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 Ponzi Schemes and the London Riots:from White-Collar Crime to City Grime

By Howard Silverstone and Jonathan Silverstone

WHITE COLLAR CRIME 

 Howard Silverstone is a Director and Co-Founder of 

Forensic Resolutions and Jonathan Silverstone is a Student

at Yale University.

A review of online postings following lastsummer’s London riots made interesting read-ing to those of us in the world of forensicinvestigations. One of the most interesting wasposted on Americablog.com:

“Fine, round up the thugs, but why don’t weever see such determined action when it’s WallStreet? The last time I checked, they caused alot more damage and the costs aren’t even close.

The bankers have looted the global economyand smashed the middle class and poor to piecesbut that is OK apparently. Somehow it’s onlyok to crack down on crime when it’s not white-collar crime.”

While this statement perhaps does not con-sider Sarbanes-Oxley and other measures putin place to counter the more high-profile white-collar crimes, it does make one think a littledeeper about the respective crimes and the effortby authorities to counter them. So let’s go back

in time to start our discourse and try to under-stand if there really is any link between covertlystealing money and overtly stealing consumerproducts.

In 1920, an Italian immigrant from Bostonadvertised astronomical rates of return forinvestors in a new company that promised inter-est anywhere from 50 to 100 percent of an initialinvestment. In August 1921, just nine monthsafter his plan’s commencement, Charles Ponziwas jailed for running a fraudulent scheme that

has carried his name for ninety years and hasbeen promulgated in many countries acrossthe globe—most recently with the largest fraudoperation ever conducted by a single individual,Bernard Madoff. With almost a century gonesince the genesis of such a means of committing

fraud, the question remains: why does the Ponzischeme still plague international enterprisetoday despite its prevalence throughout historyand the examples it has made globally of greedyfinanciers and unsuspecting investors?

The financial setup for the Ponzi schemeresembles a broadly defined pyramid: the topcomprising early investors, whose eventual divi-dends come from later investors rather than

any legitimate financial instrument as wasadvertised—eventually culminating in the depar-ture of the manager of the Ponzi scheme with allof the invested money or the complete demise ofthe scheme due to its unmanageable size. The ini-tial structure of the Ponzi scheme itself explainsthe omnipresence of this type of fraud evenafter nearly a century of victims: the apparentprimary success of this operation lures bothnew investors and retains earlier ones who hadreceived the promised returns. A scam that doesnot produce desired results can quickly fade,

but the dividends made by early investors, andthe almost unbelievable glamour of the way theoperation is sold to its victims, couple to forman intricate web of anxious investors who havecontinually fallen prey to the Ponzi scheme.

The ultimate lasting cause of the long exis-tence of the Ponzi scheme is the vulnerabilityof the modern consumer: from the appeal ofthe promised investment opportunity, to theeconomic climate during which the scheme isimplemented, to the seemingly (and in reality)

unreal returns it produces. Those who com-mandeer the Ponzi scheme range from someonewho has a substantial financial background,establishing a level of credibility suitable forsubstantive investment to those who are rela-tive novices, but somehow garner immediateattention.

One can look no further than Madoff to seethe superstar status that can be the driving force

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in drawing a sufficient tiered pool of investors.The idea of taking part in a new investmentstrategy piloted by such a well-established mem-ber of the financial services industry is enough

to sway even the most prudent of investors. Thetime period during which a disguised schemepresents itself plays an important role in theattraction of an investor base. An economicdownturn will foster desperation rather thanincredulity, and thus reels in those who view thePonzi scheme’s façade as a means of finding apath out of financial troubles during a reces-sion. When the economy flourishes, those witha now booming cash flow seek ways to capi-talize on their heightened earnings—leadingmany unsuspecting investors to a Ponzi scheme.

Therefore one can observe that the economicclimate influences the mentality of those whoultimately make the decision to invest in afinancial venture that disguises a Ponzi scheme,yet the presence of the fraud is independent of economic climate. The recession in 2008 servesas a microcosm for the omnipresent nature of the scheme: a lengthy list of Ponzi schemesbears examples of the fraudulent manipulationof unknowing investors both before and afterthe global economic downturn.

While the development of a Ponzi schemelies in the hands of the white-collar thieves whopilot them, the lasting continuation of this typeof fraud lies with those who make the deci-sion to invest. The Ponzi scheme still plaguesinternational enterprise today because of theexploitation of an international consumer basethat does not have the proper preparation torecognize and evade Ponzi schemes. In order toend the funding of these sometimes gargantuanfraudulent stratagems, we must make a bettereffort in providing the necessary tools to iden-

tify the factors that intimate the existence of a Ponzi scheme. The veneer of perfection andexclusivity is, after all, just a veneer.

So from 1920, we now move forward to 2011and the streets of London—where the cogni-tive background of looting sheds light on thepsychological foundation of such white-collarcrimes as the Ponzi scheme. Riots, apparentlystemming from a police shooting, led to more

widespread instances of looting and the theftof goods in open sight of hundreds of onlook-ers and even more on television and across theInternet. But such open channel vision did not

deter even the youngest members of the mobsfrom partaking in the behavior. Just as the fol-lowers of mob violence do little to hide their actas they smash the windows of betting shops andelectronics retailers, the followers of CharlesPonzi who furtively obtain their ill-gotten gainscome into direct contact with the “investors”whose funds they plunder.

Dr. Lance Workman teaches in the School of Social Sciences where he is head of Psychologyat Bath Spa University. He told the BBC,

“Humans are the best on the planet at imitat-ing. And we tend to imitate what is successful.If you see that people are walking out of a shopwith a widescreen TV and trainers (sneakers),a certain kind of person thinks why shouldn’tI do that?” This proclivity to copy the tours deforce of others often accounts for the repeti-tion of large scale corporate crimes, despite thefact that a sizable portion of them end in theperpetrator being led away from a city buildingby the police with his or her hand desperatelytrying to block the lenses of all the newspa-

per and television cameras documenting thisspecific crime’s demise. The same logic behindthousands of rioters in more than one neigh-borhood in London and later in more cities,explains Ponzi schemes’ repeat execution, nomatter how risky.

Dr. James Thompson, honorary seniorlecturer in Psychology at University CollegeLondon told the BBC, “Morality is inverselyproportional to the number of observers. Whenyou have a large group that’s relatively anony-

mous, you can essentially do anything you like.Part of that is down to safety in numbers. Theremay only be 20 or 30 people who are leadingthe trouble but the presence of several hundredonlookers makes it far less likely they’ll getcaught.” This actually presents a paradox, asDr. Thompson’s comments in this context arethe opposite of what forensic accountants telltheir business clients. The more safeguards youput in place to watch people, and the more they

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know they are being watched, the less likely theywill be in a position to steal from you.

Another observer of the London riots said

that for most, the motivation is the thrill, withthe “free stuff” just a bonus. This is an interest-ing observation in the context of Ponzi schemesand other white-collar crime. White-collar crim-inals typically steal because of some kind of need (usually financial); or through sheer greed;or they have the opportunity; and their expec-tation of being caught is low (usually becausethey are not being watched). However, somehave justified their actions as pure intellectualchallenges, which are akin to doing it for thethrill, something potentially at the heart of the

actions of some of the London looters.

While rioting marred the image of one ofthe international community’s most prominentcities, Prime Minister David Cameron calledupon the parents of the young rioters to take

responsibility and prevent their children fromcontinuing the ongoing destruction. As foren-sic accountants, it is our responsibility to deter-mine the causes of fraudulent schemes and setthe foundation for future prevention by ourclients. The most brilliant of criminals sharescharacteristics of the hooded thieves plagu-ing the global media, no matter the size of theamount to be illegally gained or the mannerby which it is ransacked. After all, whetherwhite-collar or blue-collar, MultinationalCorporation or a London newsagent, it’s all

looting.

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