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Networks in Ponzi Schemes

Article: http://www.cleveland.com/metro/index.ssf/2014/06/akron-based_ponzi_scheme_took.html

Two men from Northeast Ohio have been accused of organizing a Ponzi scheme that took over $20 million. The two allegedly created a fake company that bought and sold petroleum. Their supposed business plan was buying discounted oil and selling it for a profit. The profit would then be passed on to their investors. The two men who created the company found two investors to get the operation started. Their purpose was to seek out investors for the operation. One of the investors was able to bring in a total of 16 investors, whereas the other brought in 41 investors. The operation was able to go on for as long as it did because the people responsible put effort into covering it up. They would pay fake returns to investors as “proof” of the business’ legitimacy. There returns were of course from the initial investment, as the company never generated any money legitimately. The company also produced fake tax returns showing its annual sales, which were supposedly $200 million.

By virtue of how a Ponzi scheme works, the investors would ask for funds from other investments, increasing the scale of the operation. We could therefore draw a graph for the Ponzi scheme network. Each node would serve as someone involved in the scheme and each edge would represent a transaction of money. Naturally, the graph would roughly resemble a pyramid. At the top would be two nodes for the two men who created the fake company. One level below them would be the initial investors, both of whom would be connected to each other and the company’s creators. Below them would the investors they found and the investors that those investors found. One of the initial investors would have 16 below him, the other would have 41 below him. These are not quite the same structure as the social networks we discussed in class, as the the nodes generally do not have ties to multiple nodes. Instead, the nodes would only be tied to the node directly above it. The reason is that even though the investors might know each other, they do not transact money within the same level; rather, they only transact money to the level above them.

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