You don't have to be a big-time money manager like Bernie Madoff to execute a successful scam. Greg Hays, whose firm Hays Financial Consulting specializes in detecting and unraveling frauds, says they all start the same way: with one really good line of BS.
Pick a Scam
The Ponzi scheme uses cash from new investors to pay dividends to old investors, so it looks like profits are soaring. In a pyramid scheme, every "investor" lures a new batch of suckers for a cut of all future entry fees. A multilevel-marketing scam has "reps" sell some product but entices them with commissions on sales of those they, in turn, recruit.
Work an Angle
Whenever Madoff was asked how he turned such high profits (about 10 percent annually), he cited "split-strike conversions," a proprietary system that he couldn't discuss. "There's usually some cryptic angle," Hays notes. Marketing scams often push products with secret compounds that, say, triple muscle mass, hair thickness, and brain cells.
Spread the Word
Any huckster worth his salt (or someone else's) relies on word of mouth. "They have to get people singing their praises early," Hays says. Pyramid promoters cut checks regularly, and multilevel marketers shell out big "bonuses" for recruitment.
Run for the Border
By its 11th round, a pyramid that began with six takers needs 362,797,056 more. "There aren't enough people to sustain these schemes," Hays says. Skip to a country without extradition laws. We hear Vanuatu is lovely this time of year.
Make it Legal
Why not just make the whole thing legal? Open a bank and get it backed by the FDIC. Don't think a bank is a scam? How would you like to create money out of thin air, loan it out, and charge interest? If so, open a bank.
Think of it this way: A bank needs to hold a certain amount of its deposits in reserve at the Federal Reserve. This is called the reserve requirement. It is pretty low these days and good luck trying to find out what it really is. Somewhere below 10%.
So if I walk into a bank and put $10,000 into a checking account, I can still access the money. But the bank can take $9,000 and lend it out. So what happens if I go and try to get my $10,000 back? Well, they have enough from other depositors to cover me. But take any bank in the US and if over 10% of the people try to take their money out, the FDIC closes the bank pays off the depositors. As the bank owner, you have made all your money and you get away rich without any legal problems.
