WEBVTT - Rerun: It's a (Crypto) Ponzi Scheme! 0:00:04.440 --> 0:00:12.600 Welcome to tech Stuff, a production from iHeartRadio. Hey there, 0:00:12.640 --> 0:00:16.440 and welcome to tech Stuff. I'm your host, Jonathan Strickland. 0:00:16.480 --> 0:00:20.239 I'm an executive producer with iHeartRadio. And how the tech 0:00:20.280 --> 0:00:23.720 are you? I'm not doing so hot myself. I believe 0:00:24.160 --> 0:00:27.920 that I am suffering from food poisoning. I was wondering 0:00:27.960 --> 0:00:31.320 what the heck was going on. Hit me started hitting 0:00:31.360 --> 0:00:34.320 me last night, and I went through a whole bunch 0:00:34.320 --> 0:00:37.440 of different possibilities. But it was weird because I was like, 0:00:37.600 --> 0:00:41.240 how could I have caught the flu or COVID or 0:00:41.280 --> 0:00:43.120 anything like that because I hadn't even left the house 0:00:43.159 --> 0:00:46.080 for more than a week. But yeah, I think I 0:00:46.120 --> 0:00:48.560 think I ate something that didn't agree with me. And 0:00:48.680 --> 0:00:51.919 as a result, we're going to go to a rerun 0:00:51.960 --> 0:00:55.520 episode of tech Stuff because I just don't have it 0:00:55.600 --> 0:00:59.680 in me to research, write, and record a brand new one. 0:00:59.760 --> 0:01:02.240 My apologies to all of you. You all deserve better, 0:01:03.160 --> 0:01:07.200 but yeah, it's just just just not in the cards 0:01:07.200 --> 0:01:10.720 for me today. So we're going to listen to an 0:01:10.720 --> 0:01:14.880 episode that published January twenty fifth, twenty twenty one, and 0:01:14.959 --> 0:01:20.400 it's called It's a Brackets Crypto Closed Brackets Ponzi scheme, 0:01:20.880 --> 0:01:24.360 and yeah, I talk about, you know, what a Ponzi 0:01:24.360 --> 0:01:28.959 scheme is, and how a lot of cryptocurrency companies have 0:01:29.200 --> 0:01:34.399 been equated to Ponzi schemes, and yeah, some people even 0:01:34.440 --> 0:01:36.080 go so far as to say the whole thing is 0:01:36.120 --> 0:01:39.360 a Ponzi scheme. I wouldn't quite go that far, but 0:01:39.440 --> 0:01:43.119 I definitely think that the crypto world and the enthusiasm 0:01:43.160 --> 0:01:51.400 around it facilitates shenanigans and dishonest practices, So I think 0:01:51.400 --> 0:01:54.680 that that is an issue. Anyway, let's listen to It's 0:01:54.760 --> 0:02:00.840 a Crypto Ponzi Scheme from January twenty fifth, twenty twenty one. 0:02:02.240 --> 0:02:04.760 So in this episode, we're going to explore where the 0:02:04.800 --> 0:02:08.080 Ponzi scheme comes from and how it works in general, 0:02:08.320 --> 0:02:11.560 and we'll learn about cryptocurrencies and a little bit about 0:02:11.560 --> 0:02:14.280 what makes them tick from a very high level, and 0:02:14.320 --> 0:02:17.320 then we'll learn how these two things came together, kind 0:02:17.360 --> 0:02:22.280 of like a Reese's Peanut buttercup and just as evil. Now, 0:02:22.600 --> 0:02:25.720 fans of stuff you should know might be aware that way. 0:02:25.800 --> 0:02:28.240 You back in two thousand and nine, which was, you know, 0:02:28.320 --> 0:02:32.840 one year into us doing podcasts at all, they did 0:02:33.040 --> 0:02:35.960 how Ponzi schemes work. It gave birth to the phrase 0:02:36.160 --> 0:02:39.800 it's a Ponzi scheme, and so I apologize to those 0:02:39.880 --> 0:02:43.560 longtime fans who also listened to my show, because there's 0:02:43.639 --> 0:02:47.400 got to be some overlap between those two, right anyway. 0:02:47.919 --> 0:02:50.800 I know I won't be as entertaining as Josh and Chuck, 0:02:51.160 --> 0:02:53.680 but then there are two of them and there's only 0:02:53.720 --> 0:02:56.280 one of me. However, I will give it the old 0:02:56.280 --> 0:03:00.480 college try. Now. The term Ponzi scheme gets its name 0:03:00.520 --> 0:03:05.520 from a specific man, Charles Scheme. Wait, no, I'm sorry, 0:03:05.560 --> 0:03:09.160 I read that wrong, Charles Ponzi. He would be investigated 0:03:09.200 --> 0:03:12.079 and charged for fraud in the nineteen twenties, but the 0:03:12.120 --> 0:03:17.359 actual method predates Chuckarino by several decades. An earlier example 0:03:17.480 --> 0:03:19.840 of the scheme that Ponzi used was the method of 0:03:19.919 --> 0:03:23.959 choice for one Sarah Howe in Boston in eighteen seventy nine. 0:03:24.600 --> 0:03:27.800 Even this was not the first instance. There were at 0:03:27.880 --> 0:03:31.280 least two other cases of very similar schemes, one in Madrid, 0:03:31.360 --> 0:03:35.440 Spain and another in Berlin, Germany, both perpetrated by women, 0:03:35.800 --> 0:03:38.880 and the general idea is much much older. But let's 0:03:38.880 --> 0:03:42.080 explore the story of Sarah Howe. I'd love to tell 0:03:42.120 --> 0:03:45.960 you all about Sarah Howe, but historical records of her 0:03:46.080 --> 0:03:49.640 are scant. There are no known photographs of her, there 0:03:49.640 --> 0:03:53.720 are no sketches. Few details are about her past. At 0:03:53.800 --> 0:03:57.840 least few verifiable details will get to that. We do 0:03:58.000 --> 0:04:00.480 know that in eighteen seventy seven she was working in 0:04:00.520 --> 0:04:03.520 Boston as a fortune teller, so we can assume a 0:04:03.560 --> 0:04:07.680 few things. Now. Pardon me, because I am a skeptic. 0:04:08.120 --> 0:04:12.440 So if you believe in stuff like astrology or fortune telling, 0:04:13.080 --> 0:04:15.120 you're likely going to find what I have to say 0:04:15.200 --> 0:04:18.640 pretty irritating. But people who are really good at doing 0:04:18.680 --> 0:04:22.919 stuff like reading fortunes or doing astrology readings tend to 0:04:22.920 --> 0:04:26.120 be very good at making quick judgments about people, and 0:04:26.120 --> 0:04:28.360 they also tend to know what sort of things are 0:04:28.440 --> 0:04:32.920 part of the commonly shared human condition. There's a practice 0:04:33.040 --> 0:04:37.279 that's called cold reading, and here's how it works. You've 0:04:37.279 --> 0:04:41.240 got your fortune teller or your mentalist or whatever, and 0:04:41.320 --> 0:04:45.200 they spout out a bunch of general information toward their mark. 0:04:45.560 --> 0:04:49.440 Often they are actually addressing a group of people, because 0:04:49.480 --> 0:04:51.920 that increases the odds of getting a hit if you're 0:04:51.960 --> 0:04:54.799 talking to more than one person. But the whole goal 0:04:54.920 --> 0:04:58.200 is to cast a wide net so that something that 0:04:58.400 --> 0:05:02.080 the person ends up saying ends up being perceived as relevant, 0:05:02.440 --> 0:05:04.800 and you make the mark do most of the work 0:05:04.880 --> 0:05:08.599 for you. You don't have to know anything about that person. 0:05:08.960 --> 0:05:11.760 As long as you get close enough to something that 0:05:11.920 --> 0:05:15.600 is relevant to that person's life, they're likely to do 0:05:15.640 --> 0:05:18.839 the rest of the work for you. So here's kind 0:05:18.880 --> 0:05:24.800 of an example, just as a hypothetical. Let's say that 0:05:25.360 --> 0:05:28.839 the mentalist or fortune teller says, I, since you have 0:05:29.000 --> 0:05:33.440 experienced great happiness but also suffer great loss, and I'm 0:05:33.440 --> 0:05:36.120 picking up on a name. It might start with the 0:05:36.200 --> 0:05:40.400 letter J or maybe R. The vision is hazy, and 0:05:40.520 --> 0:05:42.840 meanwhile you're waiting for your mark to fill in the gaps. 0:05:42.839 --> 0:05:46.200 And people tend to be people pleasers, and they want 0:05:46.360 --> 0:05:49.560 to believe in these sort of things, and so they 0:05:49.640 --> 0:05:52.760 become willing participants. So you might have a mark say 0:05:52.839 --> 0:05:55.720 I had an uncle named Jason, or my sister's name 0:05:55.760 --> 0:05:58.680 is Rachel or whatever. And to the mark, it seems 0:05:58.720 --> 0:06:02.000 as though you, as the fortune teller, have divined something 0:06:02.000 --> 0:06:04.599 you couldn't possibly have known, but in fact they're the 0:06:04.600 --> 0:06:07.040 ones who are providing you with all the information, and 0:06:07.080 --> 0:06:10.000 you just go from there. And on a similar note, 0:06:10.120 --> 0:06:13.599 astrological readings tend to follow a similar approach by giving 0:06:13.600 --> 0:06:17.599 out a very general message that can apply to nearly anyone. 0:06:18.360 --> 0:06:20.760 A fun test to do is to take a horoscope 0:06:20.800 --> 0:06:22.800 for a day and see if you can figure out 0:06:22.839 --> 0:06:26.440 which of the horoscopes belongs to which sign. But you 0:06:26.520 --> 0:06:29.200 mix them all up so that way you can't see 0:06:29.720 --> 0:06:33.040 the sign matched with the horoscope. You're just getting the messages. 0:06:33.440 --> 0:06:37.640 And then you have somebody else who has an undoctored 0:06:37.920 --> 0:06:40.480 version of the document to see if you can actually 0:06:40.520 --> 0:06:42.080 match it up. And if you do it as a 0:06:42.080 --> 0:06:45.120 double blind, really like if the person who is recording 0:06:45.160 --> 0:06:49.080 your answers does not have access to those answers right away, 0:06:49.400 --> 0:06:51.640 you're probably going to find out that your success rate 0:06:51.760 --> 0:06:55.440 is about what chance would suggest. Double blind tests that 0:06:55.520 --> 0:06:58.440 try to match people with horoscopes show that there's not 0:06:58.480 --> 0:07:01.760 really any correlation there, but hey, what do I know? 0:07:02.400 --> 0:07:06.720 I'm a cancer. There are also warm readings. This is 0:07:06.760 --> 0:07:10.760 where you start already knowing something about the mark, perhaps 0:07:10.840 --> 0:07:13.400 through the help of an accomplice. But the reason I 0:07:13.400 --> 0:07:16.280 even bring this up is that miss Howe must have 0:07:16.400 --> 0:07:19.400 had a decent knack at reading people, which would come 0:07:19.400 --> 0:07:22.240 in very handy when it came time to fleece them. Later, 0:07:23.120 --> 0:07:27.680 in eighteen seventy eight, How launched the Ladies Deposit Company, 0:07:27.920 --> 0:07:33.440 which was ostensibly a bank. How recognized an opportunity. Unmarried 0:07:33.480 --> 0:07:37.440 women who had no guardian had difficulty establishing an account 0:07:37.480 --> 0:07:41.600 at traditional banks because it was a pretty darn patriarchal 0:07:41.680 --> 0:07:45.840 society and unmarried women were second class citizens. And I 0:07:45.880 --> 0:07:49.160 should also mention that at this time, if you weren't white, 0:07:49.280 --> 0:07:52.480 you had an even more difficult time accessing the basic 0:07:52.560 --> 0:07:57.000 functions of society. Even How, when she was making the 0:07:57.120 --> 0:08:03.080 Ladies Deposit Company was only catering to white unmarried women. Essentially, 0:08:03.600 --> 0:08:06.520 white men had access to everything and everyone else was 0:08:06.560 --> 0:08:10.239 dealing with an enormous amount of opposition. So How opened 0:08:10.320 --> 0:08:13.320 up a bank that would accept deposits from unmarried women 0:08:13.600 --> 0:08:17.200 and them alone. And honestly, if How had the means, 0:08:17.840 --> 0:08:20.200 she might have been able to have a successful business 0:08:20.240 --> 0:08:23.160 without the need for trickery. But How was making an 0:08:23.160 --> 0:08:27.560 outlandish promise to her clients. She claimed that deposits would 0:08:27.560 --> 0:08:31.480 see an eight percent interest rate, meaning that depositing money 0:08:31.480 --> 0:08:33.960 with Hol would see an eight percent return on that 0:08:34.040 --> 0:08:36.760 money over time. And she said that if you were 0:08:36.760 --> 0:08:39.760 to deposit one hundred dollars in her bank, by years end, 0:08:40.040 --> 0:08:43.640 you would have an additional ninety six dollars earned through interest, 0:08:44.040 --> 0:08:46.800 and she promised that early investors would get the first 0:08:46.840 --> 0:08:50.800 three months of that interest paid in advance. Now that 0:08:50.920 --> 0:08:54.960 interest rate was significantly higher than what banks in the 0:08:55.040 --> 0:08:57.600 general industry were able to offer, and when pressed on 0:08:57.760 --> 0:09:00.840 how she could offer such high India rates to her 0:09:00.880 --> 0:09:04.880 client tell she claimed that her bank had the financial 0:09:04.920 --> 0:09:08.040 backing of Quakers who were supporting it as a charity 0:09:08.160 --> 0:09:11.839 for women. And her spiel worked, and she advertised all 0:09:11.920 --> 0:09:15.640 around the Northeast, gathering clients all along the way, and 0:09:15.679 --> 0:09:18.400 a lot of the women, when they received their advance 0:09:18.480 --> 0:09:21.960 would immediately put that money into their account with How 0:09:22.120 --> 0:09:25.800 in order to reinvest. Historians estimate that she managed to 0:09:25.800 --> 0:09:29.000 get between two hundred and fifty thousand, five hundred thousand 0:09:29.040 --> 0:09:33.200 bucks in eighteen seventy nine that would be worth millions 0:09:33.240 --> 0:09:38.040 of dollars in today's money. Eventually investigators uncovered what was 0:09:38.080 --> 0:09:40.240 really going on, but it was pretty tricky to do 0:09:40.800 --> 0:09:44.120 because How was strict on her policy of only serving 0:09:44.280 --> 0:09:48.840 unmarried women, which cloaked her from most investigations. As this 0:09:49.160 --> 0:09:53.880 was a male dominated world. Reporters were nearly always men, 0:09:54.080 --> 0:09:58.080 and they weren't allowed inside Howe's establishments. How claimed this 0:09:58.280 --> 0:10:01.920 was to protect her customers, these delicate, unmarried women which 0:10:02.160 --> 0:10:07.960 society perpetually viewed as being helpless and just a potential victim, 0:10:08.320 --> 0:10:12.240 perpetually a potential victim. And that really showed how clever 0:10:12.360 --> 0:10:15.880 how was. She had identified a target population ripe for 0:10:16.000 --> 0:10:18.920 exploitation and at the same time figured out how to 0:10:18.960 --> 0:10:23.200 exclude people determined to investigate her. But here's what was 0:10:23.240 --> 0:10:25.880 really going on. How would bring in a round of 0:10:25.920 --> 0:10:29.079 investors who would give her money to deposit into accounts. 0:10:29.520 --> 0:10:32.239 She then would seek out a second round of investors, 0:10:32.720 --> 0:10:35.640 and using money from that second round, she would pay 0:10:35.640 --> 0:10:39.160 out the advanced interest to her first round of investors. 0:10:39.679 --> 0:10:42.240 Then she would seek out a third round and use 0:10:42.280 --> 0:10:44.840 that money to help pay out the second round, and 0:10:44.920 --> 0:10:48.320 so on. The scheme required how to constantly seek out 0:10:48.320 --> 0:10:52.199 more investors to pay out dividends to her earlier investors, 0:10:52.520 --> 0:10:55.560 and meanwhile the clock was ticking. She was helped out 0:10:55.600 --> 0:10:58.600 considerably by the fact that many women would reinvest their 0:10:58.600 --> 0:11:01.720 money into the scheme. They were doing so because to 0:11:01.800 --> 0:11:04.040 them it seemed as though they were getting an incredible 0:11:04.080 --> 0:11:07.320 interest rate, so more money in the account would mean 0:11:07.440 --> 0:11:10.840 more money in interest down the road, their money would 0:11:10.880 --> 0:11:14.160 be making more of itself. But in reality, this cash 0:11:14.240 --> 0:11:18.040 was largely going to fund Howe's new lavish lifestyle, while 0:11:18.080 --> 0:11:20.560 she kept reaching for more investors to keep the whole 0:11:20.600 --> 0:11:23.840 show going strong. She was also helped by the fact 0:11:24.000 --> 0:11:26.880 that the banking industry at the time was largely free 0:11:26.880 --> 0:11:30.400 of regulation, making it something of the wild West. But 0:11:30.559 --> 0:11:33.679 for money schemes, it was an environment that allowed for 0:11:33.760 --> 0:11:37.240 exploitation with less risk of oversight, and so there was 0:11:37.480 --> 0:11:42.840 opportunity for the enterprising scammer. But How's scheme eventually was 0:11:43.080 --> 0:11:47.920 laid bare, and the press absolutely tore her to shreds. 0:11:48.240 --> 0:11:50.679 And by tore her to shreds, I mean they didn't 0:11:50.840 --> 0:11:54.680 just point out the fraud, but they disparaged how beyond 0:11:54.760 --> 0:11:58.119 what the facts could support. They claimed she was illiterate, 0:11:58.480 --> 0:12:00.800 They said she was uneducated, They said that she was 0:12:00.880 --> 0:12:05.000 hideous to look upon. In fact, how was clearly very 0:12:05.080 --> 0:12:08.960 well educated and witty, and the fact that earlier accounts 0:12:09.000 --> 0:12:12.960 of how never brought into account her looks tells us 0:12:12.960 --> 0:12:16.680 that she was probably pretty ordinary. Looking. Not only that, 0:12:16.800 --> 0:12:19.480 but the reports on How began to fabricate an entire 0:12:19.720 --> 0:12:24.280 history of this mysterious woman, complete with salacious and frankly 0:12:24.720 --> 0:12:29.720 racist overtones. So we don't know much about How's history. 0:12:30.040 --> 0:12:34.880 The history that was published was fabricated. I won't go 0:12:34.960 --> 0:12:36.720 into the whole thing here, but to call it a 0:12:36.760 --> 0:12:40.959 smear campaign would be going lightly. Yes, How had pulled 0:12:40.960 --> 0:12:43.080 a fast one, but it seems to me that the 0:12:43.120 --> 0:12:46.440 media was more upset that a woman would find such 0:12:46.520 --> 0:12:50.640 success in what was generally considered to be a man's 0:12:50.800 --> 0:12:54.920 domain than the fact that she did so through underhanded methods. 0:12:55.160 --> 0:12:59.520 In other words, the misogyny was thick here, folks. How 0:12:59.600 --> 0:13:04.120 stood trial for accepting money under false pretenses because she 0:13:04.200 --> 0:13:07.360 had claimed that this was an extension of the Quakers. 0:13:08.000 --> 0:13:11.240 She served three years of a prison sentence, she got out, 0:13:11.640 --> 0:13:14.440 then she did the whole thing all over again. And 0:13:14.480 --> 0:13:17.320 while I don't condone crime at all, part of me 0:13:17.400 --> 0:13:20.160 admires the hell out of a woman who, when faced 0:13:20.160 --> 0:13:23.640 with a society that actively resisted the efforts of women 0:13:23.679 --> 0:13:26.680 to play a part beyond just being servileed to men, 0:13:27.600 --> 0:13:30.960 she rejected that notion and decided to go her own way. 0:13:31.160 --> 0:13:35.320 But the fact that she was targeting other women certainly 0:13:35.360 --> 0:13:37.480 takes the romance out of it, doesn't it. I mean, 0:13:37.880 --> 0:13:41.040 if she were targeting like fat cat businessmen who were 0:13:41.080 --> 0:13:43.920 accustomed to putting the screws to the little guy, this 0:13:43.960 --> 0:13:47.040 would be almost a Robin Hood like story. But with 0:13:47.160 --> 0:13:49.480 how it was more like I rubbed from the poor 0:13:49.520 --> 0:13:52.800 and give to myself. She was caught a second time 0:13:52.960 --> 0:13:55.400 and decided to give up the practice, and she went 0:13:55.480 --> 0:13:58.280 back to fortune telling. She lived out the remainder of 0:13:58.320 --> 0:14:01.959 her days in relative obscurity and modest living, still fooling 0:14:01.960 --> 0:14:04.439 people into believing she had some sort of mystical insight 0:14:04.559 --> 0:14:07.840 into their fortunes. It's more like she had a pretty 0:14:08.280 --> 0:14:11.480 regular insight into their wallets. But the heart of this 0:14:11.559 --> 0:14:14.000 scheme is the idea that you get people to pour 0:14:14.120 --> 0:14:17.440 money into what you're claiming is an investment, but in 0:14:17.480 --> 0:14:20.960 fact there's nothing there, and then you use the money 0:14:21.000 --> 0:14:23.960 from subsequent rounds of investors to pay out the dividends 0:14:23.960 --> 0:14:26.480 to the first round while keeping most of the money 0:14:26.480 --> 0:14:30.040 for yourself. And to convince people to back something without 0:14:30.040 --> 0:14:32.840 thinking too much about it, you got to do a 0:14:32.920 --> 0:14:37.560 few fairly simple things. First, you need to promise a 0:14:37.680 --> 0:14:41.360 lucrative return on your investment, and it has to be high, 0:14:41.640 --> 0:14:45.240 but not so high as to be completely unbelievable. But 0:14:45.360 --> 0:14:49.200 you can definitely stretch believability quite a bit. This taps 0:14:49.240 --> 0:14:53.720 into a particularly common human trait. It's called greed, you know, 0:14:53.800 --> 0:14:57.320 the desire for more. Second, you just need to be 0:14:57.400 --> 0:15:00.600 really picky about your clients. Now, this is helpful for 0:15:00.640 --> 0:15:03.520 a couple of reasons. For one thing, by limiting who 0:15:03.560 --> 0:15:06.840 can participate, you can reduce the chance that someone skeptical 0:15:06.920 --> 0:15:09.520 is going to catch on to you. For another, by 0:15:09.560 --> 0:15:13.560 restricting who can participate, you create a sense of exclusivity. 0:15:13.800 --> 0:15:17.680 And people love to feel like they are special. They 0:15:17.800 --> 0:15:21.000 want to be part of that exclusive club. There's this 0:15:21.360 --> 0:15:24.440 rush of serotonin when you get the sense of acceptance 0:15:24.520 --> 0:15:27.440 as you're brought into the fold of an otherwise exclusive group. 0:15:27.720 --> 0:15:31.920 You made it, you merited inclusion. And then there's the 0:15:31.960 --> 0:15:36.080 old fomo or fear of missing out. People also really 0:15:36.160 --> 0:15:38.920 hate the idea that they were unable to pounce on 0:15:38.960 --> 0:15:41.680 an opportunity. And I feel this one a lot. I 0:15:41.720 --> 0:15:44.320 can't tell you how many times I felt low because 0:15:44.320 --> 0:15:47.600 I discovered too late something that I could have participated in, 0:15:48.160 --> 0:15:50.640 but I missed out on. So hey, if you're trying 0:15:50.640 --> 0:15:54.840 to manipulate me playing upon my fomo works, I'm just kidding. 0:15:54.920 --> 0:15:59.120 Don't manipulate me. I'm on to you. So using these 0:15:59.160 --> 0:16:03.200 psychological tactics and leveraging aspects that most of us share, 0:16:03.600 --> 0:16:07.400 hucksters can gather an entire population of marx and through 0:16:07.480 --> 0:16:11.400 careful management and selection, the fraud fiend can keep things 0:16:11.440 --> 0:16:14.200 going for quite a while, at least until the scheme 0:16:14.280 --> 0:16:16.840 grows too large to support it and the whole thing 0:16:16.880 --> 0:16:21.000 crashes down. Because ultimately that's what happens with these schemes. 0:16:21.040 --> 0:16:24.200 They can't work perpetually. You will eventually hit a point 0:16:24.240 --> 0:16:27.920 of saturation where it is impossible to maintain the scheme 0:16:28.000 --> 0:16:31.400 any longer. So you might live high on the hog 0:16:31.720 --> 0:16:35.440 for a while, but eventually you will need an exit strategy, 0:16:35.760 --> 0:16:39.440 perhaps a literal one, if you plan to escape prosecution. 0:16:40.280 --> 0:16:43.320 Sarah Howe clearly had at least a feel for all 0:16:43.360 --> 0:16:46.120 of this, as her version of the scheme took advantage 0:16:46.320 --> 0:16:49.440 of some of the very limitations that otherwise held her 0:16:49.520 --> 0:16:54.280 and other unmarried women down. She preyed upon affinity, meaning 0:16:54.480 --> 0:16:57.160 she was targeting a group of people who had something 0:16:57.160 --> 0:17:01.560 in common. If you remember my episode about Earthlink, that investor, or, 0:17:01.600 --> 0:17:05.560 that scam artist was largely targeting people who belonged to 0:17:05.640 --> 0:17:09.760 the Church of Scientology, again, affinity. So she took the 0:17:09.800 --> 0:17:13.520 restrictions of society and then turned those to her advantage, 0:17:13.560 --> 0:17:17.480 at least temporarily. But again, it's not called a How's scheme, 0:17:17.840 --> 0:17:22.280 It's called a Ponzi scheme. So who was Ponzi? Well, 0:17:22.320 --> 0:17:25.280 despite my habit of mixing up people who share similar names, 0:17:25.560 --> 0:17:28.040 Ponzi was not the guy in Happy Days who wore 0:17:28.080 --> 0:17:31.800 a leather jacket, kicked jukeboxes or jump sharks. He was 0:17:31.840 --> 0:17:34.919 a different person, and I'll talk about him more after 0:17:34.960 --> 0:17:46.639 this quick break. So Charles Ponzi. He was born in 0:17:46.680 --> 0:17:49.959 Italy in the early eighteen eighties, while Sarah HALLLL was 0:17:50.080 --> 0:17:53.000 serving time in the joint for her first foray into 0:17:53.000 --> 0:17:58.879 financial fraud yea for alliteration. He immigrated to North America 0:17:59.000 --> 0:18:01.919 in the early nineteen hundreds. He worked a series of 0:18:01.920 --> 0:18:05.200 odd jobs and occasionally he got in trouble for petty theft, 0:18:05.640 --> 0:18:08.840 and his dreams were much less petty but still involved 0:18:08.920 --> 0:18:12.679 plenty of theft. Ponzi himself was reportedly a man of 0:18:12.760 --> 0:18:17.720 small stature, standing only five foot two. Reportedly, he knew 0:18:17.800 --> 0:18:20.399 no English when he first traveled to the United States. 0:18:20.640 --> 0:18:24.120 He learned it through immersion, like many other immigrants. Even 0:18:24.160 --> 0:18:26.760 if he hadn't already shown a habit of dipping into 0:18:26.800 --> 0:18:30.520 criminal activity beforehand, he probably would have found it really 0:18:30.640 --> 0:18:34.040 challenging to stay on the straight and narrow because America 0:18:34.440 --> 0:18:37.359 is in fact a country made up of immigrants. But 0:18:37.480 --> 0:18:40.200 the America of the early twentieth century had a pretty 0:18:40.320 --> 0:18:44.600 nasty xenophobic streak going through it. Communities of immigrants, like 0:18:44.800 --> 0:18:48.560 those from Ireland or Ponzi's home country of Italy, were 0:18:48.560 --> 0:18:52.119 frequently the subject of scorn and suspicion, which in turn 0:18:52.280 --> 0:18:56.240 would become something of a self fulfilling prophecy. And when 0:18:56.280 --> 0:19:00.000 there are very few avenues for legitimate prosperity open to you, 0:19:00.560 --> 0:19:04.480 there isn't much choice but to explore the illegitimate pathways. 0:19:04.840 --> 0:19:07.919 So sure, Ponzi already had a history of larceny, but 0:19:08.000 --> 0:19:10.640 I think even if he was as innocent as can 0:19:10.720 --> 0:19:14.359 be before he arrived in America, he would face realities 0:19:14.359 --> 0:19:17.680 that created a lot of, let's say, incentives to dip 0:19:17.680 --> 0:19:21.479 into crime. At any rate, that's moot speculation, because we 0:19:21.520 --> 0:19:25.160 know he definitely dove into some illegal activities. He would 0:19:25.200 --> 0:19:28.879 spend three years in prison after being caught forging checks, 0:19:29.160 --> 0:19:31.879 and he spent another two years in prison after being 0:19:31.920 --> 0:19:35.760 caught in an operation that was smuggling Italian immigrants illegally 0:19:35.800 --> 0:19:39.000 across the Canadian border over to the US, But that 0:19:39.200 --> 0:19:42.920 did very little to deter him from a life of crime. Rather, 0:19:43.000 --> 0:19:47.040 his determination to pull a scheme was taking shape, largely 0:19:47.080 --> 0:19:50.720 influenced by his experience working for a crooked bank back 0:19:50.760 --> 0:19:54.880 in Montreal, Canada. The bank was essentially following the same 0:19:54.920 --> 0:19:58.720 practice Sarah Howe had made famous decades earlier, paying out 0:19:58.720 --> 0:20:02.560 extravagant dividends to customers by taking money from later rounds 0:20:02.560 --> 0:20:06.879 of depositors. Ponzi wasn't managing that particular bank, but he 0:20:06.920 --> 0:20:09.960 did work there and apparently picked up some tricks along 0:20:10.000 --> 0:20:13.320 the way. In nineteen nineteen, he hit upon the heart 0:20:13.400 --> 0:20:17.800 of his scheme, which involved something called international reply coupons, 0:20:17.920 --> 0:20:22.199 or IRCs. And here's how they worked. Let's say you 0:20:22.400 --> 0:20:26.240 immigrated to America from Europe and you have family back 0:20:26.320 --> 0:20:30.159 on the continent. You're struggling to attain the American Dream. 0:20:30.400 --> 0:20:32.560 In the meantime, your family writes to you to stay 0:20:32.560 --> 0:20:35.800 in touch, and because you're still getting up on your feet, 0:20:36.080 --> 0:20:39.480 your family encloses an IRC in their letter to you. 0:20:40.080 --> 0:20:43.800 The IRC is a coupon for return postage which allows 0:20:43.840 --> 0:20:46.240 you to write back to your family without having to 0:20:46.280 --> 0:20:49.879 purchase your own postage, thus saving your money so you 0:20:49.960 --> 0:20:53.760 can try and prosper. But there was a possible disparity 0:20:53.840 --> 0:20:57.000 in the value of the IRC because the cost of 0:20:57.000 --> 0:21:00.479 the IRC was dependent upon the country of origin. So 0:21:00.720 --> 0:21:03.439 let's say your family's in Spain, and let's say the 0:21:03.480 --> 0:21:05.920 cost to send a letter from Spain to the United 0:21:05.920 --> 0:21:10.479 States is five cents, and an IRC costs the same amount. 0:21:10.520 --> 0:21:13.720 So your family spends five cents on an IRC to 0:21:13.800 --> 0:21:17.000 put inside the letter and then spends another five cents 0:21:17.280 --> 0:21:20.520 to post the letter to the United States. But let's 0:21:20.520 --> 0:21:24.080 say that in the US it costs ten cents to 0:21:24.160 --> 0:21:27.760 send a letter back to Spain. So you take this IRC, 0:21:28.040 --> 0:21:31.840 which remember your family paid five cents for back in Spain, 0:21:32.280 --> 0:21:34.440 and you redeem it in the United States for postage 0:21:34.480 --> 0:21:37.359 back to Spain. But the IRC allows you to get 0:21:37.440 --> 0:21:41.119 ten cents worth of postage. So while the IRC cost 0:21:41.280 --> 0:21:43.760 five cents in Spain, you can redeem it for ten 0:21:43.840 --> 0:21:46.520 cents in the United States. And that was the heart 0:21:46.600 --> 0:21:50.240 of Ponzi's scheme. In a way, it was an extension 0:21:50.280 --> 0:21:53.200 of the basic idea that you should buy commodities at 0:21:53.200 --> 0:21:55.639 a low price and sell them for a high price, 0:21:56.080 --> 0:21:58.440 which generally means you've got to find a place where 0:21:58.480 --> 0:22:01.359 the price of something is pretty low, usually because that 0:22:01.440 --> 0:22:04.960 region produces a lot of whatever the commodity is so 0:22:05.040 --> 0:22:08.480 supply is high. Then you transport those goods to a 0:22:08.520 --> 0:22:12.000 place that has a higher demand for that commodity, and 0:22:12.040 --> 0:22:14.840 you sell it for a profit. Now, over time, this 0:22:15.000 --> 0:22:18.480 can lead to changes in price at both locations. The 0:22:18.600 --> 0:22:22.680 source might start raising prices and the destination might start 0:22:22.800 --> 0:22:26.359 decreasing demand. But for a time there's a lot of 0:22:26.359 --> 0:22:29.800 profit to be made, and this is completely legal and legitimate. 0:22:30.359 --> 0:22:33.280 Ponzi's pitch revolved around this idea that he would be 0:22:33.280 --> 0:22:36.240 able to purchase IRCs for a low price in other 0:22:36.320 --> 0:22:40.560 countries and redeem them for much higher returns elsewhere. It 0:22:40.760 --> 0:22:43.320 wasn't that different from people who try to make money 0:22:43.359 --> 0:22:47.200 in currency markets, relying on the exchange rates of various 0:22:47.240 --> 0:22:51.520 currencies Ponzi might have originally been sincere in his plans, 0:22:51.760 --> 0:22:54.439 hoping to leverage the market to make a profit. But 0:22:54.680 --> 0:22:57.840 even if you were sincere, the plan was never going 0:22:57.880 --> 0:23:03.120 to work at scale. Virtual value of IRCs was very low, 0:23:03.160 --> 0:23:05.879 just a matter of a few cents each, so to 0:23:05.920 --> 0:23:09.000 operate at a scale equivalent to the investments that Ponzi 0:23:09.000 --> 0:23:13.240 would start accepting would require more IRCs than the market 0:23:13.320 --> 0:23:16.119 actually had. If I give you a check for one 0:23:16.119 --> 0:23:18.600 thousand bucks and you have promised that you're going to 0:23:18.680 --> 0:23:21.960 give me a fifty percent return and interest within forty 0:23:22.000 --> 0:23:25.960 five days, which was what Ponzi was promising people, and 0:23:26.240 --> 0:23:29.199 it's all through buying up IRCs that just cost a 0:23:29.320 --> 0:23:31.680 penny in one place and can be redeemed for five 0:23:31.760 --> 0:23:35.600 cents somewhere else. That's going to require an awful lot 0:23:35.640 --> 0:23:38.679 of IRCs to make up that fifty percent you're going 0:23:38.760 --> 0:23:40.879 to owe me in forty five days. And I'm just 0:23:40.960 --> 0:23:44.600 one investor. So this plan just could not work at scale, 0:23:44.880 --> 0:23:47.200 and so Ponzi was going to follow in the footsteps 0:23:47.200 --> 0:23:50.960 of how and others. The premise of the scheme was 0:23:51.080 --> 0:23:54.520 a bit complicated, this whole idea of IRCs, but that 0:23:54.640 --> 0:23:58.560 worked to Ponzi's benefit. It helps if the flim flam 0:23:58.640 --> 0:24:00.919 you're selling to Marx is a little bit on the 0:24:00.960 --> 0:24:04.280 complex side, because it makes it harder for people to 0:24:04.400 --> 0:24:07.840