Ponzi Redux

“What we mostly learn from history is that people are unable to learn from history.”

Warren Buffett

Back in the 1920s, Carlo (Charles) Ponzi got an entire class of financial fraud named after him, when he convinced greedy investors that he had a mechanism to double their money in a short period by buying international postal coupons at a discount and redeeming them at face value. Hundreds lost their life’s savings in his scheme.

A Ponzi scheme, also called a pyramid scheme, offers apparently superior returns through some kind of financial legerdemain, but actually pays early investors with the funds of later investors. Pyramid schemes inevitably collapse when there are too many early investors expecting cash flow, or demanding their money back, and not enough new money flowing in to keep the illusion going.

The financial press has just broken the story of the collapse of a Ponzi scheme based in New York City, in which investors were promised high returns from buying up blocks of theater tickets for hot shows, which would then be re-sold at higher prices. The big draw for many was the understanding that they’d be capitalizing on the success of Hamilton, one of the most popular musicals in Broadway history, with the highest ticket prices ever.

Of course, there was no actual buying of theater tickets. A money manager cooked up the scheme to reimburse investors whose money he had misappropriated in his investment firm. Three guys were arrested, one is pleading, and the other two will go to trial.

Who was taken in by this nonsense? Surely only credulous old ladies on Long Island or the equivalent?

Actually, not. Among the victims were billionaire computer titan Michael Dell, billionaire hedge fund manager Paul Tudor Jones, an executive at Och-Ziff Management Group (an investment firm) and 125 others.

The moral of the story is that simply following the crowd, even the famous and supposedly sophisticated crowd, is no guarantee of good results. Often it is precisely the richest and most sophisticated who are the victims of scam artists. (See Madoff, Bernie.) If it sounds too-good-to-be-true, it very probably isn’t, you know, true.