Ponzi Schemes and Hegemony

By Karen Sternheimer

I recently blogged about corporate crime and elite deviance, particularly why and how some companies might sell tainted products or swindle investors. Yes, greed and opportunity are major reasons that people try and get away with this kind of behavior. But what is our part in all of this?

The concept of hegemony is useful here. Italian social theorist Antonio Gramsci described how those in power don’t necessarily maintain  their power by force, but by the process of creating consent. For a democracy like ours to continue, a significant number of people must agree that the system is legitimate and agree to keep it that way. This is done in part by encouraging people to think that the system is based on common sense.

Let’s consider the case of Ponzi schemes, like the one Bernard Madoff recently plead guilty to perpetrating and a Texas-based executive, R. Allen Stanford is accused of creating. Each of these schemes involved thousands of clients and over a billion dollars. In Madoff’s case, it is now estimated that he bilked people and charitable foundations out of $65 billion.

In a Ponzi scheme, hucksters promise high returns on investments and initially gain credibility by paying original investors with new investors’ money. The early investors can then vouch for the schemer and believe it is legitimate, encouraging others to invest as well. Like pyramid schemes, which promise a simple business opportunity that can pay big if you can bring new people in the business, a Ponzi scheme’s success depends on getting others to agree to participate.

While both pyramid and Ponzi schemes are illegal in the United States, they are not as uncommon as we might hope. People have attempted to lure me into pyramid schemes twice. When I was just out of college and looking for a job I responded to an ad in the employment section of the newspaper. The ad was vague but promised management opportunities for people with good communications skills, so I went to what I thought was an interview in a very fancy office building in midtown Manhattan.

Instead it was a meeting with others involved in “the company.” I can’t remember what the “product” was, only that the meeting had the feel of a religious service with people testifying how this business changed their life. “I used to drive a cab, now I drive a Porsche!” one man excitedly shared. Others had the same over-the-top enthusiasm that told me this “business” was suspect—that and the fact that I had to pony up a few hundred dollars to get started and find others willing to do the same, who would become my “employees” and I would get a share of their sales revenue.

A few years later, a friend (who was a newly practicing attorney) encouraged me and other friends to come to a meeting about a new business opportunity. I was very skeptical—as a graduate student at the time, I was busy with my research and had no interest in starting a business. But another friend convinced me that we could at least go and see what it was about so as not to offend our pal. Within seconds I had flashbacks of the first meeting: overly excited testimonials about how easy it is to make tons of money selling things I didn’t want to sell, all for a low start-up fee, of course.

I told my attorney friend that this was clearly not a legitimate business; for one, the product was something that anyone could buy at a grocery story for a fraction of their asking price, and the only way to make money seemed to be to lure others into the scheme. He looked dejected as he realized that I was right.

So how does an attorney get lured into a scheme like this? The same way so many investors placed their financial trust in Ponzi schemers like Stanford and Madoff: they wanted to get rich fast. As Los Angeles Times business columnist Michael Hiltzik noted, Americans often see wealth as just around the corner, a magical investment away from being ours (think lottery tickets). This, Hiltzik argues, is why many people identify with the rich and want them to pay lower taxes. We think we might be one of them soon; so, as Joe the Plumber famously did during the 2008 presidential campaign, argue that tax increases for the wealthiest 1% are unfair.

Back to hegemony now. In order for get-rich-quick schemes and investment fraud to work, participants must buy in to not only the scheme, but the legitimacy of the social system itself. One way that Madoff was able to defraud so many people was that he was once chair of NASDAQ, a major American stock exchange. Rather than a fly-by-night con artist, he had many long-term ties to the legitimate financial industry.

He also allegedly didn’t let just anyone participate in his scheme; by concocting an air of exclusivity he created the impression that it was a privilege to be accepted. Wealthy and aspiring wealthy people are used to “special” opportunities--hedge funds, for instance, are typically only open to people with lots of money and promise to beat the market. So the cultural belief that the rules for wealthy people are different might have led some investors to believe that the promise of unusually high returns every year was a realistic expectation.

The people who got ripped off did not consent to losing all of their savings. But they—and most of us—generally consent to the system of beliefs that enabled it to happen. Suppose one of the bilked investors was walking down the street and was robbed at gunpoint. They might give the robber their wallet that one time, but they would not agree that the means was legitimate and probably call the police immediately. Unlike Ponzi scheme victims, they would not encourage their friends to also give the robber their wallet or seek them out again later to give them more money. Only hegemony can enable thieves to take our money and make us, at least initially, happy to give it to them.

Comments

[michael webster]

This is a pretty decent overview, but you are incorrect about the rate of return Madoff promised.

A usual ponzi scheme has high rates of return, which entices the naive investor to think that he can beat the system and earn risk free or house money after he has made back his or her initial investment.

Madoff was far smarter. What he was promising a realistic rate of return, but with no volatility or risk. Lack of volatility is of interest to the long term investor. These investors did not want to get rich fast, they wanted to maintain their capital and grow at a "safe" rate.

I think that your overview has merit, but some of the particular facts needed to be corrected.

[Ron C. de Weijze]

Can conspiracy theories be self-fulfilling prophecies? I believe many schemes in society are like the ponzi or pyramid ones. Isn't it basically favoritism towards one another, nepotism or cronyism? The more members a groups gets, favouring each other over non-groupmembers, the more democratic influence they get. Then where's the glitch? I think (yes this is all very speculative) that it is fooling democracy, by claiming that one voice or vote really is many and should be counted as many, thereby gaining the sought-after power and influence. What is held covert, is that this outcome was the incentive to become a group in the first place. Independence, as in judicial, journalistic or scientific fact finding and truth maintenance, is sacrificed. It is the 'yes we can' in politically 'correct' hallelujism.

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[Suzie Sebastian]

I can imagine how I myself could have been pulled into this Ponzi scheme quite easily if I had any money whatsoever to give to the guy. I did not come from a family with much money and I have always wondered and thought that the people who have money must have some special secret or special connections. I have had the opportunity to travel and spend time with quite a few people with a whole lotta dough and while in their company felt as though I was richer just being in their breathing space. If I had a friend who introduced me to Bernie and said give this guy your money I probably would have gone to my piggy bank or sold the stuff in my garage to scrape together as much dough as I could give to the guy. The whole time I would feel as though I had arrived with the In-group and my success was around the corner. I would probably be thinking how the heck did I get so lucky to meet this guy and probably wouldnt even asked for a formal receipt. We all know that success is almost always more as a result of whom we know rather than what we know. Bernie Madoff is extremely charismatic and brilliant. I am sure more people than those that would like to admit it would do the same thing.

[chance wood]

Is there really "two America's"? One for the rich, and one for the poor? After the outrage of the stock crash, monetary malfeasance of investor money and just plain unethical behavior on part of a select group of people on Wall street. I, among many other have to say yes.

I have to agree with Michael Webster, the American public was spoon fed that if we should put money in 401k's, put money in a hedge-fund, put your money in pensions and just leave it there, don't worry about it. And that what people did, the we're investing in the long-term, doing the "safe thing" and got burned.

More than 2 million people watched John Stewart grill Jim Cramer like a New York steak about his part in creating an aura of security in his investment picks, which ultimately evaporated. The public expressed outrage over Bernie Madoff, and AIG. Nearly every day brings new tales of outright deception and I don't think anyone should be spared in this environment of accountability and faireness. We're the ones holding the check for corporate/white color crime, and it feels like the American public are the ones capitalizing the adventure of the elite's on Wall Street with our pensions and hard earned money.

[Brooke Robison]

Upon reading this article at first glance, I was convicted because I myself have fallen for such a scheme at the encouragement of a family member. That family member is notorious for being swindled by these types of companies yet he keeps on applying to them. I was unaware of this at the time. So first tell me why someone would continue to invest in this type of company even after multiple rip-offs? Is that not like being stolen from and then asking to be stolen from again? I am appalled that greed would overpower someone to the point that he would swindle his own family and friends for an unworthy cause. This article is definitely a warning that these kinds of companies are still out there and to be aware and watch out for them. It is so true, that hegemony plays a major role in the swindling process. I can see that many times the reasons for the choices a person will make is based on an attribute seen in someone else that is perceived to be classified in a higher class system then them. An example I could think of would be a fashion fad. Those in a higher class would be able to buy expensive designer accessories like the Louis Vuitton brand, which is so plain yet extremely wanted. The purse is not wanted because it is extremely beautiful but that it is designer. It has an implicit stamp of elitism upon it. Those in a lower class system continue to buy look-alike products to somehow fit in, or play like they are part of the higher class. Thus the chase for more than what we have or for something better than what we have is what I perceive to be at play in everything that we do even the choices that we make.

[Brent Sianez]

I agree that greed motivates people to commit such crimes and/or become participants in schemes. As an economics major I am familiar with the idea of money as motivation. I agree with the concept of hegemony, as a participant in what we called social marketing (the politically correct word for pyramid schemes). I recruited other people saying how much it could help them – when I was doing it for my benefit. The fascinating part about my experience was how the company maintained the image that it was helping its employees, and at first I really believed I was helping other people. It wasn’t until seeing some of my close friends’ failures and losses that I realized the problems with these types of companies.
I don’t agree with the assumption that all participants are exploited. From my experiences, the money is real. Even the products were of great quality, but overpriced. Unfortunately the real money was in recruiting new people, not selling the products. I witnessed a lot of people making good money and I did pretty well myself, but I also saw people losing their money. I feel that in joining these companies you are being exploited, but you also become an exploiter. Your job is to find more people to exploit, and the targets are usually friends. I thought that “employing” my friends was going to help them make the same money I did instead I felt like I alienated my friends.
She says that such schemes are illegal, which seems odd because I was involved with two companies and never saw anybody penalized. How do these companies get so big? I felt I knew what I was getting myself into when I joined, but I didn’t know until reading this blog that they are illegal. Greed is a reason to join these companies, but how are so many Americans joining these social groups of thieves without knowing what they are getting themselves into?

[Jack Shaw]

Ponzi scheme which promises high rate of return with low risk. This type of schemes have a controller/promoter or mastermind who starts the scheme.