Psychology weds finance in Ponzi scheme frauds

Tue Apr 28, 2009 6:30pm EDT
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By Pascal Fletcher

MIAMI (Reuters) - Take the malleable clay of human nature, add greed, deceit and manipulation, and you have the basic ingredients for a Ponzi scheme financial fraud.

Throw in 'bird dogs', 'boiler room boys', socialite philanthropists, 'front' companies, slick sales talk and glossy promotion. These are some of the accessories that can turn a simple scam into a persuasive fictional investment vehicle.

As victims and regulators still digest the shock of the recent scandals involving disgraced financier Bernard Madoff or Texas billionaire Allen Stanford, experts are probing the psychological and financial components of Ponzi schemes.

The Ponzi scheme is named after Italian immigrant Charles Ponzi whose 1919-1920 fraud was a cause celebre in Boston.

It works on the simple principle of luring investors by promising attractively high returns, while in fact paying its early clients with the money provided by later investors.

While basically insolvent from the start, it feeds, fraudulently, on the natural desire to obtain financial gain.

"It's human nature and psychology, it's preying on individuals that are vulnerable," Maria Yip, a forensic accounting expert at Yip Associates, told Reuters.

She and other fraud experts explained to an offshore finance conference in Miami on Tuesday some of the common attributes of Ponzi schemes, which have bilked investors in the United States and elsewhere out of billions of dollars.   Continued...