California SEC case highlights multimillion dollar cloud computing scam that victimized Asian-Americans and Hispanics.

• Madoff in the Cloud
• Ponzi Schemes versus Pyramid Schemes
• Madoff Collapse
• Meet Ming Xu, Coud Con-Man
• Cloud You Can Trust

Madoff in the Cloud

A couple weeks ago, ABC announced that it had landed Richard Dreyfuss for the role of Bernie Madoff in a series due out in several months. A second project is also in the works: HBO has been working for four years with Robert De Niro on a film about the legendary confidence artist.

Why are there two major media projects being made about a guy roundly considered to be a despicable human being and who used his one degree of separation away from Kevin Bacon to swindle him? Simply put, the sheer audacity of crime can be incredibly captivating, as can pain. We are intrigued by the boldness and can’t stop looking, like we are rubbernecking at the site of an accident.

Well, ladies and gentlemen, Madoff is not the only sociopath on the block. Last March, the Securities and Exchange Commission (SEC) announced that it had dismantled a global Ponzi scheme that defrauded Latinos, Asian-Americans, and people outside the United States by offering smoke-and-mirrors stakes in nascent cloud hosting firms.

Let’s take a look at the nature of a Ponzi scheme, and then explore the niche follow-up effort by Californian Ming Xu.

Ponzi Schemes Versus Pyramid Schemes

Although we are fascinated by scams, we don’t know how to talk about them. The terms Ponzi scheme and pyramid scheme are often used interchangeably, but these two concepts are actually quite different.

In a pyramid scheme, the structure and member expectations are uncannily similar to network marketing, a.k.a. multi-level marketing (hmmm). The members believe that part of the way they can succeed in the system is to go out and attract new participants.

On the contrary, “Ponzi scheme participants typically believe they invested in an actual security, and are unaware that they are involved in a Ponzi scheme,” explains San Francisco law firm Gerrard Gibbs LLP.

In both scenarios, existing members are paid off by the money coming in from new members. Those ensnared in a Ponzi scheme think their money is profits from the investments that have been made with their cash. Meanwhile, those in a pyramid scheme understand that their money is earned through recruitment.

As you can see, membership in a Ponzi scheme is more passive. It is also built to last. Whereas traditional pyramid schemes cannot maintain the breakneck pace that keeps members excited and active, Ponzi schemes can remain viable for substantial lengths of time, as long as enough money is coming in to continue to pay returns. Gerrard Gibbs provided the Bernie Madoff model, active for more than three decades, as an example.

Madoff Collapse

In a Ponzi scheme, everything falls apart when your old clients get skittish. That typically occurs when the economy becomes shakier and people need access to their funds. Essentially it’s a run on a bank that doesn’t have very much in the vault. Madoff’s clients wanted total payouts of $7 billion, and there was only about $300 million available.

Meet Ming Xu, Cloud Con-Man

In March 2014, a federal judge okayed the SEC’s proposal to freeze the accounts of WCM and WCM777, which have offices in Los Angeles and Hong Kong.

Between March 2013 and March 2014, Ming Xu and his team attracted almost $70 million in investments “by promising people they could double their money in 100 days by investing between $399 and $1,999 in cloud services such as website hosting, data storage and software support,” per Reuters.

The SEC investigation revealed that people were told if they invested their money with the companies or brought other people onboard, they would be given membership points that could be used to buy shares of 300 cloud firms that WCM was developing in advance of their IPOs.

The agency told the court that Xu had built a bogus financial market based on $900 million of points that actually only held value in the form of small incremental payouts. Absurdly, the WCM777 website stated explicitly that the company was not running a Ponzi scheme.

As new investments came into the organization, Ming Xu (also known as Phil Ming Xu and to his record label as The Artist Formerly Known as Phil Ming Xu) used a portion of it to pay existing members. He used the remainder to buy stock and purchase real estate, including a couple of golf courses.

“They were operating a pyramid scheme that preyed on investors in particular ethnic communities,” summarized Michele Wein Layne of the SEC, “leaving them with nothing left to show for their investment.”

In addition to the asset freeze, the SEC also wanted to recoup money lost by investors and issue a fine, presumably a huge one.

Cloud You Can Trust

These two scams have something obvious in common – confusion. People are confused by the financial markets, so they trusted Madoff, known as a Wall Street insider who helped launch the Nasdaq stock exchange. People are similarly confused about cloud: technology was obtuse enough when machines were involved, but when the system becomes virtual, it can be extraordinarily difficult to understand.

Transparency is critical. “Your staff was very patient and knowledgeable,” says our customer Russell Piper in a user comment. “They helped us learn how to fish instead of just giving us fish.” Click here to learn about our industry-leading guarantees.

By Kent Roberts