FINANCIAL MISCONDUCT: What is a Ponzi scheme and how did Madoff get away with it for so long?
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What is a Ponzi Scheme?
A Ponzi scheme is a form of a pyramid scheme. In a Ponzi scheme the instigator interacts with the investors. The ruse is carried out by creating the false impression that the money is actually invested and making a profit. The key to a Ponzi scheme is to get the initial investors to reinvest what they are paid, thereby reducing or eliminating the need to actually show a return on investments. Equally important are feeders who have been hired to manage other people's money and who turn to people like Madoff to make their jobs easier. Often times they are also victims, devoured by their own laziness, greed and stupidity. These people have a psychological makeup that often allows them to be easily schmoozed, impressed and cajoled through their own vanity and the illusion that they themselves must be important if someone like Madoff is paying attention to them. They continue to owe their investors a duty to perform due diligence in a professional manner but are easily side tracked with lavish parties and extremely large referral fees.
The investors are furhter defrauded through phony monthly statements that create the impression or illusion of investments and that those investments are earning a return on the corpus. It’s a giant illusion that requires a juggling of the books and the creating of phone reports. It also involves out right verbal lies to the investors (along with lies through reporting).
What causes a Ponzi scheme to be discovered?
1. Promoters and/or funds vanish.
2. Scheme collapses.
3. Scheme gets exposed.
In the case of Bernard Madoff he exposed the scheme by admitting publicly what he had been doing and even used the term Ponzi scheme. Without knowing more it’s difficult to tell exactly what would have occurred but it seems with the financial and stock markets it’s more than likely the scheme was ready to collapse and he feared someone would expose it, taking his family down with him.
How easy is it to get caught up in one?
Busy people are as easy to take as are those without a very high financial intelligence. Greed is factor; wanting an unreasonable rate of return on their investment. Lazy people can get caught up in the Ponzi scheme. Lazy fund managers who don’t do the required due diligence to really understand the fund and how the promise of a return will be realized can also be taken in by the Ponzi schemer. They too, as intelligent fund managers can get taken and lose the money investors have entrusted to them.
$50B Scam Victims Speak
December 15, 2008
Who got taken by Madoff?
December 17, 2008
How could one man work so many investors?
In the case of Bernard Madoff he used feeder firms who would send him investors, family and friends.
Where did the money go? The $50 billion is gone, mostly.
He spent it on a lavish lifestyle and to pay feeders to bring him more investors.
Aren’t we protected by the Securities and Exchange Commission?
Well, the SEC is supposed to protect investors from illegal financial activity and licensed brokers who act illegally. In the case of Bernard Madoff the SEC did investigate his investment company in 2005 and again in 2007. The matter was not on either of those occasions referred to the Commission for enforcement action. The SEC is overworked, understaffed and under funded; so we can not rely completely on this federal agency to protect us. The FDA and the Consumer Product Safety Commission are in the same position. So when we talk about protecting us or if we can believe in our government protecting us, we need to stop thinking in those terms.
If we can’t trust the SEC with protecting our money how can we trust the FDA with the drugs we ingest?
Madoff: “I’m very close with the regulators … As a matter of fact my niece just married one.” October 20, 2007.
What interests me is how smug this group is acting towards regulation by the federal government and how Madoff seems to chide regulators as against making a profit; as if making a profit were something bad.
I said early on in the Bush Administration when everyone was bashing those who were against the war and against anything that was popular, that if we lawyers waited awhile we would see really bad things happening. “If you think it’s bad now just wait till you see what’s coming down the pipe line.” People in general were acting naïve and believing anyone that lied, but told them what they wanted to hear. This is a good example of what was and is wrong with wanting something for nothing. There is no free lunch.
We all want to spend less money on insurance but like all federal efforts, tort reforms that promise you a quick fix and great savings, without proving how or setting out a plan as to how it will realistically happen; simply can’t be believed. Like all promises that are too good to be true, 99.99% of the time it’s not going to fix anything except the profit margin of some special interest group.
Madoff Victim Commits Suicide – Lost $1 Billion of Client’s Money
December 23, 2008, slashed his wrists; suicide is not an answer.
90-Year-Old Madoff Victim Goes Back to Work
February 19, 2009, lost his entire life savings.
A grocery store owner, Ron Clements, created a greeter position for the long-time customer.
The investor is Ian Thiemann who now works 30 hours per week for $10 per hour.
How can you recognize a Ponzi scheme?
The FBI’s web site indicates to avoid a Ponzi scheme exercise due diligence in selecting investments and the people with whom you invest. Second, make sure you understand the investment. If the investor indicates his/her methods are secret or too complicated for most people to understand then that’s a sure indication of a scam.
What evidence can show the Ponzi schemers knowledge?
January 30, 2009 – Why might Madoff have homesteaded in Palm Beach in Florida? Were they protecting assets from their creditors?
We look at those closest to him. Like a wife withdrawing $10 Million.
February 12, 2009
But the biggest question that remains unanswered is why is Madoff smiling?