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Transcription of interview with Tamer Frankel on September 24, 2012.
Douglas Goldstein, CFP®, Financial Planner & Investment Advisor
Tamar Frankel is a law school professor at Boston University Law School. She is the author
of a new book called the Ponzi Scheme Puzzle.
Douglas Goldstein, financial planner & investment advisor, interviewed Frankel on Arutz Sheva
Radio.
Douglas Goldstein: Give us a definition of a Ponzi scheme.
Tamar Frankel: A Ponzi scheme is a scheme in which the con artist sells shares or some
other securities to the public based on a story about the source of the money. Usually
the money is very high, the returns are very high, but in fact there is no enterprise and
there is nothing except the money comes from other investors that invest later. At the
beginning, the first group of investors get quite a bit sometimes 200 percent and their
investment then it goes down to 150 and 100 and finally the largest number of investors
get nothing because there is nothing to back them up.
Douglas Goldstein: This is also what would be referred to as the pyramid scheme?
Tamar Frankel: Correct that is because at the beginning the investors receive quite
a bit but there’s a small group. At the end, there is a large number of investors
who get nothing.
Douglas Goldstein: Why do people fall for Ponzi schemes?
Tamar Frankel: These schemes attract a certain type of person but also all of us. First of
all, they’re too good and they are unique. In this case, they always offer an enormous
return in a very short time. In addition, the stories of the so-called source of the
money are very interesting and very intriguing so people stop to listen and they can be exciting.
There’s one con artist said it’s the gold, that’s not all of it, he said it’s the
glitter, it’s the [inaudible 0:03:15] so some people are very excited about it. In
addition, it is not offered to just everybody. It’s offered to some and that of course
makes people feel unique. The result is looking around seeing that many people did make a
lot of money in the market in an hour or two hours so people say, “Why not I? Why is
this not my chance to be also rich very soon?”
Douglas Goldstein: Don’t they remember the words, “If it sounds too good to be true,
it probably is?”
Tamar Frankel: They don’t remember that and that’s why some do. It’s not that
everybody falls for it, but a significant number of people fall for it and at the same
time, they focus on that instead of other things. Now one thing is clear, these types
of con artist pay on time and always pay until they stop so that you have eight banks in
the United States who fell for a scheme of this sort to the tune of about $1 billion.
One of the reasons was that the payments were made and another unfortunately was that the
investment went to India and nobody went to India to check until this payment stopped
and then they found out there are no Indian businesses at all.
I would add also that people rely on other people and that is efficient, “Instead of
checking for myself, sometimes I ask, sometimes I’m told and so why not do that?” In addition,
sometimes people follow in affinity groups. In Australia, there were number of policemen
that fell into such a scheme and that was because they listen to their own and relied
on their own instead of looking at the [other source].
Douglas Goldstein: Don’t we rely on our governments to protect us from this sort of
manipulations?
Tamar Frankel: There are limitations on protection. First of all, governments at least in many
countries including the United States and I think Israel as well don’t regulate businesses
and so if someone says, “I have a business” the government doesn’t regulate it, not
even a risky business after all IPOs are risky because they have no real public history,
but governments require only disclosure but to find out that the disclosure is fraudulent
is a very difficult thing and not preventive. It can come out later so there is a place
for people to protect themselves to ask the questions.
When they meet, the people are nice and they are very good sales people and one of the
problems is that it is very hard to distinguish good salesman from good salesman who are selling
fraud. It’s very hard to distinguish a new business from a new business that has no business.
That is why they are very close to every legitimate arrangement that is why it is so difficult
to avoid them.
Douglas Goldstein: What are the tools people could use to identify a con man?
Tamar Frankel: First of all, they may look at themselves. I, for example, can drink wine
and not become an alcoholic, but if
I
take one cigarette, I’ll take two packs a day very soon knowing that I don’t touch
cigarettes anymore. I think the same applies to each of us. We have a tendency. If we get
excited about the possibility of becoming a zillionaire in two hours then we should
never accept any invitation immediately. We should never accept free bids or free lunches
because that will induce us to then reciprocate. We shouldn’t accept story that involved
a secret because that means I’m trusted and therefore I have to trust you.
There are some rules that one can give oneself if one knows that this is the tendency and
that is you never make a decision on the spot. You say, “I’ll think about it.” You
separate friendship from business. I think, in that case, you can then protect yourself
especially if you’re smart and you understand what your tendencies are.
Douglas Goldstein: What was your goal? What did you want readers to take away from it?
Tamar Frankel: I started really because I was very curious. I’m teaching about people
who hold other people’s money and that involves trust and so I’ve written and taught about
trust but then one person said to me, “You’re dealing with trust, why don’t you deal also
with people who mimic trust?” I’m not a journalist, I didn’t go to look and to
try and talk to people but I went to LexisNexis which is my source and I punched Ponzi schemes.
I was flabbergasted that there were hundreds of these cases going way back to the 1800.
Ponzi is only in 1800, which is more before Ponzi. In 1884, a former president of the United
States, Ulysses Grant, fell for such a scheme. I began to look at patterns. I said to myself,
“What are the patterns?” and that is what came about. I wanted to write the book because
I wanted to share what I found with people who are interested in the same thing and then
I asked how can we protect ourselves and I came to the conclusion that warnings are not
sufficient and self knowledge and really asking people who know is a better way.
Douglas Goldstein: How can people learn more about your work?
Tamar Frankel: Although I’m not a good salesperson, but if they order my book on Amazon, they
can get it in a price that is not very high.
Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel. Securities offered
through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried
by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
Disclaimer: This document is a transcription and/or an educational article. While it is
believed to be current and accurate, divergence from the original is to be expected. The original
podcast can be heard at https://sites.google.com/site/goldsteinradioshows/. All information on this website is purely
information and should not be used as the sole basis for making financial decisions.
The opinions rendered herein are those of the guests, and not necessarily those of Douglas
Goldstein, Profile Investment Services, Ltd., or Israel National News. Readers should consult
with a professional financial advisor before making any financial decisions. Please see
the complete disclaimer at https://sites.google.com/site/goldsteinradioshows/.