To give a sense of what a real-world Ponzi scheme looks like, here are five prominent Ponzi scheme examples from recent history.
The Bernie Madoff Ponzi Scheme
Bernie Madoff began as a legitimate stockbroker in the 1960s. Allegedly starting in the early 1980s, though, his company’s operations began transforming into the biggest Ponzi scheme in history. As standard for a Ponzi scheme, Madoff baited investors with promises of large returns with minimal risk. But they were investing in an illusion—Madoff was using their money to pay his previous investors.
Madoff also made money for himself through “pay for order flow” (PFOF), a fee his firm charged to set up financial transactions involving investors and the ventures they were backing. However, since these enterprises were all fake (or actually his other investors), the PFOF amounted to investors overpaying to invest, while Madoff pocketed the difference.
By the time it fell apart in 2009, the Madoff Ponzi scheme had collectively cost over 13,000 investors somewhere between $65 billion and $74 billion US. Madoff, for his part, was arrested and sentenced to 150 years in prison. He died in prison in 2021.
The DC Solar Ponzi Scheme
This particularly infamous green-energy Ponzi scheme snared Warren Buffett’s Berkshire Hathaway insurance corporation, the Sherwin-Williams paint company, and many other big-name investors.
It started with a California mechanic named Jeff Carpoff, who invented a portable clean energy generator by rigging a car trailer with a large battery and numerous solar panels. He called it the Solar Eclipse. Soon after, everyone from blue chip corporations to sports and entertainment companies to even the US government wanted in on DC Solar, Carpoff’s new company.
But the company had trouble fulfilling orders for Solar Eclipse generators, and the generators that did go out didn’t work very well. So in 2012, Carpoff tried to fix DC Solar’s situation by turning it into a Ponzi scheme. It would not only pay off previous investors with money from new ones but also bilk the US government out of millions of dollars in tax credits as a registered green energy company.
Between 2018 and 2020, US authorities exposed the scheme and arrested Carpoff, along with many of DC Solar’s other executives. For a scheme that cost investors—and, in this case, American taxpayers by extension—almost $1 billion US, Carpoff was sentenced to 30 years in prison in 2021.
The George Santos Ponzi Scheme
In July of 2020, Republican congressman George Santos was hired to work at a Florida-based investment company called Harbor City Capital. During his time there, he wooed investors by offering them high-return, low-risk investments (a classic warning sign for financial fraud) in digital advertising companies.
To make his sales pitch more authoritative, Santos occasionally misrepresented how academically or professionally qualified he was and claimed he had connections with several rich or powerful people when he really didn’t. In addition, a prospective investor eventually alerted Santos to evidence that Harbor City Capital was using fraudulent financial documents. He passed the concerns off to a company lawyer but took no further action.
In April 2021, the SEC froze Harbor City Capital’s assets. It accused the company of misappropriating nearly $4.5 million US of investors’ money for the CEO’s personal use. It also charged the company with routing investors’ money to other entities unrelated to their desired investments, including as payments for other investors—the hallmark of a Ponzi scheme.
Santos was not named in the SEC’s lawsuit and claims not to have known about the fraud.
The “Texas Preacher” Ponzi Scheme
This is also called the Doc Gallagher Ponzi scheme after its mastermind, a Fort Worth resident named William Neil Gallagher. A former stockbroker, church minister, and radio show host, Gallagher—a.k.a. “The Money Doctor”—used both the pulpit and the airwaves to publicize his financial business. He also warned his followers about government, academic, and financial elites allegedly manipulating markets for their own greed.
This combination of self-promotion and preaching convinced nearly 200 people—mainly elderly devout Christians—to invest nearly $38 million US with Gallagher collectively. He promised the investments would provide returns between 5% and 8% per year with no risk. (Again, this kind of high-return, low-risk promise usually indicates a Ponzi scheme or other investment fraud).
By 2019, authorities had gathered irrefutable evidence that over approximately 10 years, Gallagher had misappropriated at least $20 million US of investors’ money to pay for personal and company expenses. They also proved he had created fake account statements to make it seem like investors were earning money when in reality, he was just paying them with other investors’ money—that is, running a Ponzi scheme.
Between 2020 and 2021, Gallagher was arrested, forced to repay over $10 million US to his scheme’s victims, and sentenced to three life terms in prison.
The OneCoin Cryptocurrency Ponzi Scheme
The largest crypto Ponzi scheme as of this writing, OneCoin was a cryptocurrency created in Bulgaria in 2014. It was described as a method for purchasing access to education materials, focusing on financial management. But its inventor, Dr. Ruja Ignatova, was more interested in hyping OneCoin as an investment asset—a major red flag for fraud.
Sure enough, in 2017, financial authorities exposed OneCoin as a massive Ponzi scheme that was providing returns to initial investors via incoming money from new investors. While many of the scheme’s leaders were caught, Ignatova herself disappeared with around $4 billion US and has yet to be found. The fraud is estimated to have cost investors nearly $25 billion US.
Ponzi schemes involving cryptocurrencies are particularly dangerous because crypto transactions are difficult to reverse, given how the blockchain systems they rely on work. These transactions also have a degree of anonymity, making it difficult to tell where crypto is coming from or going to.
Use Unit21’s Anti-Fraud and AML Tools to Detect Signs of Ponzi Schemes
Like many other kinds of fraud and financial crime, there are certain unusual indicators that a Ponzi scheme will give off. These include a stockbroker or investment firm not having valid credentials or making a series of seemingly meaningless transactions (like in money laundering).
Tools like Unit21’s Transaction Monitoring and Case Management solutions help to spot these oddities and make connections between them, exposing Ponzi schemes and other financial wrongdoing.
To see how our tools can work together towards those ends, contact us for a demo.
