The GameStop stock saga — with its element of David versus Goliath, not to mention its head-turning price gains followed by stomach-churning drops — may have been all the talk of Wall Street in the last couple of weeks.
But that is just a sideshow.
A bigger issue for investors may well be the increasing number of Ponzi schemes, which use money from new investors to pay earlier investors until the fraud falls apart. Many of the latest fraudsters have been preying on people who feel they lost out on the big stock market gains of the last few years. The schemes have failed because they did not have the sophisticated apparatus of two of the biggest in the last decade — the multibillion-dollar ones perpetrated by Bernard L. Madoff and R. Allen Stanford.
Those both failed in the financial crisis. What is different now is that Ponzi schemes are collapsing while financial markets are soaring. That worries the lawyers and academics who track the schemes, because the trend is likely to only get worse when the markets do pull back.
Over 600 Ponzi schemes have been detected in the past decade, said Marie Springer, who teaches at John Jay College of Criminal Justice in New York and wrote a new book, “The Politics of Ponzi Schemes: History, Theory, and Policy.”
Referring to Mr. Madoff’s prison sentence, she said: “If he got 150 years, why would anyone start a Ponzi scheme and think they’ll get away with it? But they do. They think they’re smarter.”
Kathy Bazoian Phelps, a…
