Chain Letters and Ponzi Schemes
M. E. Kabay, PhD, CISSP-ISSMP
Professor of Computer Information Systems
Norwich University, Northfield, VT
This is another in a continuing series devoted to how ordinary people can protect themselves when using the Internet.
A particularly annoying form of junk e-mail is the chain letter. Some chain letters include obviously ridiculous stories about terrible diseases and accidents that have befallen people who refused to forward the nonsense, but others are focused on getting victims to send money to a list of names and then add their names to the list before sending it on to everyone they know.
This type of pyramid is known as a Ponzi scheme, which is an investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised from later ones. The scam is named after Charles Ponzi (1882?-1949), an Italian-born speculator who organized such a scheme in 1919 & 1920). The "Ponzi scheme" tricked thousands of people in Boston when Ponzi guaranteed a 50% profit on contributions in 45 days and a doubling of value in 90 days. The con man claimed he was redeeming 1-cent Spanish postal certificates for 6-cent US stamps – a claim ridiculed by financial analysts at the time. Nonetheless, Ponzi took in around $15 M (in 1920 dollars, mind) and stole around $8M, paying out the rest to the gullible twits who ill receive 12¢ on the dollar. Six banks collapsed because they invested their depositors’ funds in the scheme. Ponzi eventually served over three years in jail but escaped in 1925.
The modern-day e-mail Ponzi scheme typically includes passionate assurances from vaguely identified people about how skeptical they were about the scheme but how they succumbed to curiosity, participated in the scheme and earned vast amounts of money (e.g., $50,000) within a couple of weeks. The letters often include assurances that everything is legal and point to nonexistent postal information phone lines or claim “As Seen on TV” at various points in the letter.
These letters claim that all you have to do is send in $1 (or $2 or $5) to each of a short list (e.g., 4) people to receive their “reports” and then add your name and address to the list while removing the first one before sending a copy of the new letter to as many people as possible. Some letters go through computations involving such assumptions as “Imagine you send out a hundred / thousand / ten thousand) messages and get a mere (1% / 2% / 10%) response” and then calculate enormous returns.
In fact, the “reports” are nothing but one-page, meaningless blurbs about chain letters. The scammers are trying to get around regulations such as the US Post Office’s bar against fraudulent uses of the mail.
A superficially similar phenomenon is known as multilevel marketing. In this non-fraudulent, legitimate system of selling products and services, people are encouraged to recruit distributors from among their friends and acquaintances, but the emphasis is on the value of the products. No one claims that anyone is going to become wealthy without work, and there is no demand for investments. The products have an established market, and the company makes money through sales, not through recruitment.
“Gifting Clubs: A New Twist to the Age-Old Pyramid Scheme” from the Better Business Bureau < http://www.bbb.org/library/giftingclub032000.asp >