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