When you hear about modern Ponzi schemes, you usually think of wealthy networkers like Bernie Madoff or con men who bilk people in their local communities by promising them high profits with low risk. Thanks to the Internet, though, scams have gone global and anonymous. Even Google and Microsoft make money off the suffering of others.
Of course, "Ponzi scheme" is a term used only after someone gets caught. The proper euphemism is "high-yield investment program" or HYIP for short. Carlo Ponzi, the scheme's namesake, promised a 50% return on investment after 45 days. His deliveries on this promise caused a sensation. (The book Ponzi's Scheme offers an expertly-written history of the scheme itself and of the community that celebrated it even in mainstream media.) Carlo's promise of 3.3% of principal returned per day, for a total of 150% of principal invested, lives on in HYIPs.
If you use AdBlock, turn it off for a brief exercise. Go to Google or Bing and search for "HYIP." Before the search results you'll see sponsored links paid for by an industry built on the Ponzi scheme. Google offers to sell me a book for "serious investor clients" to separate fraudulent programs from legitimate ones "that may make millions of profit [sic]." Bing is awash in paid placements for HYIPs: its ads tout "up to 500$ [sic] a day," "200% to 700% profit," "600% Guaranteed Return," and "2% daily or 60% Monthly on Your Money." Most of these programs trade in payment instruments like Liberty Reserve that emphatically state that transactions are "final and not reversible." Players are putting cash up front and hoping to get a huge return from other players' stakes.
In the search results themselves, you find dozens of forums where people vouch for their favorite "paying" programs. On the most popular, TalkGold, banner ads scream out payout rates as much as 10% per day — triple what Mr. Ponzi himself paid — while tiny white text cautions, "Watch out, as many are pyramid related schemes which may be illegal." Inside the forums for individual programs, many threads have thousands of posts. Inevitably they start out hopeful, the early replies playfully skeptical, followed by proud excerpts from payment accounts showing funds received, eventually leading to slight delays due to technical hiccups like web site upgrades, and finally longer delays. The denouement of a program follows the five stages of grief: players first deny that their money is gone, then express anger not at the administrators but at pessimistic players on the forum, then bargain by rationalizing that the program will come back soon if only people would stick together, then fall into depression that their stake is gone (but the program looked so promising!), and finally they accept the situation and move on to another program. As with any investment, players advise diversifying and there are undoubtedly some Michael Milken types who find enough returns for a long enough time to make a good amount of money.
I follow the HYIP community as a very sparse part-time hobby. I find it remarkable how people will rationalize what is clearly an unsustainable program when it supports their livelihood. Ignorance of these programs caused major problems in post-Soviet Russia and Albania. In Russia, players lost as much as 10 billion U.S. dollars in an investment scam called MMM. In Albania, corrupt officials endorsed Ponzi schemes and when the schemes collapsed, so did the government in a bloody rebellion in which thousands were killed.
All this brings me to JustBeenPaid (JBP), a novel scam which claims about a million members and which promises 2% returns per day. When JBP can't pay these returns, it does a "restart" in which its players instead have "2x2 matrices," pyramids with two people at each of two levels beneath the top. When $20 comes in for each of the 7 positions in a pyramid, the one at the top of the pyramid gets $60. This mode actually makes JBP profitable for its founder, Frederick Mann: the next level of the pyramid pays off when only four new investors come in, so $80 comes in and only $60 is paid out. I'm drawn to JBP not because of its Ponzi-pyramid hybrid structure but because of its conference calls.
Every week JBP hosts a conference call with Mr. Mann, a man with a South African accent and smooth, measured diction that reminds me of the late Bob Sheppard. A forest of Flash-based media players dots the JBP conference call page, each with a recording of one call. (The March 15, 2012 call was removed because in it Mr. Mann inadvertently revealed that JBP was a Ponzi scheme, according to Patrick Pretty, a Ponzi watchdog.) Frederick does not dial into the call himself; instead he is on a three-way call with Dale, a Floridian woman who moderates the call and occasionally helps to answer questions.
JBP calls are like radio dramas complete with their own introduction, read every time by moderator Dale: "For those of you who may not know, Frederick Mann has an extensive diverse background as an author; an entrepreneur, having been involved with several successful businesses; and it would seem he's also a mathematical genius, making this program possibly the only indefinitely sustainable high-return program on the planet! With JustBeenPaid, Frederick's only true desire is to help everyone become financially free." I've listened to nearly every JBP call and recently, for the first time, I called into one live. Most of the callers are from the U.S. or Canada, although Mr. Mann describes the program as stateless and frequently expresses anti-government and anti-American sentiments with the slightest provocation. (Frederick also doesn't trust doctors other than his own Chinese one and he occasionally refers to schools as "concentration campuses.")
Most callers thank Frederick for JBP, drawing a warm "You're welcome." Some ask questions about their account status which usually results in a request to file a support ticket with the help desk (which has been "reorganizing" for the last month). Others ask what it is they're buying for their $10 investment that returns a $5 profit in 75 days; the answer is always "advertising" but there is no detail about what is being advertised that bears such a huge and quick return. Occasionally would-be players ask where the money comes from. Frederick has a flowery pre-written spiel about two levels of upgrades available to members and states that he is working on vague, non-specific products to help people be more successful and healthier. Whether he intends to sell these products is unclear, as is his target market: Free World Order, one of Frederick's many colorful web sites, already contains reams of incoherent anarchist ramblings and lots of YouTube clips from frustrated people who share his hatred of modern society. Lastly, a common question is about matrices, the pyramids mentioned earlier. Frederick usually lambasts participants for not "cycling their matrices" by buying additional spots or recruiting others to fill the pyramidal structure, referring them to FAQs like this one which helpfully describes a matrix using a graphic of a pyramid and to condescending guides like "The Power of Doing Things Right" which you can only read after you dismiss a giant ad for JustBeenPaid. (You might want to turn AdBlock back on at this point.)
All this brings me to my question. Giving a false name and city, I asked Frederick on a recent call whether he gets any money for JBP from the general public or from outside investors like venture capitalists. My question came late in the call, so Frederick reiterated that money comes in from members buying upgrades and that he's working on developing new products. I complimented him on these new products but I asked whether, today, all the money being paid to members came from the pool of existing members.
"Yes," came the reply. After some more digression about plans for advertising revenue, Frederick offered that "We have about a million members in JBP now."
"That sounds great," I replied. Based on previous calls, Frederick and Dale love it when callers compliment them. "That sounds like a great little social network to be monetizing here. … Those payments coming in from the million members right now are just being redistributed to those million members. None of the money is coming into the program from other non-members and none of the money is going out of the program to other companies. It's just circulating in the program. Is that right?"
"That's essentially right, yes," answered Frederick.
"OK! That's all I wanted to know. Thanks, Frederick, you have a great evening," I said.
The conference call recording is available for download as of July 1, 2012. My question starts at about 47:20 in.
Update: Patrick Pretty, the HYIP watchdog mentioned earlier, has reported on this as well.