Ponzi’s legacy, the pyramid scheme fraud

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Ponzi's legacy, the pyramid scheme fraud

Ponzi’s legacy, the pyramid scheme fraud

Ponzi and origins

The name of the scam is the surname of an Italian, although he was not the first to practice it. There are other precedents in time and “illustrious” successors such as Bernard Madoff.

Carlo Ponzi went down in history as the father of one of the most fraudulent businesses that has taken millions of people out of their pockets. The idea of the pyramid scheme that bears his name is as simple as it is destructive to those who put their money into it.

What is a pyramid scheme?

The only business plan in this scam is based on the fact that investors receive their benefits using the money from the contributions of new scammers, those who occupy the base of the pyramid, and are usually forced to attract and recruit under the promise of multiplying the benefits in fees and expanding the pyramid without end. In the end, the only beneficiaries are a few at the top.

The scamming company has no other legitimate source of income or is simply false and generally uses some intangible as bait as a prize, games, writing and publishing advertisements, travel, cars that do not exist, discounts in exchange for invented coins, virtual points or medals or any other roll in the form of pure smoke.

The pyramid survives and gets fat artificially while money is coming in from new cheats, when new unwary people stop joining, the pyramid goes to hell and the two or three smart people at the top leave the “business”, if they are not caught first, and run away sharing what is left of what they have been swindling.

Today there are quite a number of suspicious bars on the internet of what they call MLM (Multi Level Marketing) that are very close to pyramid schemes, flirt with the limits and seem almost like family. In fact, many of these businesses, at the very least murky, start out claiming to practice Maribel Multi-Level Marketing. Beware of their faithful because some defend their rolls with the passion of the craziest cult member.

Timos y estafas

Some basic prevention recommendations

Be cautious and sceptical. Be wary of any approach that seems ambiguous to you. Get a lot of good information about what and who is in the background even if the business is recommended by your holy mother. Be wary if they do not clearly state what they are selling and where exactly the profits are coming from.

 
   

Be wary even if there is a product for sale, it can be a facade and you can still get a pyramid scheme.

Avoid any proposal that promises large amounts of easy and/or quick money and/or forces you to recruit other people to get it, but above all reject without thinking any story in which you have to buy the products or pay a fee in a single or periodic payment, no matter how small, to be able to do the job. They will most likely disappear with your money before you can blink twice.

This is a review of Ponzi’s legacy through some high profile cases that were based on or inspired by his famous system.

Sofico, golden bricks

Sofico. El legado de Ponzi, la estafa piramidal

Some full-page ads from the International “Sociedad Financiera Internacional de Construcciones, Sofico”, flooded the press with them. Source: La Vanguardia Newspaper Library

Ponzi's legacy, the pyramid scheme fraud

Considered the first great brick bust on the Costa del Sol and the biggest pyramid scheme of the Franco era, Sofico based his deception on creating and betraying the confidence of investors and on the promise of a very desirable and almost eternal growing capital gain of his flats.

Originally, the sale of the wonderful flats was closed when they were finished and ready to move in, but then they went on to sell off-plan by charging amounts on account, including the total price of the property before it was built. On many occasions, Sofico had not even bought the land on which to build, so most of the properties did not even exist.

This meant that the company did not have the money to pay the juicy interest promised to the investors and Sofico had to buy new land to try and put up more unbuilt flats and to be able to pay a hefty 12% profit which they ceaselessly boasted about, accelerating their ruin.

Ponzi's legacy, the pyramid scheme fraud

 
   

From then on everything went wrong, all his movements to save the hole put one more stone in the pile that would end up burying the company and the hopes of the investors to recover their money. In 1974, Sofico stopped paying the promised return and continued to sell flats, knowing that he could never deliver them.

In 1987, thirteen years after the trial began, the trial was held. For the only two defendants, Eugenio Peydró Salmerón and his son Eugenio Peydró Brillas, 12 years’ imprisonment was demanded as the perpetrators of the continuous crime of falsehood to commit fraud. The high officials of the Franco regime who were part of the company were exempted from any responsibility, and the Supreme Court did not authorise their prosecution “as it was clearly established that the management and executive decisions of all Sofico’s financial activities were taken personally and exclusively by Peydró Salmerón”.

Eugenio Peydró Salmerón was sentenced to 9 years in prison and his son to 2 years and 4 months, in addition to which they were to pay some 5 billion pesetas in compensation to the 3,200 people affected. The sentence stated that the accounting hole left by the suspensions of payment of Sofico Inversiones, Sofico Renta, Sofico Vacaciones and Sofico Servicios Turísticos, amounted to the scandalous number of 8,182,555,731 pesetas.

The swindlers only spent a few months in jail, as both appealed the sentence. Neither did they pay the compensation because they were declared partially solvent for a ridiculous amount of only 22.5 million pesetas.

Fidecaya, stealing savings with impunity

It was in the early 1980s when the Fidecaya case, another of the biggest scandals of the young democracy, which was still dragging in not a few of Franquismo´s financial rubbish, exploded.

Fidecaya. El legado de Ponzi, la estafa piramidal
By hitting with Fidecaya. ABC 28/08/1981

On 4 September 1981, the Spanish Council of Ministers approved the forced liquidation of the private savings bank created in 1952. The company was even advertised on television using such popular faces of the time as the comedian Miguel Gila. Fidecaya was intervened with 250,000 affected and more than 1.8 billion pesetas in swindled money, the government taking over a quarter of the deposits.

This article on Fidecaya was published in number 139 of the magazine Mundo obrero in August 1981:

 

“Its origins date back to 1952. Its main founder was the Catalan banker Julio Muñoz Ramonet, himself involved in various scandals and prosecuted in September 1978 in Geneva.
Until the 1970s, his activity was aimed almost exclusively at speculating with money. Later they learned to do the same with real estate. Espacontrol Services carried out an audit of Fidecaya’s activity in 1979 and discovered that 2,922 million pesetas had been lost that year
In April 1981, the losses amounted to 7 billion pesetas.

The tip came in March 81, when the Directorate General of Insurance made a report on Fidecaya, discovering important irregularities. After several changes in the Board of Directors, Fidecaya was bought in May by Alfaro, who, smiling, announced the new company to the press, saying that: “Fidecaya is a strong company capable of coming out of its bad moment”. Among the projects he presented was that of distributing a purchased farm in the municipality of Aranjuez to family gardens.

Ponzi's legacy, the pyramid scheme fraud
Fidecaya joke in La Vanguardia, 12/08/1981

As the time is not ripe for selling vegetable gardens, we must ask ourselves about Alfaro’s real motives. In financial circles there is speculation that the purchase of Fidecaya was a big scam. If this is the case, and everything indicates that this hypothesis could soon be confirmed, those who will lose out will be, firstly, those hundreds of thousands of small farmers and, secondly, the State, which will once again pay for the shares of a high-flying financier who has become rich through speculation and swindling.

In 1982, the prosecution opened a case for alleged fraud and Fidecaya was bought by Rumasa. Judge Ricardo Varón Cobos acquitted Fidecaya’s last owner, Edmundo Alfaro.

Prosecutor Carmen Tagle, who did not agree with Varón Cobos’ decision, took further action against Alfaro, but in 1989 another prosecutor requested the case to be closed considering that no crime had been committed.

Afinsa and Forum Filatético, the stamps that did not exist

Ponzi's legacy, the pyramid scheme fraud

The most bloody case in our country, both in terms of the number of people affected and the volume of money swindled, is that of Fórum Filatético and Afinsa, businesses that have been buying and selling stamps for almost three decades.

Ponzi's legacy, the pyramid scheme fraudIn May 2006, the Audiencia Nacional intervened the headquarters of these two companies in a tumultuous action and the police arrested their directors in their respective homes. The biggest pyramid scheme in our country was discovered. They accumulated a break in their patrimony of about 3,000 million euros and left about 400,000 people affected. Many of them took to the streets both on the day of the intervention and in the following days in demonstrations to demand the return of their investments.

The candy that they offered by contract was a very greedy revaluation of their stamps in the philatelic market and if this was not the case they committed themselves to pay this revaluation, always much higher than the purchase price, from the company’s coffers. The reality is that they were not sold because they were worthless and in many cases did not even physically exist.

Ponzi's legacy, the pyramid scheme fraud

 Fórum Filatélico web in 2001

The stamps were resold to new investors and with this money they paid the previous ones who wanted to recover their investment, so that the interest was not paid for the sale of the stamps in an external market, there was no legitimate external circuit to generate profits from their sale.

The business was based on a pyramid scheme hidden under deception and this was confirmed by the Supreme Court in March 2020.

Ten long years later, the case was resolved in court and five Afinsa directors were sentenced to prison for between five and eight years, and between one and twelve years for those of the Philatelic Forum.

The sentence also revealed that some of the defendants created, and others participated in, schemes made up of intermediary companies in which they circulated the stamps in a real or supposed way to artificially increase their price with successive sales and finally acquired them by Forum.

The process ended without the whereabouts of most of the money collected being known. The investors concerned were only able to recover a maximum of 20% of the money they handed over.

 
   

Website of the administration of the Philatelic Forum.

Website of the bankruptcy administration of Afinsa.

Fort Ad Pays, a Spanish brand pyramid

Ponzi's legacy, the pyramid scheme fraud

In 2016, the pyramid created by a group of Spanish companies collapsed leaving some 40,000 investors from more than ten countries without their money, although it is believed that many more may have been affected.

In just two years, the Fort Group set up three businesses that promised large daily profits by managing online advertising spaces with a minimum investment of 1 dollar. Like all pyramid schemes, the companies made little or no revenue outside the internal loop and were busy dividing up the financial contributions of the new members among the older ones until the fraud broke out.

 

According to El País, the Fort Group managed to bring at least one million euros to Dominica’s tax haven, but the real figure could be much higher.

In a final attempt to raise more funds, the group marketed supposed shares of the company at $350 a unit, which could be acquired by bank transfer, ensuring that their market value exceeded $51 million. Some of those affected, after several weeks of unsuccessfully trying to recover their money, began to organise themselves to file a lawsuit.

The group’s founder, Pedro Fort, who was not the first fraud he left behind, fled Spain for Colombia and finally settled in Florida where he ended up being arrested by the US authorities on SEC charges.

Ponzi's legacy, the pyramid scheme fraud
One of its pages in a screenshot of 2016

According to the SEC’s complaint against Miami-based P.F.B. and its Fort Marketing Group, they operated fraudulent Internet advertising businesses under names such as Fort Ad Pays, The Business Shop and MLM Shop.

“Allegedly, they solicited investors through online publications and videos claiming that they could share in the companies’ profits and earn investment returns of up to 120% by purchasing an advertising package for as little as $1 and clicking on four ads a day,” the SEC complaint read.

It was estimated that this pyramid scheme managed to raise some $38 million.

In 2017, Pedro Fort announced a lawsuit against El País for slander and published part of it on his personal website, although no copy is kept in the Archive. He also stated that he hoped to be able to return the money and regain the trust of his associates and even ventured to announce the creation of his own bank.

Unetenet, the pyramid with a fake coin

 

Ponzi's legacy, the pyramid scheme fraudA Latvian bank alert that froze scammers’ accounts for signs of money laundering and a report by an Unetenet programmer set off alarm bells about this pyramid scheme. The scam was set up by a couple of charlatans using a network of companies and bank accounts in different countries such as Panama, Romania, Liechtenstein, Saint Vincent and the Grenadines, Malta and the United Arab Emirates. This is how El País told it in 2015.

Unetenet caught some 50 million euros from more than 60,000 victims in different countries. To the two managers of Unetenet, the couple composed by José Manuel Ramírez and Pilar Otero, La Sexta TV dedicated a program of “Equipo de Investigación” as well as another program about another condemned for creating a pyramidal scam, Finanzas Forex, with which Ramírez had coincidentally shared business in Panama.

Ponzi's legacy, the pyramid scheme fraud
The “Unete” in all its splendor

This couple of swindlers promised “financial freedom”. They invented a virtual currency with less value than a cardboard dollar, the “Unete”, which they said was equivalent to one dollar and which served only to retain the money they were making and to keep investors entertained with the game. The recruits ate the jar periodically in ridiculous motivational parties that looked like a world championship of histrionics and exaltation of friendship while the couple polished off the dough in various trips and luxuries.

 

The scam is based in principle on placing advertisements on the internet, something within the reach of any earthling, however clumsy. In reality, this was irrelevant because the scam was based on the promise that with an investment of 18,000 dollars, 67,000 units could be obtained. The new investors were used to pay the first ones, and as usual, when they stopped coming in, the “uneteneros” were left with supposedly worthless coins that they could not convert into euros because the whole business was based on a lie. Their only, and unlikely, desperate way out was to try to place these ridiculous “Unetes” on new unwary people.

Ponzi's legacy, the pyramid scheme fraud
This is what its website looked like in 2013

In July 2015, within the framework of Operation Pharaoh, 20 company leaders were arrested, although the ideological couple were not among them. The accused face more than 200 years in prison for fraud, membership of a criminal organisation and money laundering.

Ramírez and Otero later presented themselves voluntarily to the Audiencia Nacional and after testifying were sent to prison at the risk of flight or destruction of evidence. The couple were released from prison after paying a bail of 150,000 euros and it was not known any more, I suppose that they are still awaiting trial and these things are not exactly going very quickly that is said.

Telexfree, global fraud

Ponzi's legacy, the pyramid scheme fraud

Telexfree was an American company with a notable presence in Brazil that landed in Spain in 2012 presenting itself as a multilevel company, but this was just another pyramid scheme that based its supposed business plan on publishing ads on the Internet. The company swindled more than one million people worldwide, in Spain were about 50,000.

The minimum payment to invest and start generating supposed benefits was established at 1,400 euros with the promise to double and triple that amount in profits monthly. In order to convince the people they were recruiting, they encouraged the creation of close networks of family and friends who were easily “infected” by those close to them, thus dispelling any doubts the new indoctrinators might have about the legality of the proposal. Recruitment was ensured when recruiters showed the amounts they earned.

 

A partir de aquí, la historia se repite. Cada inversor creaba una cadena de nuevos estafados como referidos mientras los listos explotaban los frutos de la pirámide hasta que se desplomaba.

From here on, history repeats itself. Each investor created a chain of new scams as referrals while the smart ones exploited the fruits of the pyramid until it collapsed.

Ponzi's legacy, the pyramid scheme fraud
This is what the Telexfree scammers were “working on.

Telexfree also had a legion of followers who behaved like members of a sect and organised bizarre shows to exalt the virtues of the business and to continue eating the heads of those who were getting fat off the scam without even suspecting it.

On April 13, 2014 TelexFree filed for bankruptcy under the United States Bankruptcy Code. Two days later the US Securities and Exchange Commission filed charges against TelexFree Inc. and TelexFree LLC for operating “a large pyramid scheme that was primarily targeted at Dominican and Brazilian immigrants residing in the United States. The next day, following the Commission’s request, the District Court in Boston ordered a freeze on the company’s assets and approved a plan to return more than US$150 million to the people who lost their money when TelexFree collapsed.

In May 2020, the owners of Telexfree Carlos Roberto Costa and Carlos Nataniel Wanzeler, were sentenced by the Federal Court in Espírito Santo (Brazil) to twelve years and six months in prison in a closed regime for the crime of financial pyramid and the payment of different amounts in fines.

At the beginning of September this year the money defrauded by Telexfree would start to recover some of their money after a legal process that has lasted six years. In this first batch, 40% of the money claimed will be returned. As more money is recovered and Telexfree’s remaining assets are liquidated, a possible second return could be made for the rest of what was lost.

Telexfree. El legado de Ponzi, la estafa piramidal

Last message on Telexfree website. Archive.

Finanzas Forex, a copy Madoff

The CNMV had already informed in 2008 that the chiringuito known as Finanzas Forex, a trademark born under the company Evolution Market Group (EMG), incorporated in Panama, was not authorized to provide in Spain the investment services it offered and warned its manager that it was operating without a license. Nor did he need to, everything in Forex Finance was a lie.

In April 2018, the Supreme Court sentenced to 13 years and 3 months in prison and 300 million euros of fine the person responsible for Finanzas Forex, the Valencian German Cardona Soler. The fraudster, nicknamed by the media as “the Spanish Madoff“, was found guilty of illicit association, a continuous crime of aggravated fraud in ideal competition with falsification of documents and money laundering related to the pyramid scheme with which he swindled 390 million dollars from 186,000 people in at least 110 countries between 2007 and 2010.

The 3-year prison sentence and a 900,000 euros fine were also confirmed for her partner, Lina Maria Mantilla, for money laundering and illicit association. Both attracted clients and investors to operate in the Forex currency market, promising very high profits. These people were paid a supposed return with the contributions of the new investors, without any commercial or financial activity actually producing any return.

Ponzi's legacy, the pyramid scheme fraud

One of the magic tables with the different amounts they swindled

As could be read at the time in the note on the page of the General Council of the Judiciary, the pyramid had seven levels:

“The operation of the defendants, typical of the so-called pyramid schemes, where the defendants developed an “aggressive and misleading advertising” to permanently expand the base of new customers since the alleged profits of investors were only covered by the amounts captured from new customers, since – the judges add – “the profit made by them was never effectively distributed, or was made in ridiculous amounts” the sentence fixed at 5% the money actually transferred to the foreign exchange market.

In order to increase the number of clients, the defendants deployed intense internet advertising. They also organized conventions in hotels around the world where the three fictitious vice presidents “appeared to be solidly behind the group” and another of the defendants, Santiago F.J., gave the lectures to attract clients, who in turn would attract new investors, “using their family or social circle” under the promise of obtaining returns of up to 20% per month in the most conservative investment plan and up to 40% in the so-called variable plan, all in the “Forex” currency market.

The pyramid had seven levels and the investors were offered the possibility of becoming “promoters” to go up the level and in this way they received commissions of 0.50% of the amounts contributed by the new attracted clients. Those who reached the highest levels benefited from prizes such as trips, cruises, luxury cars or bonuses for the purchase of homes”.

Zeek Rewards, the auction scam

On August 17, 2012, the U.S. Securities and Exchange Commission (SEC) filed a complaint against Paul Burks and ZeekRewards.com, a North Carolina-based company.
Zeek Rewards was being offered as an “investment opportunity” and promised benefits to investors by sharing the profits of a “penny auction” system called Zeekler that they sold as a fun way to bid on all sorts of new products at a discount of up to 90% or more that many people cheated on.

Ponzi's legacy, the pyramid scheme fraud

Investors were advised and encouraged to let their profits accumulate and to recruit new members in a “forced matrix” to increase their profits. Like many of these pyramid schemes, he had a series of ranks or “packages” with the typical names of “silver, gold and diamond” that promised more profits in exchange for losing more money in monthly payments.

Ponzi's legacy, the pyramid scheme fraud

The SEC concluded that this forced matrix payment scheme constituted a pyramid scheme scam. New investors were required to pay a monthly subscription fee of between $10 and $99 and pay out an initial investment of up to $10,000. The higher the initial investment, the higher the promised return.
The “business” only generated about 1% of the company’s supposed revenue and the vast majority of the funds disbursed were paid for with new investments from new recruits.

Ponzi's legacy, the pyramid scheme fraudZeek Rewards was a scam of around 600 million dollars, although at first there was talk of figures exceeding 850 million, affecting one million people, making it one of the largest Ponzi schemes in history in terms of the number of investors affected, although these figures were estimates as the number of clients who made money may have exceeded 2 million. This is a common occurrence in these cases, as many choose not to sue and forget about it for various reasons.

Paul Burks was sentenced to 14 years and 8 months in prison as the ideologue of the Zeek Rewards scam. Federal District Judge Max Cogburn, Jr. also sentenced Dawn Wright-Olivares, the company’s chief operating officer and public face, to 90 months in prison and three years probation, and her stepson and programmer, Dan Olivares, to 24 months in prison plus three years probation.

The court administration that took over the assets of ZeekRewards fought to have each member who had earned at least $1,000 at ZeekRewards reimburse the court administration for their net earnings to be distributed to the victims of the scam. After the company’s assets were seized and auctioned, the money began to be returned to the claimants in April 2020.

GetEasy, the ghost GPS

Ponzi's legacy, the pyramid scheme fraud

GetEasy changed its name to Igetmania and Viconcept, but they were still in the same old fraud. Although they presented themselves as a legitimate multi-level marketing (MLM) company, it was just a fake wrapper to camouflage another pyramid scheme.

They didn’t beat around the bush, they didn’t just repeat that tired of “financial freedom”. They went further and promised directly that you could get rich without working. The dream of any fool.

This international criminal organisation was based in Portugal and Macao (China) and spread the fraud to several countries around the world, including Spain, where the victims transferred their investments and where GetEasy had its complex business network that it used to launder money. It is estimated that more than 25 million euros were swindled from approximately 10,000 victims in at least three countries.

This gang practiced a pyramid scheme that differed somewhat from most of these scams because they claimed to market a product that supposedly existed.

Ponzi's legacy, the pyramid scheme fraud
The GPSs they offered needed another GPS to find them.
 

They sold various rolls related to supposed crypto-currencies, music and their star product, something called “Gettracker“. When the fraudster bought one of the four or five “packages” of GPS geolocators that ranged from 180 to 3200 euros, these devices were supposedly given to them for their own use with the promise of renting the remaining GPSs to third companies with which they claimed to have signed contracts that they called “comodato contracts“.

From this alleged operation it was promised that the investor would obtain a return on the capital invested or “rate of return” close to 300%. However, both the purchase of the GPSs and the subsequent transfer of their use to third parties were fictitious operations. Nothing existed and the only real “business” was a few redeeming prizes in the form of exchangeable luxury items in exchange for points to encourage the recruitment of more investors for the pyramid.

Among the appetizing prizes were a Mont Blanc pen, a Rolex watch, a trip to Bora Bora or a Mercedes Benz, a Ferrari, a Lamborghini, and even a luxury real estate property to remove the hiccups. As expected, none of the recruiters ever got a whiff of any of these non-existent assets. The trail of all these lies can still be found in videos that are still posted on Youtube.

GetEasy. El legado de Ponzi, la estafa piramidal

“Purely illustrative images”, said the jokers.

On 14 November 2014 the Banco de Portugal issued a warning to investors about the activities of fraudsters, informing them that.

“…either acting in their own name or on behalf of third parties, were not entitled to carry on in Portugal an activity of taking deposits or other repayable funds or any other financial activity subject to the supervision of the Banco de Portugal”.

The police are coming!

Finally, some of the fraudsters were arrested by the Guardia Civil in Spain as part of “Operation Bateo” in coordination with EUROPOL. Seven searches were carried out in Madrid and Mérida (Badajoz), corresponding to the four main locations and the homes of the main members of the group, involving numerous documents related to the fraud, jewellery, telephones, luxury items and more than

The arrests and searches authorised by the Central Court of Instruction 5 of the Audiencia Nacional concluded with the bringing to justice of some of the Portuguese leaders of the plot operating from Spain, as well as several Spanish citizens responsible for laundering the money here, and an arrest warrant was also issued for those responsible.

A total of 21 people of Spanish, Portuguese and Colombian origin were arrested in Spain. A further four were arrested in Portugal, Brazil and France under the arrest and surrender warrant.

Don’t go yet

The Internet and the real world ™ are full of companies with at least dubious activities, and not so much that they flirt with the pyramid system. In 2017 the Peruvian Superintendency of Banking, Insurance and Pension Funds published a long list of companies that, in its opinion, carry out pyramid schemes and other fraudulent activities to attract customers under the promise of incredible profitability figures. These were some of the companies reported for pyramid schemes:

Emgoldex Ltd, Ju Ding Inc, Wake Up Now Peru, LibertàGià, Wings Network, Bisxatone Prosefi Peru, Telar de Mujeres / Telar de la Abundancia, Global Intergold, Emgoldex, Pay Diamond and Wealth Generator.

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