Great frauds in history: John G. Bennett Jr’s Ponzi scheme
John G. Bennett Jr's classic Ponzi scheme cost his investors $135m and ended him ten years in jail.
John G. Bennett Jr was born in Olney, Philadelphia, in 1937, and worked for brief stints as an airline clerk, a chemistry teacher and a medical school student before becoming a successful drug counsellor. Within a couple of years he had set up seven drug treatment programmes and was appointed to a board advising the governor of Pennsylvania on drug policy. He then decided to use his contacts within Philadelphia’s non-profit community to become a consultant offering fund-raising advice, setting up the Center for New Era Philanthropy in 1982, followed by the Foundation for New Era Philanthropy seven years later.
What was the scam?
Bennett was a poor businessman and the Foundation for New Era Philanthropy quickly ran into cash-flow problems. He fraudulently shuffled money between various bank accounts in an effort to stay in business, then attracted funds by pretending he was working for an anonymous philanthropist who would double people’s donations, provided they briefly left their money with him. Initially, Bennett targeted individuals, and repaid the first wave of donations with money from a grant that his business had received. He quickly switched to targeting institutions and charities, including Harvard University, following the Ponzi strategy of using new money to repay existing investors.
What happened next?
As the scam progressed, Bennett constantly increased the minimum donation required, as well as lengthening the period before the money was returned. However, the need for more funds forced him to borrow money from Prudential Securities. At the same time, suspicions from an accounting professor at a college who had participated in the scheme prompted the authorities to investigate Bennett. Prudential called in its loan. In May 1995, Bennett finally confessed that the scheme was a scam and he got a ten-year jail sentence.
By the time New Era declared bankruptcy it had $551m in debts, against $80m of assets, making it one of the largest pre-Madoff scams. Excluding fictitious paper profits, initial investor losses were estimated at $135m. The bankruptcy trustees were eventually able to reduce this by around 60%, but only by forcing charities that had already been paid to return their profits, even if they had already been spent on charitable works.