In what would be the second-largest Ponzi scheme in history and second only to Bernard Madoff's massive scheme, Chinese authorities have arrested nearly two dozen people on accusations that a person-to-person (P2P) lender they operated was nothing more than an elaborate fraud that duped nearly 1 million investors. At least 21 people were arrested for their role in Ezubao, a P2P site that offered the ability to profit from purported online financing opportunities. At least one Chinese state-run news site is reporting that several suspects have already confessed to the fraud. If true, the accusations would place Ezubao in notorious company alongside Bernard Madoff's $65 billion scheme and R. Allen Stanford's $7 billion scheme.
Ezubao (also called Ezubo by several publications) is a subsidiary of Yucheng Group, a Chinese entity that mainly dabbled in finance leasing. In exchange for providing businesses with equipment, the business agreed to pay Yucheng a series of rental payments. This form of banking is highly unregulated and appeals to businesses that might be turned down for a conventional loan due to substandard credit. Armed with this stream of rental payments, Ezubo then solicited investors with the promise of safe and steady annual returns ranging from 9% to 14.6%.
However, police now believe that the vast majority of purported financing projects presented to potential investors were simply fabricated to induce new investments. Rather than using new investor funds to finance equipment purchased by businesses, authorities claim that Ezubao used those funds to pay returns to new investors - a classic hallmark of a Ponzi scheme. In addition to making Ponzi payments, a chairman of Ezubao's parent company is believed to have spent nearly two billion on gifts, including a $20 million diamond ring and over $1 billion in cash payments.
Police began investigating Ezubao in December, seizing records and freezing assets as part of their probe. According to the Wall Street Journal, the company sought to hide certain records from authorities by burying over 1,000 accounting books in 80 plastic bags nearly twenty feet underground on the outskirts of town.
While both the frequency and severity of Ponzi schemes have generally declined in recent years, there have been several recent schemes that parlayed social media into massive growth which ultimately ensnared hundreds of thousands - or even millions - of victims. One of these examples is TelexFree, a Massachusetts company which attracted more than one million investors through the promise of outsized returns through investments in VOIP software. That scheme, which incentivized the recruitment of new members though social media and the payment of commissions to existing investors, ultimately took in more than $3 billion from investors.