Miracle Men and Exclusivity: Key Elements of the Ponzi Scheme

Is it not odd the way people are lured into frauds with the simple bait of exclusivity and Miracle Men.

This idea came from a conversation with a friend about marketing and how active you need to be on line. I remarked that it was interesting that some of the biggest frauds of the last couple decades used little real advertising but instead relied on word of mouth and cultivating this idea of exclusivity and access to a miracle man or woman.

It says something about us as a species and probably a country that we keep seeing frauds like these take in 100s of millions of dollars, while people with legitimate products and services work their buts off just trying to get noticed. There was a new one that just came out involving an actor who told people his company had exclusive distribution rights for a bevy of movies. Apparently he didn’t, but he took in hundreds of millions.

Understand I come at this topic from a long-time interest in the power of advertising and marketing. I took two courses of economic geography in college and I was interested enough in advertising to consider trying to go into it as a career and even read up on it soon after college. I particularly liked David Ogilvy’s books.

But alas, the classic ad agency I was interested in was consumed into something else and so I went into another industry, newspapers where I worked on the business desk which allowed me to write about businesses and economics and trends and fraud.

Frauds that take in a lot of money are interesting. They can start in just about any industry, but the key to their growth is eventually getting the attention and getting access to wealthy investors. Once a fraudsters gets a few really rich folk on board, they tell all their buddies and then everyone wants in.

Capturing the interest of the key investors, seems predicated upon having a Miracle Man or Woman at the helm. Someone who tells everyone that he or she is the only one that can do this. That they will disrupt an industry and they talk about the future as a certainty because they are going to make it happen. You can find Miracle People in every part of our society. They’re in the nonprofit sector, government and business. They can even be in little leagues and other community-based organizations.

Elizabeth Holmes, the former CEO of Theranos, was such a person. She was not only someone who could tell you how special and great she was, but she had bakers who believed her. If you recall she was going to change medical testing with a test that could detect all kinds of maladies from one-blood drop. She got access to the wealthy set due to birth, she came from a privileged background for sure. The key is that people want to believe in the miracle person. It’s just something that I’ve seen. Maybe it’s a desire to be among a select group of people who recognize genius? I don’t know, but I do know believing in a miracle person can blind you to his or her faults.

There have been legitimate miracle people, who, though probably overhyped, at least delivered quality products and services. The fraudsters tend to imitated these legitimate people, even down to the way they dress.

One of the best example of this type of person and fraud is probably Bernie Madoff, the man behind what the SEC called a $64 billion Ponzi scheme that sucked in something like 4,000 investors over the decades it went undetected.

By the way, if you like history about scams, check out Mitchell Zuckoff’s book, Ponzi Scheme. It’s a great read about the man whose name is now used to describe a particular type of fraud. Fascinating, really.

For those that don’t remember, Bernie Madoff was a fixture on Wall Street and well respected for returns that were better than market average to his investors over the course of his career. He was also considered an innovator, with his firm contributing to the development of the NASDAQ and he sat on the board of governors for the National Association of Securities Dealers and served as an executive of that board. What’s interesting is that a Boston portfolio manager, Harry Markopolos, had reported to the SEC that Madoff was running a Ponzi scheme almost a decade before he got caught, but, in a show of how strong the belief in a Miracle Man can be, the SEC did not appear to actually dig into the allegations because it was Madoff.

I imagine most schemes arise by accident.

A lot of frauds I think start off as accidents. Say you’re a securities trader on Wall Street. Well, a friend or family member comes to you and says, “hey, can you help me out? Can I give you some money to invest. Or you even go to friends and family with what you think seems like a sure thing and ask them to invest. In both cases, something goes wrong and it looks like you’re going to lose their money, so you find another investor and use their funds to pay off the family member and even give them a profit. Next thing you know, that family member has told some friends and other relatives what a genius you are and you agree and then you start to build up more and more investors and pretty soon, you don’t have to do any real investing work, other than just enough to cover your tracks and you certainly don’t have to advertise.

Why? Because people like to brag. You hear people talk about their investing and business deals and they generally don’t like to tell you about failures or little profits. They like to tell you about the great deal they got, or how they’re involved in the next big thing thanks to a connection with a Miracle Man. People like to let others into the club. It makes them feel big and generous and that somehow, they’re special because they hold the keys of access to the miracle people. It earns them a special position in their immediate community.

Clearly this says something about our psychology and its something I think people need to look out for. If someone tells you they are the only person who can do something, it might be true, but let’s face it, with almost, 8 billion people in this world, probability doesn’t favor that conclusion. And if you are being granted access to a deal because of who you know and who they know, I would be careful there too.

Madoff and almost every other investment scheme I saw unearthed in the fallout from 2008, built their client lists from friends and family, people they associated with through their religions and leisure pursuits. These people then connected others to him in an ever widening wide. It collapses when too many people start needing and asking to cash out of the scheme.

The jaded part of me wonders after all these years why no one has come out with a book called something like, “Market Like a Ponzi Scheme Master,” that would tell people how to create these ideas of the Miracle Person and exclusivity as a marketing strategy. I’d do it, but the part of me that believes we can be and should be better as people, the part of me to be honest that I hide deep down inside might die if I actually wrote such a crass work. I don’t want to lose that part of me. It’s just hanging on by a thread these days.

As for those of you who have read my books or follow me here and else where, I assure you that you are already part of an exclusive club as a result and I’m pretty sure I’m the only one who writes like me. At least I hope so.