Lessons from the Hamilton Ponzi

February 7, 2017

 News has been slowly coming out about one of the latest Ponzi schemes. Like most, it is a tale of greed and manipulation but what sets this one apart is the level of clientele that it affected. While many Ponzis are targeted at the average investor, this one, much like Bernie Madoff, hit several high-power professionals as well. So how do investment professionals fall for a scheme like this?

 

A successful Ponzi is usually a combination of several different factors. Often the perpetrator uses personal relationships to sell the investment. The deals are based off a friendship and the appropriate due diligence is ignored. The “product” is usually something familiar and is pitched as a sure thing with a high return. It was common knowledge how well the Hamilton play was doing and its high-ticket prices made it easy to imagine there was a way to make money. CDs and real estate are other common substitutes where investors are told they can never go down. Lastly one of the most common selling points is that of an “inside man.” To keep the deal from sounding too good, the perpetrators justify the high returns to that of someone who has special access to the market.

 

So how could this have been avoided? There are typically several red flags that come into play. The first is the promise of outsized returns. Investors were promised over 10% returns risk-free. With five-year treasuries still yielding below 2%, that represents a good base-line for what a truly risk-free investment looks like. The entire structure of this deal was based on an inside man. Supposedly they had connections to the producer where they could get discounted tickets. Their entire product was based off an exception instead of a way of adding value. Lastly was the selling of something that is trending. The familiarity of Hamilton wove a narrative that was not only easy to fall for but also to sell to others as well.

 

Alternative investments continue to gain traction as greed in the markets continues to grind higher. Investors are finally feeling confident to put their money to use but have been scared by the stock and bond markets. However, investing in these alternatives only hides an investment that is typically more volatile and expensive, if not outright fraud. As both individuals and professionals, constant vigilance is incredibly important in these times.

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