Now consider the pyramid from the investor/recruit/victim''s perspective -- after the entire scheme has collapsed around him.
The victim, like the first investor, thought of himself at the top of the pyramid but suddenly realizes that he is actually at the bottom, unable to find people interested in the program to build out his downline. He is not alone because mathematics shows that MOST investors will find themselves at the bottom of the pyramid when it collapses. The very structure of this matrix dictates that whenever the collapse occurs, at least 70 percent will be in the bottom level with no means to make a profit. They all will be out $500.
In our example, even those people one level above the bottom will not have recouped their investment. They each will have paid a membership fee of $500 and collected commissions of $150 for each of three recruits, leaving each investor in the second-from-the-bottom tier at least $50 shy of his break-even point. In short, when the pyramid collapses all the investors in the bottom two levels will be losers. Adding together the number of victims from these bottom two levels shows that 89 percent of all the pyramid''s participants (108 of 121 investors) are doomed to lose money.
A Ponzi scheme could yield even worse results for investors, because it does not pay out any commissions at all. This can have disastrous consequences, as exemplified by Charles Ponzi''s infamous fraud in the 1920''s. Charles Ponzi, an engaging ex-convict, promised the Italian-American community of South Boston that he would give them a 50 percent return on their money in just 45 to 90 days. Mr. Ponzi claimed that he could pay such a high rate of return because he could earn 400 percent by trading and redeeming postal reply coupons.
These coupons had been established under the Universal Postal Convention to enable a person in one country to pre-pay the return postage on a package or letter sent back from another country. For a short time after World War I, fluctuations in currency exchange rates did create a disparity between the cost and redemption value of postal reply coupons among various countries. However, Mr. Ponzi discovered that he could only make a few cents per coupon and that handling large volumes of coupons cost more than they were worth.
He stopped redeeming any coupons, but continued to collect investors'' money. When he actually paid a 50 percent return to some early investors, his reputation soared and Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period—and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons. Mr. Ponzi used the funds to buy a stylish house in the best part of town and purchase a large minority interest in his local bank, the Hanover Trust Company.
Eventually his scheme began to unravel, bringing ruin to the bank and thousands of investors. When Mr. Ponzi began to overdraw his accounts at Hanover Trust, the Massachusetts Banking Commissioner ordered Hanover Trust to stop honoring Ponzi''s checks. The bank refused and even issued back-dated certificates of deposit to cover Mr. Ponzi''s overdrafts. A few days later, the Banking Commission took over Hanover Trust, and Mr. Ponzi was arrested for mail fraud. In the end, Charles Ponzi owed investors over $6 million, an enormous sum of money for that time. He was convicted of fraud in both state and federal court and served ten years in prison.
