My guess would be most Ponzi schemes arise out of desperation and self-deception, rather than deliberate intent. Not knowing anything about this specific case, I believe these schemes are 'emergent phenomena'. The business owner likely starts to run low on operating capital, and promises out-sized returns to get investment, then they either need another boost, or that investor recommends the fund to an associate, and the snowball grows.
At the root, Ponzi schemes stem from dishonesty, an unwillingness to tell people that your vision did not align with consensus reality. It is a manifestation of imposter syndrome and an unwillingness to align expectations with reality.
This is why everyone who is smart about raising money for ventures underpromises and overdelivers. The opposite, overpromising and underdelivering, is a road to hell.
>This is why everyone who is smart about raising money for ventures underpromises and overdelivers. The opposite, overpromising and underdelivering, is a road to hell.
The vast majority of startups fail! From a financial point of view, most startups look a lot like Ponzi schemes; the difference is that startup investors know it's risky.
You overpromise when you fear that what you can actually deliver is inadequate.
Obviously imposter syndrome doesn't lead inevitably to ponzi schemes, but it's a possible maladaptive response to those feelings. Bernie Madoff was probably competent enough to be successful at a high level, I have no idea why he actually went off the rails but I can see how imposter syndrome could lead someone in that direction.
I'm actually fascinated to understand more about how these things arise, as well as cases of scientific fraud (like the Schoen research scandal:https://en.wikipedia.org/wiki/Sch%C3%B6n_scandal. I tend to imagine (without data) that many of these situations arise as you suggest - someone gets squeezed, whether for money or research results, and turns to fraud to make ends meet - which becomes a vicious cycle.
I recently finished "No One Would Listen" by Harry Markopolos who was a whistleblower who spent YEARS and resigned from his other jobs trying to alert the SEC about Bernie. It was pretty outrageous how the SEC passed the buck around interoffice like a hot potato literally sending the investigation to and from the DC to NYC office and back again. It's a great read although Markopolos comes off as somewhat (deservedly) self-rightous: https://en.wikipedia.org/wiki/No_One_Would_Listen
As for the "how does it happen" root cause of the fraud, in my perspective it's a bit like trickle truth. They start with one small lie - maybe keeping two sets of books, and get away with it for five years. Hey, that wasn't so bad, let's open a few shell companies for our shell companies and offshore some funds to get out of taxes. Wow, we got away from that, let's do a capital call and double it. Then they start doubling down and because it's easy money they spend it on lavish things, need more income to offset loses. Like you mentioned- turns into a vicious cycle.
The page you linked to was a fascinating read, I enjoyed it a lot. I wonder how much this happens - making up fake data in research papers. It seems that it would be easy to get away with in a lot of cases, but unlikely to succeed if your "research" promises a breakthrough in making smaller computer chips, because lots of people will want to replicate that.
Money recovery to the degree possible? That's up to the investors and the courts. That's not the SEC's job. The SEC does attempt, with only a degree of success, from fraudulent investment schemes from being offered in the first place. (And, to the annoyance of many here, prevents low asset investors from investing in less regulated/more speculative types of investments.)
