Pigeon Fever: Ponzi Schemes Still Thriving

The ancient wisdom that there's a sucker born every minute has been especially pertinent given the financial disasters of the past few years. So it's time for a short and painless test: are you sometimes just too trusting? Do you invest in things you don't really understand? Are you also a bit greedy? Then, you too could be suffering from "pigeon fever."

"Pigeons" are what con men call their victims.

After a year of revelations about Bernard Madoff, who cheated investors out of billions, you might think Americans have wised up. Fat chance.

Prosecutors and regulators tell us that even in this age of skepticism, Ponzi schemes like Madoff's are thriving. One regulator even calls it "ponzimonium."

Why are there so many pigeons around? 60 Minutes correspondent Morley Safer asked a few people who should know.

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"As a student of con games and deception, were you at all surprised by the Bernie Madoff scam?" Safer asked Ricky Jay.

"Would you be surprised if I told you that I predicted it?" he replied.

We approached Jay, America's foremost card sharp. He's an actor, sleight of hand artist, a man with an encyclopedic knowledge of con men past and present.

He told us of a talk he gave seven years before Madoff's fall.

"Beware of someone well established in the industry," he warned.

It was a lecture on financial fraud to a gathering of police officers in 2001.

"I would also beware of someone who will rely heavily on an affiliation with an investor group, be it religious, ethnic, or geographic," he told the group.

He was describing Madoff to a T.

"I think these elements will make the market ripe for any sort of pyramid or Ponzi scam," Jay said.

"And that is pure Bernard Madoff," Safer remarked.

"It's pure Bernie Madoff. But can I tell you another element of the con? That I actually made this page on Photoshop last night and put it into this bulletin. And I did that to prove a point, and the point is…," Jay told Safer, showing him a doctored magazine.

"You got me," Safer said.

"…you set it up by saying that I was a student of cons and that I'm knowledgeable in that area," Jay explained.

"And so, you allowed my supposed expertise to make you believe this is true. This magazine is true. I really have lectured to this group of police against confidence crime. Everything is true except for this page which I slipped in last night."

So what's the moral? Trust no one?

"We wouldn't want to live in a world where we couldn't be conned because in effect we would then be living in a world where we mistrusted or refused to trust anyone. So this is the price we pay," Jay said.

And pay we have: in the wake of the Madoff scandal, Ponzi perp walks have become a marathon.

There's Texas financier Allen Stanford, accused of a $7 billion Ponzi scheme; Minnesota businessman Tom Petters, convicted recently of a $3 billion scam; and Park Avenue lawyer Marc Dreier, mastermind of a "mere" $400 million Ponzi scheme that landed him first on "60 Minutes" and then in federal prison.

"I thought if someone would ever interview me on a program such as yours, it'd be for something good I've done, not something humiliating I've done," Dreier told correspondent Steve Kroft.

Despite the downfall of the Dreiers and the Madoffs, Ponzi operators large and small are busier than ever. Knowing we're all capable of greed, misplaced trust - and something else.

"I think it's anxiety. It's anxiety that you're losing out, that other people are doing better than you are," Stephen Greenspan, a University of Colorado professor who writes and lectures on gullibility, explained.

Greenspan is warning audiences that not reading the fine print or buying something on a tip from your brother-in-law are bad ideas; and that older people are particularly vulnerable to a friendly pitch from a con man.

"In most of the great moments of gullibility in history, the perpetrator seems to target a particular group, correct?" Safer asked.

"Yes. There have been Mormon Ponzi schemes targeting Mormons, or fundamentalist Christians. Madoff mostly was aimed at Jews because he was a prominent Jewish philanthropist. So yes, there is this affiliation aspect of it, because we tend to trust our own kind," Greenspan said.

Mr. Charles Ponzi himself promised fellow Italian immigrants he could make them rich trading in postal reply coupons, sort of the pre-paid phone cards of the day.

Ponzi went to prison and died a pauper. "I went out looking for trouble, I found it," he admitted.

But his name lives on for the fraud he made famous.

"The basic concept is robbing Peter to pay Paul. You have a fund of new money coming in and you use the new money to pay the old investors. But at a certain point that has to stop," Ricky Jay told Safer.

Asked if gullibility is at the very core of this, Jay said, "Absolutely. I mean, history is filled with examples of people who are incredibly gullible. They will believe all sorts of things."

Jay's library is replete with documents about cons, scams and hoaxes of all kinds, like amazing animals.

"The cynocephalus was often featured on circus lots. And then, eventually people realized that the cynocephalus was a baboon wearing lederhosen," Jay explained.

There are celebrated con men, including Count Victor Lustig. "One of the things that he did in France was that he was able to sell the Eiffel Tower for scrap metal. And he was able to do it twice, which is sort of wonderful," Jay said.

Jay reports that over the years people really have tried to sell the Brooklyn Bridge, as well as Nelson's Column in Trafalgar Square in London. And in another cautionary tale, still unfolding, pigeons were both the investors and the investment.

Arlan Galbraith, who called himself "The Pigeon King," convinced hundreds of American and Canadian farmers there was good money to be made raising the birds for food.

"And everybody we talked to said this guy was, he was on the up and up. Nobody had a bad word to say about him anywhere that we could find," Ohio farmer Aaron Humbert told Safer.

He and his wife Joline had signed up with Galbraith.

Asked if he knew anything about pigeons going into this, Aaron Humbert admitted, "No. Nothing whatsoever."

The Pigeon King assured investors that pigeons would replace chickens in every pot in America and the world. He'd sell you breeding stock and buy back the offspring. Soon, barns across the Midwest and Canada were filled to the rafters with birds and high hopes.

"He was building his herd, building the flock," Aaron Humbert said.

"He had to have so many hundreds of thousands of birds a week to get, to supply his production," his wife Joline added.

But to some, including the attorney general of Iowa, it sounded like a Ponzi scheme. Iowa and three other states barred The Pigeon King from doing business. And shortly after the Humberts bought in, Pigeon King International declared bankruptcy. The Humberts lost $300,000, most of it borrowed money.

"We've contacted everybody in the states we could think of. And, you know, from elected officials to FBI to our local prosecutors. And everybody says, 'Yeah, obviously there's something wrong here. It was a scam. But to prove it is gonna be very difficult,'" Joline Humbert told Safer.

Galbraith declined our request for an interview. Canadian police now say he was running a Ponzi scheme.

"Do you blame yourselves at all?" Safer asked the Humberts.

"To a point," Joline Humbert replied. "We just didn't find the red flags poppin' up. So we tried it. And then we lost. A lot."

"Might as well went to Vegas and put it all on red," her husband added.

At least in Las Vegas you know the odds always favor the house. Elsewhere, even the most sophisticated among us can be had.

For instance, our gullibility expert, Stephen Greenspan, who, after writing a book on the subject, discovered he had lost $400,000 of his retirement money to Bernie Madoff.

Asked if it was embarrassing for him, Greenspan told Safer, "Two days after I had the first book copy in my hand, I found that out. Well, it was painful, obviously."

And the fact was Greenspan had never even heard of Madoff. The hedge fund managing his retirement money had simply reinvested the $400,000 with Madoff.

"I don't even think I read the prospectus," Greenspan admitted. "I trusted the people I was turning my money over to, and I've always done that and it's usually worked well. Except in this one case."

"What did your wife say to you when you confessed that you lost part of your nest egg?" Safer asked.

"'I told you so,'" Greenspan recalled. "Because I had tried to talk her into it, and she said, 'I don't think so.'"

What made her suspicious?

"Maybe it was the word 'hedge fund,'" Greenspan said.

Which brings us to Wall Street and the financial meltdown of 2008.

Poking through the wreckage, many experts believe the root cause was a perfect storm: a monsoon of gullibility colliding with a tidal wave of greed.

"This was a massive Ponzi scheme. And it's the biggest crime against the American economy in our lifetimes, in fact, ever," analyst Janet Tavakoli explained.

Tavakoli is an analyst specializing in derivatives, the exotic financial instruments at the heart of the meltdown. She argues that the bad mortgage loans that fueled the crisis were repackaged by investment banks, sliced into increasingly complex derivatives and resold to other investors, even though the underlying mortgages were often virtually worthless.

"You had various traders buying each others' products to artificially keep the prices up so that the bubble didn't collapse," she told Safer.

Not only that. But the mortgage derivatives being traded were so mind-numbingly complicated, nobody understood them fully. Certainly not the pigeons: the buyers at banks, mutual funds, pension funds and insurance companies who wound up holding a bag full of worthless paper.

"But these guys are smart guys. They're all graduates of the finest business school, correct?" Safer asked.

"Yes. If they were gullible, they're sophisticated investors. So they can't really go back to the investment banks that sold them this product and say, 'We've been had.' Because they held themselves out to be experts in these kinds of securities," Tavakoli replied.

All of which proves that whether you're on Wall Street or Main Street, brain power is no defense against con men. In fact, smart guys may be the biggest suckers of all.

"As someone who does sleight of hand for a living, to me, the ideal audience would be scientists or Nobel Prize winners who are incredibly smart in their one area, and often - often, not always - have an ego with them which says 'I am really smart so I can't be fooled.' No one is easier to fool," Ricky Jay said.

"So Morley, I'm gonna play you one hand of Blackjack with certain propositions that make it too good to be true…," Jay told Safer.

And so, determined not to be conned by him again, Safer sat down for a friendly card game with Jay. The rules were all stacked in Safer's favor. Safer got 20.

Jay showed a nine, meaning, Safer thought, it was impossible for Jay to win.

"God, the only thing that could beat you with would be if I had a twelve or something. Which I do. See, I have a twelve of clubs. So I have 21 to your 20," Jay said, producing a twelve of clubs.

But there's no such thing as a twelve of clubs, right? Wrong. Not only did Jay manipulate the cards somehow to get the ones he wanted, he was also dealing from a deck used in certain rummy games that includes elevens, twelves and thirteens.

This pigeon had been had again.

"And the other real element of a con is that I told you this was too good to be true. Anyone should stand clear of something that's too good to be true," Jay said. "It never is."

Produced by David Browning and Diane Beasley