Bernard Madoff may be alone in the sheer magnitude of his alleged $50 billion fraud uncovered Thursday, but he wasn't alone in devising and becoming cornered in an irreversible Ponzi scheme. Norman Hsu and Lou Pearlman were charged for multimillion-dollar Ponzi schemes just within the last year.
Barry Minkow, a former Ponzi scam artist, and psychologists for the Wall Street elite offer very different motives behind why people dig themselves so deep into fraud for so long. But all agree the path to high-stakes Ponzi schemes has less to do with money than emotions.
"We want to sleep at night too," said Minkow, who served seven years in federal prison for his multimillion-dollar Ponzi scheme, but now investigates corporate fraud through the Fraud Discovery Institute, Inc., which he co-founded in San Diego.
For five years during the 1980s, Minkow ran a Ponzi scheme behind the ZZZ Best Co. Inc., once thought to be worth $300 million. He appeared on "The Oprah Winfrey Show," made headlines as a young entrepreneur and, according to his online biography, amassed more than $20 million in loans from banks with no real profitable business.
"We all have a cure," he explained. "The irony of white collar crime is we believe that we're one good week in trading away and we'll get enough to pay it all back."
Ponzi schemes pay existing investors with the money from new investors rather than the profits from a legitimate company. As long as new investors buy in, the old investors will see a "profit," but eventually the pyramid becomes too large and the scheme collapses.
"We're not going to give up in it -- you got to buy time until the cure," said Minkow.
Before the cure, Minkow said he's found that most high-profile Ponzi scam artists work through trust.
"Perpetrators of crime rely on imputed credibility," said Minkow. "Once you've got that then people look at subjective criteria, not objective criteria to do business."
So rather than looking at the profitability of the company or its practices, Minkow said people will go with the credibility from word of mouth, reputation, prominence or glamour.
Minkow said he gained credibility through media appearances.
"Madoff was able to succeed because of his past position as chairman of NASDAQ," he said.
Minkow has found a similarity between Ponzi scam artists when their lies start to unravel, too. Rather than a change of heart, Minkow said there's usually the "unknown variable" that exposes the crime.
"We all get caught because of the unknown variable. It's the thing that brings us down," said Minkow. "For me, it was an investigative reporter. For Madoff, it was an economy that's so bad people began asking for redemptions."
Ironically, Minkow said the end of a Ponzi scheme can be the most psychologically therapeutic.
"The first good night sleep I got was in prison," said Minkow. "Because it was over, I didn't have to lie anymore."
Stephen C. Josephson, a psychologist who treats many Wall Street clients in Manhattan, said he has seen similar greed and deceit in the financial world.
"There's been an association between money and self-esteem, that they'll do anything to keep it," said Josephson, who is also a clinical associate professor at Cornell Weill Medical College and at Columbia University in Manhattan.
"I think he [Madoff] is a textbook, but extreme, example; there are others like him out there," said Josephson.