Over at HuffPo legal analyst Sunny Hostin offers readers an article on Ponzi Schemes and How to Spot Them. The article spells out in a straightforward and accessible manner how Ponzi or pyramid schemes work. Hostin describes the red flags that ought to have alerted investors prior to the discovery that Bernard Madoff perpetrated a $50 billion fraud, which is still affecting financial institutions worldwide.
What Ms. Hostin's article doesn't say is that knowing how such a scam works will not stop it now or in the future. A pyramid scheme--in which early investors are paid ridiculously high returns at the expense of new investors, until new investors can no longer be found and the whole system collapses--relies on more than a set of fake records. The premise succeeds on the charm and attractiveness of the con artist at the helm, and on the greed of his investors. In short, it can never be spotted in advance by the people who will be taken in, because they are people who want to be taken in and the scheme is designed and decorated to look like the things they already believe in.
Most people want more money than we deserve, and the attention and flattery of someone delightful. The means used to con people is built into human nature. We are shallow. We will always choose the svelte over the tubby, the successful over the struggling, the sleek over the meek, and the photogenic over the good. And as long as we do, we will be cheated and lied to.