The Biggest Ponzi Schemes in Modern History

The Ponzi scheme is named after Charles Ponzi who in 1920 proposed a scheme where investors would invest money to purchase postal reply coupons, and would receive a 50% return in 45 days or double their money back in 90 days.  Ponzi took in $15 million before the fraud collapsed because not enough new investors were coming in to pay off the earlier promises.  About one-third of the invested money was returned.  Adjusted for inflation, Ponzi’s scheme would have been only about $150 million on 2009 dollars, which would not qualify for Ponzi for the top spot.  However, because we was an earlier designed of these schemes, and he committed the largest scheme up to that time, the name stuck, and ever since that time, Charles Ponzi’s name has been associated with the fraudulent schemes where later investors pay off earlier investors.  

Assuming the rules do not change, the largest Ponzi schemes are probably Social Security and Medicare, where later investors are funding the promises to the earlier investors.  However, the government has the power to tax to avoid the systems’ collapse, and these systems are technically not frauds because the entire system is disclosed to each participant, even if no worker is allowed to voluntarily withdraw from these systems.  In addition, unlike traditional Ponzi schemes where investors are promised greater returns, participants in Social Security and Medicare will actually receive about 80% of what they put in if the systems remain solvent.  No Ponzi scheme has been successful by promising investors less than their investment.  Because of these complications, these two systems will not be included in the list of greatest Ponzi schemes.

The biggest Ponzi schemes are:

1. Bernard Madoff: $50-65 billion in 2009 dollars.  This massive fraud carried out over 30 years will not be eclipsed anytime soon.  Madoff was even a registered investment advisor with the SEC, and his registration gave him even greater credence with investors.  Further, he never promised great returns; rather he promised steady returns.  Madoff’s genius in the realm of Ponzi schemes was to exploit not greed but fear; fear of volatility in returns.  He promised a conservative return.  For that innovation, which was somewhat unique in the Ponzi scheme world, he went to the head of the class.

2. A distant second is Alan Stanford who clocks in at between $4.5 – 8 billion.  Mr. Stanford seemed to be offering certificates of deposit, another seemingly safe investment.  Trading on safety was a winning Ponzi scheme strategy in recent years.

3. Next up is Tom Petters, a celebrity businessman in conservative Minnesota who defrauded investors of about $3.5 billion.  His scheme involved the promise of high returns, and his fraud ran for 13 years before he was turned in by one of his lieutenants.

4. There is a tie for the next most massive Ponzi scheme, with a few fraud perpetrators clocking in around the $1 billion mark.  The Caritas scheme in Romania ran for three years, involved about 400,000 depositors, and took in about $1 billion during 1991 to 1994.  Inflation adjusted, that would only total about $1.4 billion today.  A Russian company — MMM — involved over 2 million victims and took in around $1.5 billion.  Inflation adjusted, that would about $1.7 billion giving MMM 4th place if the numbers are accurate.  1994 saw the European Kings Club in Switzerland take in $1.1 billion on fraudulent “letters” entitling the holder to 200 Swiss francs per month for life.  This would be about $1.5 billion in today’s dollars.  In 1997, in Albania, government endorsed pyramid schemes took in about $1.1 billion before the collapse.  Almost the entire population of Albania participated and was devastated by the collapse.  Peter Lombardi in Florida ran Mutual Benefits Company in 2003 taking in about $1 billion from 28,000 investors.  He advertised it as buying out life insurance policies on HIV patients. 

There were two other billion dollar schemes, and then the cases drop into the hundreds of millions.  Even inflation adjusted, Ponzi could not compete, but he was the most flamboyant, and was the Madoff if his day.  If Bernie Madoff had lived in 1920, we might now be talking about Madoff schemes rather than Ponzi schemes.