Just over a year ago, Bernie Madoff’s multi-billion-dollar Ponzi scheme crashed and burned. Prosecutors estimate losses at $64.8 billion. You’d think that that would be a wake-up call for investors…but similar schemes are thriving.
People who are still too trusting in “what’s too good to be true” schemes have what CBS News calls “pigeon fever,” because “pigeons” is a term all con men call their victims.
Ponzi Schemes have been around forever. The term, “Ponzi scheme” is named after a notorious scammer, named Charles Ponzi, in the 1920’s. At its core is a scheme that robs later investors to pay off early investors. This is a variation of robbing Peter to pay Paul. Usually, there is no actual business behind the scheme, it is strictly money transfers (for example, Bernie Madoff was faking stock trades for years.) Eventually, the scheme collapses as the scheme continues to pay unrealistic returns to investors and the pool of new investors begins to dry up. Unfortunately, Ponzi schemes have been around far longer than 1920. Charles Dickens’s novel, Little Dorrit, written in 1857 described a Ponzi scheme. Amy Dorrit grew up in a debtor’s prison with her father. After many twists and turns, the Dorrits inherit enormous wealth only to lose it all to Mr. Merdle’s bank in a Ponzi scheme.
In 1880, a Boston woman, Sarah Howe, organized a Ponzi scheme where investors were restricted to women and were promised an 8% interest rate on a “ladies’ deposit.” Unfortunately, Sarah Howe ran off with the money.
Why do people fall for Ponzi schemes? Essentially, people are looking for a “too good to be true” investment. Two percent at the bank doesn’t cut it; we want 25%, 50%, etc. So there is the greed factor; another is fear that others will make the high returns and you will be left out. Do you understand the business behind the investment? Warren Buffett, one of the richest men in America, has said many times he doesn’t invest in businesses he doesn’t understand. Any of these reasons could result in you becoming a “pigeon”, someone vulnerable to schemes and rackets. It would almost be amusing except that some people lose their life savings.
This brings us to the Pigeon Ponzi. Incredibly, a pigeon breeding business was disguised as a Ponzi scheme, extensively covered by Better Farming Magazine and PyramidSchemeAlert.com. The basic scheme was that pigeons (the birds) were the future. Instead of a chicken in every pot, American and Canadian families would have a pigeon in every pot. This scheme sounds like something that might have happened 100 years ago; no, the scheme began in 2007! Farmers would buy pigeon “breeders” from Pigeon King International and then raise pigeons in the rafters of their barns. Then the farmers would sell back to the company the offspring. Very high rates of returns were promised to the farmers (investors).
What happened to the farmers (investors)? It is estimated by Better Farming Magazine that around 1,000 farmers lost over $1 billion, bankrupting many farmers. Some Canadian and American farmers invested up to $1 million. Farmers lost their investments and were left with a barn full of pigeons needing feed and care.
|
No one is eating pigeons. The problem was that there was no market for selling pigeons as food in the US and Canada! There are many problems with the concept of a pigeon in every pot, not the least of which is that a pigeon does not make a very good meal. One of our staff members was raised in Europe. In his youth, after WWII and a civil war left food scarce and even eating chicken was a luxury, he hunted down two pigeons and three sparrows. The sparrows were worth only one mouthful altogether, he reports, and the two pigeons were boney and did not even begin to feed his five-person family. Needless to say, he never went pigeon hunting again.
Which brings us to Arlan Galbraith, the aptly self-titled “Pigeon King” who convinced as many as a thousand American and Canadian farmers that there was good money to be made in raising pigeons for food. He started Pigeon King International headquartered in Waterloo, Ontario and ran many ads and promoted the scam on talk shows. He particularly targeted retired farmers, young farmers, and the Amish community. Most of the investors knew absolutely nothing about pigeons.
What happened to the perpetrators? Very little. The Company failed in late 2008 as Mr. Galbraith filed for bankruptcy and is still at large.
Where were the regulators? Sadly, the second story here is the inaction of both the Canadian and American regulators. Canadian authorities had decided that due to some technical details they could not prosecute under multi-level marketing plan statutes. It was through the efforts of various consumers groups, former employees, and the sources already quoted that the scam was publicized. Eventually, the state of Iowa and, later, Washington State, Pennsylvania and Maryland banned the scam. On January 25, 2010 Better Farming Magazine reported that the Canadian Government is finally going to charge Mr. Galbraith and his company with fraud.
"Ladies' deposit" Ponzi Scheme
What happened to the
pigeons? With no real market for the pigeons, Mr. Galbraith in his letter to the investors when he filed for bankruptcy said, “You can sell them for whatever price you want to whomever you want. You can auction them off. You can let them free fly [sic] and forage in the fields with the wild pigeons. You can gas them and bury them on your farm. The choice is yours.” One estimate was that the collapse of the scam left 250,000 to 400,000 birds in the barns of about 300 contract holders in Ontario alone. That means the remaining 700 contract holders probably had up to another 1 million birds.
What can we learn from the Pigeon Ponzi? New Ponzi scams are hatched every day, some in San Diego. Remember La Jolla’s famous Ponzi scheme in the 1980’s. J. David Dominelli bilked local investors of $80 million. The scam shook San Diego society and even brought down the mayor. We all need to wary of investments that sound too good to be true because it probably is. Do your research; check out sites like PyramidSchemeAlert.com.
Likely, pigeon breeding scams are finished, but con men are out there looking for new pigeons (investors). Sparrows anyone?
|