1: your family's in Spain, and let's say the cost to
Speaker 1: send a letter from Spain to the United States is
Speaker 1: five cents, and an I r C costs the same amount.
Speaker 1: So your family spends five cents on an I r
Speaker 1: C to put inside the letter, and then spends another
Speaker 1: five cents to post the letter to the United States.
Speaker 1: But let's say that in the US it costs ten
Speaker 1: cents to send a letter back to Spain. So you
Speaker 1: take this I r C, which remember, your family paid
Speaker 1: five cents for back in Spain, and you redeem it
Speaker 1: in the United States for postage back to Spain. But
Speaker 1: the I r C allows you to get ten cents
Speaker 1: worth of postage. So while the I r C cost
Speaker 1: five cents in Spain, you can redeem it for ten
Speaker 1: cents in the United States. And that was the heart
Speaker 1: of Ponzi's scheme. In a way, it was an extension
Speaker 1: of the basic idea that you should buy commodities at
Speaker 1: a low price and sell them for a high price,
Speaker 1: which generally means you've got to find a place where
Speaker 1: the price of something is pretty low, usually because that
Speaker 1: region produces a lot of whatever the commodity is, so
Speaker 1: supply is high. Then you transport those goods to a
Speaker 1: place that has a higher demand for that commodity and
Speaker 1: you sell it for a profit. Now, over time, this
Speaker 1: can lead to changes in price at both locations. The
Speaker 1: source might start raising prices and the destination might start
Speaker 1: decreasing demand. But for a time there's a lot of
Speaker 1: profit to be made, and this is completely legal and legitimate.
Speaker 1: Ponzi's pitch revolved around this idea that he would be
Speaker 1: able to purchase I r c s for a low
Speaker 1: price in other countries and redeem them for much higher
Speaker 1: returns elsewhere. It wasn't that different from people who try
Speaker 1: to make money in currency markets, relying on the exchange
Speaker 1: rates of various currencies. Ponzi might have originally been sincere
Speaker 1: in his plans, hoping to leverage the market to make
Speaker 1: a profit, but even if you were sincere, the plan
Speaker 1: was never going to work at scale. The actual value
Speaker 1: of I r c s was very low, just a
Speaker 1: matter of a few cents each, So to operate at
Speaker 1: a scale equivalent to the investments that Ponzi would start
Speaker 1: accepting would require more I r c s than the
Speaker 1: market actually had. If I give you a check for
Speaker 1: a thousand bucks and you have promised that you're gonna
Speaker 1: give me a fifty return and interest within forty five days,
Speaker 1: which was what Ponzi was promising people, and it's all
Speaker 1: through buying up I r c s that just cost
Speaker 1: a penny in one place, it can be redeemed for
Speaker 1: five cents somewhere else. That's going to require an awful
Speaker 1: lot of I r c s to make up that fifty,
Speaker 1: And you're gonna owe me in forty five days, and
Speaker 1: I'm just one investor. So this plan just could not
Speaker 1: work at scale, and so Ponzi was going to follow
Speaker 1: in the footsteps of how and others. The premise of
Speaker 1: the scheme was a bit complicated, this whole idea of
Speaker 1: I r c S, but that worked to Ponzi's benefit.
Speaker 1: It helps if the flam flam you're selling to Marx
Speaker 1: is a little bit on the complex side, because it
Speaker 1: makes it harder for people to sell us out that
Speaker 1: it's a scam. If what you're selling is complicated enough
Speaker 1: that the average person can't really follow it, but it
Speaker 1: sounds legit enough to fool them, you've got yourself a
Speaker 1: potential gold mine. You just need to sound like you
Speaker 1: understand how it all works. Even if it doesn't work.
Speaker 1: It puts the confidence in con man. Sound assured enough,
Speaker 1: and folks will tend to think you really got it together.
Speaker 1: Ponzi was promising a pretty incredible return, that return on
Speaker 1: investment within the first forty five days, with future payoffs
Speaker 1: making everyone truckloads of cash. He began the old practice
Speaker 1: of robbing Peter to pay Paul with that old gimmick
Speaker 1: of taking newcomers money and paying out dividends to early
Speaker 1: investors and pocketing the rest, and all of those early
Speaker 1: investors reinvesting that money and then just rents and repeat,
Speaker 1: same scam, just different trappings. He attracted a lot of customers.
Speaker 1: Some were poor Italian immigrants, much as Ponzi had been
Speaker 1: when he came to America in nineteen o three, so
Speaker 1: again we have that affinity going on there. Others were
Speaker 1: people of high social stature and those with the respectable occupations.
Speaker 1: And over the course of eight months, Ponzi was rolling
Speaker 1: in dough, bringing in an estimated fifteen million dollars in
Speaker 1: nineteen twenty. If we adjust for inflation, that's nearly two
Speaker 1: hundred million dollars in today's money. To say that Ponzi
Speaker 1: lived in luxury is kind of under selling it a bit.
Speaker 1: He bought a very expensive mansion in Boston. He bought
Speaker 1: a luxury automobile. He really was living the dream. He
Speaker 1: also attempted to invest in legitimate businesses in an effort
Speaker 1: to try and shuffle some money around to pay off
Speaker 1: investors of his primary scheme, as it was becoming increasingly
Speaker 1: difficult to meet the interest payments of the various rounds
Speaker 1: of investors. Now it helped that again a lot of
Speaker 1: those investors would turn around and reinvest their interest payments
Speaker 1: in the scheme, but it still meant he had to
Speaker 1: come up with those dividend payments on a regular schedule,
Speaker 1: and it was getting more challenging to do that. Ponzi
Speaker 1: was also the subject of a lot of publicity. This
Speaker 1: was actually something that Ponzi sought out, because, after all,
Speaker 1: he needed more people to be aware of him in
Speaker 1: order to get more investors to keep the whole thing going.
Speaker 1: But it also meant that more people were paying closer
Speaker 1: attention to his activities, and at least a few of
Speaker 1: those people knew that if something seems too good to
Speaker 1: be true, it probably is, and so the net was
Speaker 1: gradually closing around Ponzi. In July of nineteen twenty, the
Speaker 1: Boston Post published an article revealing that the math just
Speaker 1: didn't add up to support Ponzi's story. The reporter pointed
Speaker 1: out there just weren't enough I r c s in
Speaker 1: circulation to support the amount of money that Ponzi was handling,
Speaker 1: and that the very foundation for his investment scheme was
Speaker 1: literally impossible. Now that should have been the end of it. All,
Speaker 1: but Ponzi spun a story about how he had actually
Speaker 1: long since switched over to a different investment strategy that
Speaker 1: didn't involve I r C S at all, but he
Speaker 1: never revealed that trade secret in order to prevent others
Speaker 1: from stealing his business. In other words, he was saying, oh, yeah, no,
Speaker 1: if I were just using I r C S, I'd
Speaker 1: totally be a liar and a thief. But I'm not.
Speaker 1: I'm using this other method only I can't tell you
Speaker 1: what it is, but trust me to keep things moving.
Speaker 1: Ponzi even paid out about two million dollars worth of
Speaker 1: dividends to investors, which actually helped prevent a run on
Speaker 1: his company. In fact, a lot of those investors, once
Speaker 1: they were reassured by this payment, chose again to reinvest
Speaker 1: in Ponzi scheme, and so you was able to keep
Speaker 1: things afloat a little bit longer. But the net cinched
Speaker 1: tightly because of a decision that Ponzi himself made. He
Speaker 1: hired on a public relations manager who happened to be honest,
Speaker 1: and this manager suspected that Ponzi methodology was in fact fraud,
Speaker 1: and he went to the press and the authorities Ponzi
Speaker 1: was arrested on charges of fraud. He was tried and
Speaker 1: convicted and sentenced to go back to prison for three
Speaker 1: and a half years before he was let out on parole.
Speaker 1: He was then arrested again. He jumped bail, headed to
Speaker 1: Florida and tried to run a real estate scam, but
Speaker 1: there he was arrested again, sent back to Massachusetts and
Speaker 1: sentenced to another seven years in jail, and then subsequently
Speaker 1: the United States government deported him to Italy and said
Speaker 1: there you you handle this guy. The investors back in
Speaker 1: the United States and then Canada lost almost all of
Speaker 1: their money. Some of them saw a return of around
Speaker 1: thirty percent of their actual investments, but no matter why,
Speaker 1: it was a loss. As for Ponzi, well, he hooked
Speaker 1: up with Mussolini back in Italy and joined the Fascist movement.
Speaker 1: He was briefly an official in Mussolini's treasury department. However,
Speaker 1: it became here that Ponzi's business acumen wasn't all there.
Speaker 1: He knew how to run a convincing scam, but not
Speaker 1: how to handle, you know, real financial matters. So Mussolinian
Speaker 1: decided to send Ponzi off to Rio de Janeiro in Brazil,
Speaker 1: where he would manage an airline called Altalia until all
Speaker 1: Talia was forced to close due to World War Two.
Speaker 1: Ponzi ultimately would live in poverty in Brazil and died
Speaker 1: in a charity ward. In the publicity and the overenthusiastic
Speaker 1: support of Ponzi before the scheme came tumbling down are
Speaker 1: likely what led people to refer to this practice as
Speaker 1: a Ponzi scheme. But as we've learned, Ponzi was not
Speaker 1: the first to do it, nor was how and honestly,
Speaker 1: the whole idea of robbing Peter to pay Paul is
Speaker 1: a very old one, and of course he wouldn't be
Speaker 1: the last person to do it either. When we come back,
Speaker 1: i'll talk about one of the most recent incarnations of
Speaker 1: the Ponzi scheme and how it ties into the complicated
Speaker 1: world of cryptocurrency. But first let's take another quick break
Speaker 1: so cryptocurrency. After even just a brief overview of this topic,
Speaker 1: you will see how it becomes an ideal focus for
Speaker 1: a Ponzi scheme. The way it works is pretty hard
Speaker 1: to explain to the uninitiated, which frequently can include people
Speaker 1: who happen to have a lot of money, but they
Speaker 1: want to have more of it investors. In other words,
Speaker 1: and moreover, one of cryptocurrency's most important features is that
Speaker 1: you're usually talking about an unregulated currency that is independent
Speaker 1: of any government or financial institution backing, which means that,
Speaker 1: like the banking industry of the late nineteenth century, it's
Speaker 1: prime real estate for scam city. But we should really
Speaker 1: start with defining cryptocurrency. A lot of folks think cryptocurrency
Speaker 1: and bit going are synonymous, but that is an oversimplification.
Speaker 1: Bitcoin is a type of cryptocurrency, but not all cryptocurrencies
Speaker 1: are Bitcoin, just like all dogs are mammals, but not
Speaker 1: all mammals are dogs. Bitcoin's identity is tied to the
Speaker 1: concept of blockchain, which in itself can be used for
Speaker 1: other things besides cryptocurrency. But what the heck is cryptocurrency?
Speaker 1: Oxford defines the term as quote a digital currency in
Speaker 1: which transactions are verified and records maintained by a decentralized
Speaker 1: system using cryptography rather than a centralized authority end quote. So,
Speaker 1: in other words, instead of having a government or a
Speaker 1: financial institution overseeing and verifying transactions and keeping a ledger
Speaker 1: of everything, there is some computational system in place to
Speaker 1: perform this task, and it is dependent upon cryptography. Okay,
Speaker 1: so what is cryptography. Well, simply put, it's encoding. It's
Speaker 1: taking information and using some form of reversible transformation on
Speaker 1: that information. In the transformed state, it is difficult or
Speaker 1: ideally impossible to determine what the encoded information actually is.
Speaker 1: Only by performing the reversible transformation can you get at
Speaker 1: the original form of that information. With Bitcoin, the system
Speaker 1: has transactions that are awaiting verification, and as part of
Speaker 1: the verification process to update the system wide ledger that
Speaker 1: keeps track of where bitcoins have been spent and how
Speaker 1: they have changed hands. Obviously that's important, otherwise you could,
Speaker 1: in theory, spend the same bitcoin more than once and
Speaker 1: then the whole system cracks. Well, the system will generate
Speaker 1: an equation that is missing a random number to solve it,
Speaker 1: and computers connected to the system try to essentially guess
Speaker 1: that random number, and when a computer does this, the
Speaker 1: equation is solved. The winning computer selects which transactions are
Speaker 1: going to make up the next block in the blockchain.
Speaker 1: Those transactions are verified, and the block of verified transactions
Speaker 1: joins the growing chain of transactions that trace all the
Speaker 1: way back to the very beginning of bitcoin. Oh, and
Speaker 1: every machine on that system receives an update on this chain,
Speaker 1: so that this distributed ledger is up to date across
Speaker 1: the entire system. And that's how you know that all
Speaker 1: of these transactions are legit. In return, the computer that
Speaker 1: succeeded in guessing the number is awarded a certain number
Speaker 1: of bitcoins. The quantity of bitcoins is fixed, meaning that
Speaker 1: eventually every bitcoin that will ever exist will be in
Speaker 1: circulation and no more will be made. At the time
Speaker 1: I'm recording this, the value of bitcoins is astronomical, with
Speaker 1: one bitcoin equal to nearly thirty seven thousand dollars. It
Speaker 1: might be even more by the time you hear this.
Speaker 1: And if your computer, or more accurately, your network of
Speaker 1: very powerful computers, is the one that solves the equation,
Speaker 1: you would get six point two five bitcoins right now,
Speaker 1: which means you break in around two dollars per block solved.
Speaker 1: This explains why there's such a rush to scoop up
Speaker 1: stuff like powerful graphics processing units or GPUs, which are
Speaker 1: better suited to solving these kinds of problems. Oh and
Speaker 1: to compensate for that, the system can actually adjust the
Speaker 1: difficulty of the next problem that spits out when it's
Speaker 1: time to verify a new block. The goal is for
Speaker 1: the time between the problem being broadcast to the system
Speaker 1: and the solution coming back is around ten minutes. So
Speaker 1: if a computer on the system is solving the problem
Speaker 1: in less time than ten minutes, the system will essentially
Speaker 1: make the future problems more challenging. Now, if that sounds
Speaker 1: a little weird to you, that's a pretty common reaction
Speaker 1: and it's what scammers bank on, figuratively speaking, because with
Speaker 1: that unusual approach comes a lack of understanding and familiarity.
Speaker 1: But because of the success of Bitcoin, there's a general
Speaker 1: sense that cryptocurrency is a way to make stupid amounts
Speaker 1: of money super fast, and it's deregulated. You couldn't ask
Speaker 1: for a better set up as a confidence artist. You
Speaker 1: just need to demonstrate that you know what you're talking about,
Speaker 1: or at least you appear to, and you can lure
Speaker 1: folks in with the promise of untold riches, and you've
Speaker 1: got success stories like Bitcoin to point at as your evidence. Now,
Speaker 1: according to a report titled the twenty twenty State of
Speaker 1: Crypto Crime published by an analytics firm called chain Analysis.
Speaker 1: In twenty nine, the cryptocurrency community saw four point three
Speaker 1: billion dollars worth of digital money go to scammers. Now,
Speaker 1: that includes all types of scams, including selling customers fake
Speaker 1: tokens for digital currency. But of all, the cash fleaced
Speaker 1: from victims followed the old Ponzi scheme. And yeah, the
Speaker 1: actual scheme is the same as it always has been.
Speaker 1: There's a promise of a means of generating a high
Speaker 1: and rapid return on investment, and the meteoric rise in
Speaker 1: value of bitcoin in particular makes this seem plausible. I mean,
Speaker 1: when bitcoins first emerged, they were peaking in value at
Speaker 1: about eight cents per bitcoin, eight cents in and a
Speaker 1: decade later there worth nearly forty thousand dollars for one bitcoin.
Speaker 1: That is a fact. It is also a very difficult
Speaker 1: to believe fact. It does feel unbelievable, but it's true.
Speaker 1: And when you've got a truth that seems impossible, it's
Speaker 1: pretty easy to sell people on the idea of equally
Speaker 1: impossible things. So convinced that the scammers are going to
Speaker 1: use the weird, seemingly magical world of cryptocurrency to make
Speaker 1: investments balloon, exponentially. People poured money into these schemes, and
Speaker 1: the scammers, like those in years past, take the money
Speaker 1: of new investors, use a little bit of it to
Speaker 1: pay out dividends to earlier investors, and then hold on
Speaker 1: to the rest. And like schemes of the past, they
Speaker 1: frequently will see those early investors reinvest the quote unquote earnings,
Speaker 1: which not really earnings. You're not earning more money, you're
Speaker 1: just builking more investors. So the scammers end up getting
Speaker 1: to keep way more money than they ever pay out,
Speaker 1: and they keep it going for as long as they can.
Speaker 1: But like every other Ponzi scheme, the strategy only works
Speaker 1: for as long as you're able to get new people
Speaker 1: to sign on, and you often just need to seem
Speaker 1: semi legit and appeal to people's greed in order to
Speaker 1: get bites. Take the scam plus Token for example. This
Speaker 1: was a scam out of China that primarily targeted investors
Speaker 1: or suckers if you prefer in China, Korea, and Japan.
Speaker 1: The pitch was that plus token was a type of
Speaker 1: digital wallet, and the scammers claim that if users purchased
Speaker 1: a plus token with digital currencies like bit, going or ethereum,
Speaker 1: they would see huge returns on that investment. The scammers
Speaker 1: went big with their approach, taking out ads in supermarkets
Speaker 1: and using the messaging service we chat to reach potential targets. Reportedly,
Speaker 1: more than three million people fell victim to this scam,
Speaker 1: signing over their digital currency to these hucksters who are
Speaker 1: really just selling fake tokens. And like all Ponzi schemes,
Speaker 1: the scammers used money from later investors to pay out,
Speaker 1: you know, a dividend to the earlier ones. And because
Speaker 1: of the nature of cryptocurrency, it's pretty darn hard to
Speaker 1: track down all the perpetrators and punish them. That plus
Speaker 1: scam was reportedly a monumental success, with the scammers stealing
Speaker 1: what amounted to around three billion dollars that's billion with
Speaker 1: a B. The scam ran its course through July of
Speaker 1: two thousand nineteen, when the scammers tried to high tail
Speaker 1: it out of there, and Chinese authorities claimed to have
Speaker 1: arrested a hundred and nine people connected with a scam,
Speaker 1: including twenty seven believed to be chiefly responsible for it.
Speaker 1: And while investors lost a huge amount of money, it's
Speaker 1: not exactly easy to get cryptocurrency out of the system
Speaker 1: and converted into other forms of currency. In other words,
Speaker 1: it's hard to launder and get hold of that cash,
Speaker 1: especially in those amounts. It requires tons of money laundering,
Speaker 1: which in turn can sometimes create enough of a digital
Speaker 1: noise for authorities to take notice and then try and
Speaker 1: track down who is behind the activity. The plus token
Speaker 1: shenanigans were so disruptive that they affected the exchange rate
Speaker 1: of bitcoins, the value of bitcoins, and for a while,
Speaker 1: the cryptocurrencies value against the dollar took a big hit.
Speaker 1: Now it has since fully recovered and then some. There
Speaker 1: are other examples of cryptocurrency ponzi schemes. In the United States,
Speaker 1: the Department of Justice filed charges against five defendants alleging
Speaker 1: that they had defrauded investors out of seven hundred twenty
Speaker 1: two million in dollars using a similar ponzi scheme called
Speaker 1: the bit club network. The bit club approach involved pitching
Speaker 1: investors the chance to put their money into cryptocurrency mining pools.
Speaker 1: So from what I can gather, they were claiming that
Speaker 1: the investment money would go toward building out computer systems
Speaker 1: that would solve those equations I mentioned earlier and do
Speaker 1: so at a rate fast enough to be a profitable investment,
Speaker 1: So the bitcoin's mind would end up generating value that
Speaker 1: could be distributed to the investors. And when you're talking
Speaker 1: about making a couple hundred thousand dollars potentially every ten
Speaker 1: minutes or so, assuming you've actually got the computer power
Speaker 1: that can outclass all the other computers on the system
Speaker 1: trying to do the same thing, well it sounds like
Speaker 1: a no brainer. But an investigation showed that, counter to
Speaker 1: what the bit club network claimed, the payouts for investments
Speaker 1: had little or nothing to do with the performance of
Speaker 1: the cryptocurrency mining pool. The scammers were using investor spent
Speaker 1: rounds to help pay out high dividends early on, which
Speaker 1: attracted more investors, and then they gradually began to decrease
Speaker 1: the amounts they were paying out. Meanwhile, the actual performance
Speaker 1: of the mining pool wasn't really providing much in the
Speaker 1: way of revenue. It was all down to that classic
Speaker 1: robbing Peter to pay Paul. According to investigators, internal communications
Speaker 1: within the bit club network showed that the scammers held
Speaker 1: their targets in contempt, calling them morons and sheep. So
Speaker 1: it seems pretty safe to say that they were fully
Speaker 1: on board with pulling a fast one on their marks
Speaker 1: until they got caught. Anyway, the use of cryptocurrency as
Speaker 1: the foundation for ponzi schemes is bad enough to prompt
Speaker 1: the u S Securities and Exchange Commission or SEC to
Speaker 1: publish a brochure warning people about them. And it's a
Speaker 1: good reminder that when you are faced with an opportunity,
Speaker 1: you should examine that opportunity critically. If the promised returns
Speaker 1: seemed too high, If they are significantly higher and you
Speaker 1: would find elsewhere on the market, If the means for
Speaker 1: generating revenue seem overly complicated or even convoluted, those are
Speaker 1: all red flags. If the opportunity is reliant on people
Speaker 1: with a shared affinity, such as when Sarah How targeted
Speaker 1: unmarried women, that's another big red flag. I think the
Speaker 1: real lesson here is that the smoke and mirrors can
Speaker 1: change over time, but in the end, these schemes all
Speaker 1: rely on the same old tricks as what we saw
Speaker 1: that more than a century ago, and as long as
Speaker 1: the scam seems to work on people, there will no
Speaker 1: doubt be con artists willing to use it. It can
Speaker 1: be extremely profitable at least in the short term. Now
Speaker 1: you don't hear many stories of people who ran that
Speaker 1: kind of scheme and then we're able to make a
Speaker 1: clean getaway. A lot of these stories ultimately end with
Speaker 1: the con artists caught and prosecuted. So I guess crime
Speaker 1: does pay, but it also demands its own high price.
Speaker 1: And that wraps up this episode of tech stuff. I
Speaker 1: wanted to cover it because again, I think critical thinking
Speaker 1: is something we all can focus on and get better at,
Speaker 1: myself included, And it's good to remember that just because
Speaker 1: something might involve a cutting edge technology doesn't mean that
Speaker 1: underneath there isn't a very old hoax or scam at play.
Speaker 1: We've seen it over and over with a lot of companies.
Speaker 1: Saros is one that comes to mind that wasn't so
Speaker 1: much a Ponzi scheme, but it did look like it
Speaker 1: was a bit of a shell game with trying to
Speaker 1: keep investors in the dark as far as how far
Speaker 1: along or not far along the technology was. So again,
Speaker 1: it's good for you to use critical thinking when you're
Speaker 1: looking at chances to invest money. You don't want to
Speaker 1: get burned. You want the best chance for success, and
Speaker 1: you want to support people who are you know, doing
Speaker 1: real work out there. So that's it for this episode.
Speaker 1: If you would like me to cover a specific topic
Speaker 1: in the future, whether it's a company, a trend in tech,
Speaker 1: how a specific technology works, whatever, let me know send
Speaker 1: me a message. The best way is on Twitter. The
Speaker 1: handle is text stuff H s W and I'll talk
Speaker 1: to you again really soon. Tech Stuff is an I
Speaker 1: heart Radio production. For more podcasts from I Heart Radio,
Speaker 1: visit the i heart Radio app, Apple Podcasts, or wherever
Speaker 1: you listen to your favorite shows.