If you think that investors in India were naive to have invested in plantation or ostrich schemes, well, US-based investors have shown themselves to be an even more gullible lot, as demonstrated by the pigeon scam. The fraudster sold investors a pair of racing pigeons. If the pigeons produced two fledgelings in a year, the scammer bought them back at the same price at which he had sold the original pair. The investors thus got a 100 per cent return on their investments. News of such fabulous returns brought in a new lot of investors, to whom the fledgelings were sold. The scam continued for a few years, but it could not go on forever, simply because there aren't so many buyers for racing pigeons. When the scheme collapsed, many investors, who had sold their farms to raise money for it, were left penniless. This scam, by the way, did not occur in the eighteenth or nineteenth century, but in the first decade of this century.
A useful insight the author offers is that Ponzi schemes are subject to the snowballing effect, which limits the time for which they can run. The reason, he says, lies in the law of compounding. Suppose that a scammer collects Rs 100,000 and promises investors a 15 per cent return. At the end of year one, he must find a new set of investors willing to invest Rs 115,000, so that he can pay off the first set. At the end of year two, he must collect Rs 132,250, at the end of year three, Rs 1,52,087, and so on. As time goes by, the task of finding new investors to pay off the older set gets more onerous. This poses a challenge to scammers who aim to steal large sums. Either they must disappear with a new set of investors' money soon, or else the scheme collapses due to the inability to find a new set of investors. For investors, the lesson is that if a deposit scheme has been around for very long, it is unlikely to be fraudulent.
To deter people from using this book as a manual for embarking on a career in fraud, the writer says that most of the legendary fraudsters described therein did get caught eventually. The high-rolling life does not usually last for long. The net return, after deducting all costs and the prison time served, hardly justifies the effort, which, he says, may as well have been devoted to building an honest business.
To investors, he offers the age-old advice of caveat emptor (buyer beware). If something is too good to be true, it probably is. He warns that any business that is growing at an exceptional rate or offering a fantastically high rate of return, should be viewed with an extra dollop of suspicion.
Even if the instances in this book are from the Western world, it is still relevant to Indian readers as the essential patterns of frauds do not change. Having read it, Indian investors will hopefully be able to recognise a scam from a distance and flee in the opposite direction.