Posted: May 01, 2009
Rundles wrap-up: Suckers
One bright spot in this recession: Growing knowledge of Ponzi schemesBy Jeff Rundles
I follow the business news like the news hound I am, and of course the all-consuming recession is beginning to bug me. You get the run-up in the stock market one day on better-than-expected home sales reports, then a plunge the next day because some giant corporation announces poor earnings. I have never liked roller coasters, and I am not going to start now.
Then I read about professional sporting teams feeling the blues. Season ticket sales are off, attendance is down, and many are being forced to offer the public such unheard-of amenities as smaller hot dogs for a mere $2.50. Based on the last “larger” hot dog I ate at the ballpark for $6, I suppose that means the new, cheaper version will be a cocktail weenie. If they apply that same logic to beer at sports arenas, ballparks and stadiums, it’ll be served in shots.
To me, however, there is always a silver lining, and this current recession – the Daddy of all recessions in my lifetime – there are a few bright spots. And in this recession, the bright spot is the growing universal knowledge of the Ponzi scheme.
When I was a young journalist here in Denver in the late 1970s, I got an education in Ponzi schemes because then, similar to the last several years, there was a frenzy for giant rates of return on so-called penny stocks. Invest $10,000 in some penny stock at 2 cents a share, usually with a wink and a nod from some insider, then sell at 8 cents a share, and quadruple your money.
Not all penny stocks involved Ponzi schemes, but many did, and a few of us got an education on Charles Ponzi, a turn-of-the-last-century Italian immigrant who made famous the scam of promising investment riches, then paying off the first in with the money of the followers, and of course raking in huge ill-gotten gains in the process. Ponzi didn’t invent the ruse, but it ended up bearing his name because of all the publicity when it all came crashing down in 1910.
Given how that works – the publicity and all – the latest twist will probably mean that such a scam in the future will be known as a Madoff, as in “financier” Bernie Madoff, who made off with many billions of dollars and finally got busted late last year. Now we come to find out that a Denver-based “financier,” Shawn Merriman, made off with $20 million or more in a Ponzi scheme. The new twist in this century is being called “affinity fraud,” because the swindlers use some built-in affinity – in the case of Madoff, connections in the Jewish community, and for Merriman his status as a trusted lay bishop in the Mormon Church – to build trust with those who get bilked.
While the affinity was clearly the entrée these predators needed to get going, it also seems evident that they expanded their circle of suckers beyond the affinity by simply impressing potential investors with lavish lifestyles. Madoff had several high-profile homes and yachts and all the other trappings of the highly successful. Merriman had the trappings, too, including an unbelievable art collection, with several original Rembrandts. And neither was shy about showing all that bling off, as often as possible. Nothing sucks in the gullible better than public displays of affluence.
So that’s the silver lining, or at least it is potentially. People just might stop looking at all of the trappings – stop swooning over the Joe Nacchios and Bernie Ebbers and all of the Lehman Brothers simply because they are rich – and start looking toward the Warren Buffets of the world as the paragons of aspiration.
Just remember that Madoff and Merriman didn’t necessarily set out to emulate Ponzi. No, their inspiration was none other than Phineas Taylor Barnum. Keep that in mind the next time the circus comes to town.
Jeff Rundles is a former editor of ColoradoBiz and a regular columnist. Email him at firstname.lastname@example.org.