CASE 11
Frauds of the Century
CASE NOTES FOR INSTRUCTORS
This case will help students understand the nature of Ponzi schemes and pyramid schemes. The line of
distinction between each scheme is often blurred because they resemble one another so closely. Each
scheme is clearly defined, compared, and contrasted. Real-life examples are included in an effort to
reduce confusion so that an effective conversation can be had in the classroom.
A pyramid scheme offers an opportunity for an individual to make money that requires effort. Usually
this is in the form of an investment, business, or product opportunity. The first person recruited then sells
or recruits more people, and a type of financial reward is given to those who recruit the next participant.
The key aspect of a pyramid scheme is that people pay for getting involved. Each new individual or
investor joins in what is believed to be a legitimate opportunity to get a return, which is how the fraudster
gets money. However, unlike a legitimate organization, pyramid schemes either do not sell a product, or
the investment is almost worthless. All income comes from new people enrolling. Direct selling
QUESTIONS AND DISCUSSION
1. How do Ponzi schemes and pyramid schemes differ? How are they similar?
A Ponzi scheme differs from a pyramid scheme in that the investment is the only action required on
the part of a participant. This investment offers an above average return to the investor, and they only
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2. Why are white-collar criminals such as Madoff able to carry out their schemes for so long when
similar types of fraud often collapse at an early stage?
Students’ answers may vary and should be supported by reasoning. Answers may include the fact that
white-collar criminals dupe their victims by establishing themselves as trustworthy and respectable
figures. Victims of white-collar crime are trusting clients that believe there are sufficient checks and
3. What should be done to ensure large-scale fraud such as Ponzi schemes and pyramid schemes do not
happen in the future?
Student’s answers may vary and should be supported by reasoning. Answers may include not putting
all of your money in one investment, at least until you thoroughly research the company. Investors
should carefully examine the business’ model and determine if a legitimate product is being sold
before investing large sums of money to join the network or buy products. Individual investors,
110 Case 11: Frauds of the Century
• Revamping the handling of complaints and tips
• Encouraging greater cooperation by ‘insiders’
• Enhancing safeguards for investors’ assets
• Seeking more resources
• Integrating broker-dealer and investment adviser examinations
• Enhancing the licensing, education and oversight regime for ‘back-office” personnel.
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ADDITIONAL RESOURCES