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The largest financial scams in history explained – what did we learn?

The following lines contain the biggest financial frauds in history, while exploring the lessons learned all the way from Charles Ponzi to cryptocurrency scams.

The history of scams along with frauds is a long and sordid one, with new examples continuing to emerge. From Ponzi schemes to cryptocurrency scams, unscrupulous individuals have taken advantage of others for financial gain, leaving many people with significant financial losses. Here are some of the most notable examples of fraud in recent history. Let’s start at the beginning, with the origins of the Ponzi. 

1. Charles Ponzi – the creator of the Ponzi scheme

Ponzi

Charles Ponzi, source: historicnewengland.org

The Ponzi scheme is named after Charles Ponzi, who became infamous for using the technique to defraud thousands of investors in the 1920s. The scheme involved promising high returns on investment, but using the money from new investors to pay off earlier investors, rather than investing it as promised. Classic Ponzi.

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Eventually, the scheme collapsed when there were no longer enough new investors to pay off earlier investors. Ponzi’s scheme became famous because of its size and because of the way he used the media to promote it. He promised investors returns of 50% in just 45 days thanks to which he was able to attract millions of dollars in capital.

However, it soon became clear that Ponzi was using new investors’ money to pay off earlier investors, with the scheme collapsing in the early 1920s, just a few years before the Great Depression. Ponzi was later charged with fraud, sentenced to spend time in jail. But that was only a small scheme compared to the master of Ponzi, Bernie Madoff.

2. Bernie Madoff’s scandal

Bernie Madoff, source: npr.org

Bernie Madoff’s Ponzi scheme is often considered one of the largest financial frauds in history. That’s right, the biggest one ever recorded. Madoff used his reputation as a respected businessman and investment advisor to attract thousands of investors, including many high-profile individuals or organizations. 

He promised steady returns on investment from the stock market, but was actually using new investors’ money to pay off earlier investors, much like Ponzi. However, he was smarter than Charles Ponzi because he offered realistic returns. Most frauds show off by giving a very high return of 30%, 50%, or even 100%, but Madoff just offered a steady 10% return yearly. 

Madoff was able to run this scam for decades before it collapsed. His scheme began to unravel in 2008 when the Global Financial Crisis led to more scrutiny of investment firms. It was discovered that Madoff’s fraud had been going on for decades, defrauding investors of billions of dollars. The estimates show that approximately $65 billion got into his hands. Madoff was eventually arrested and sentenced to 150 years in prison, passing away in jail in 2021.

3. Theranos Fraud

theranos

Elizabeth Holmes, source: vanityfair.com

Theranos was a biotech company founded by Elizabeth Holmes that promised to revolutionize the healthcare industry with its innovative blood testing technology. However, it was later revealed that the technology did not work as advertised, with the company misleading its investors and the public about its capabilities.

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The Theranos scandal began to unfold in 2016 when a series of investigative reports revealed the truth behind the company’s technology. It was discovered that Theranos was using traditional blood testing methods for most of its tests and that the technology it did use was highly inaccurate. 

Many wondered why it took so many years to discover the truth. Holmes with her business partner, Sunny Balwani, were charged with fraud in 2018, and the company shut down. The numbers vary, but it’s clear that hundreds of millions, if not billions, of dollars were lost in this fraud. 

4. Wirecard Scandal

wirecard

Wirecard chart, source: bloomberg.com

Wirecard was a German payment processing company that was once valued at $27 billion. However, it was later revealed that the company had been engaged in massive accounting fraud, inflating its revenues and profits to make the company appear more profitable than it really was.

The Wirecard scandal began to unfold in 2018 when a series of reports by the Financial Times raised questions about the company’s accounting practices. It was eventually discovered that Wirecard had been inflating its revenues along with profits for years and that much of its business was actually fraudulent. 

The scandal led to the collapse of the company. As a result, many investors lost huge amounts of money. There’s now even a Netflix documentary about this incident, called “Skandal! Bringing down Wirecard,” or a Netflix show called “King of Stonks.” Netflix also has documentaries about Theranos (The Dropout) and Bernie Madoff (Madoff -The Monster of Wall Street).

5. Terra Luna Crash

Terra Luna (LUNA) chart, source: coinmarketcap.com

Terra was a cryptocurrency project that promised to offer an algorithmic stablecoin called UST, which would be pegged to the US dollar, backed by its own token Terra Luna (LUNC). It was founded by Do Kwon. However, in May 2022, the project experienced a crash, with the price of UST dropping by over 70% in just a few hours. 

To its surprise, the token is still tradable, but the stablecoin’s value is down over 97%, with a low chance of ever recovering back to one dollar. The crash was caused by a combination of factors, including a large number of investors withdrawing their funds from the project, and concerns about the stability of the reserve backing UST. 

Many investors lost significant amounts of money in the crash, with the incident raising questions about the stability of the cryptocurrency market. Over $50 billion in market cap was wiped out in a course of a few days, leaving many people desperate. But these people were yet to find out the biggest bombshell is just about to be uncovered in November of 2022. 

6. FTX collapse

ftx chart

FTX token (FTT) chart, source: coinmarketcap.com

FTX was a cryptocurrency exchange called a “platform for traders, by traders.” It was growing at a very fast pace, making its founder Sam Bankman-Fried (SBF) one of the richest people in the crypto space. It was founded in 2019, rocked the crypto market in 2021, and eventually crashed in 2022. What a short-lived success.

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It was later revealed that the company was engaging in fraudulent activity, including market manipulation and insider trading. The FTX scam began to unravel in late 2022 when an investigation by several American law-making institutions (e.g., SEC) found evidence of market manipulation and insider trading at the company. 

Millions of investors and clients of the bankrupt crypto exchange lost money due to this revelation, as FTX became a global phenomenon. The whole crypto market dropped in November 2022 when the news was revealed because FTX held a lot of crypto assets that had to be sold for liquidity issues. 

Other notable crypto scams and hacks of 2022

Unfortunately, Terra or FTX were not the only cryptocurrency projects to experience problems in 2022. There were tons of other notable scams and frauds that occurred in the industry, but people just don’t talk about them because they may have been small, causing “only” a few million-dollar loss.

Read more: TOP 5 largest crypto hacks of 2022 – how much money did they lose?

However, some scams or hacks caught the eye of the public. One such scam was the Poly Network hack, which resulted in the theft of over $600 million in cryptocurrencies. The hack was eventually resolved, and the funds were returned to their rightful owners, but it highlighted the security risks associated with investing in cryptocurrency.

Then there are tons of mini scams, meme tokens, or “revolutionizing projects,” that promise investors high returns in a short period of time. They also attract investors by claiming to find groundbreaking technology. The red flags are always similar. 

Lessons learned from scams and frauds

The history of financial frauds is long and varied, but there are a few common themes that run through many of these incidents. One of the most common is the promise of high returns on investment. Many scams are built around the idea of promising investors a way to get rich quick, without doing much work.

Another common theme is the use of deception with lies to mislead investors. Scammers often use sophisticated marketing tactics to make their projects appear legitimate and trustworthy, even when they are not.

Finally, many scams or frauds are able to continue for years because of a lack of regulatory oversight. In many cases, regulators are slow to catch on to the fraudulent activity, which allows scammers to continue to operate and defraud investors.

Conclusion

Financial scams have been a part of human history for centuries, and they show no signs of disappearing any time soon. The examples outlined in this article are just a few of the many incidents that have occurred over the years, but they serve as a powerful reminder of the risks associated with investing.

Investors should always be cautious by doing due diligence before investing in any project or company. They should also be aware of the risks associated with investing in new and unproven technologies, such as cryptocurrency. 

Diversification could be very helpful in case of unintentionally becoming a part of a scam. By taking these precautions, investors can help protect themselves from financial frauds and scams. Hopefully, you can avoid becoming the next victim.

I got into financial markets by accident in 2012 and started with Forex trading. Later in 2017, I started investing in stocks in cryptocurrencies and began writing articles profess...

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