Why do people fall for Ponzi fraud schemes?

Today's revelation that the SFO has secured a successful conviction against former taxi driver Kevin Foster regarding his Ponzi scheme is yet another example of the problems the UK authorities have regarding fraud. When the scheme collapsed Foster was found to be £34 million short of the funding required to cover payments to his 8,500 investors. However, it is the promises made by the convicted fraudster which caused most concern to the UK authorities.

In simple terms he promised investors that he could turn every one pound invested into his scheme into £28.50. He also convinced investors there was £203 million in the bank and the fact that earlier investors were regularly paid out large returns gave the impression the scheme was working. At the end of the day the scheme survived because of the ever-growing number of new investors whose funds were being used to pay out original investors. Indeed many of these who received significant payouts were encouraged to reinvest into the scheme, helping to fund the lavish lifestyle of Kevin Foster.

It is unclear how the authorities became aware of the scheme but ultimately once the Financial Services Authority acted it quickly became apparent that a sizeable fraud was ongoing. It would appear that fear and greed are the two main characteristics which attracted investors to this scheme, much to their financial detriment!