Trusting the Con Man: The Role of Social Networks in the Diffusion of Fraud

This dissertation is focused on the social structure of a Ponzi scheme, and the consequences of that structure on various phenomena associated with it. A central assumption of this dissertation is that the social structure of a pre-planned fraud has consequences for understanding how and why such a fraud spread to such a large number of victims, and the implications for the nature of the investment that victims made, or the harm they suffered after it was revealed that they were involved in a fraud. Using data from a detailed survey of 559 victims of Eron Mortgage, a fraud which deceived 2,285 investors for $240 million between 1993 and 1997, this dissertation draws from social network analysis, diffusion theory and models of trust, adding to the body of literature on white-collar crime in the context of fraud victimization. Results show that characteristics of social ties within the structure of the Eron network were responsible for the successful spread of the fraud: 1) Eron principals and Eron employees invested their personal time and effort recruiting investors; 2) independent brokers actively spread the fraud to their clients; and 3) investors themselves, unknowingly spread the fraud through their social networks by recruiting their friends and family to invest in Eron. Findings also show that trust in specific types of social ties is associated with increased initial investments and different types of harms experienced by victims (emotional, financial, and harm to friends and family relations). Respondents who reported having been influenced to invest by multiple types of sources however generally reported lower levels of loss of capital and harms suffered. The social chain element inherent in the structure of Ponzi schemes plays a dual role in either protecting against or being the cause of malfeasance, having implications for fraud victimization and making it an important factor to integrate in future studies on white-collar crime.