Madoff’s Ponzi Scheme
By now, everyone has heard of Bernard Madoff’s Ponzi scheme, but few people really understand just what it was he did.
To begin with, few people know just what a Ponzi scheme is. I found a great article on a news site, but I knew it would be gone pretty quickly. So, I created a pdf, which you can access by clicking on Ponzi, to read more about the original Ponzi and what he did. However, the essence of what he did was get people to invest in a business that didn’t really exist, and he got them to believe it by paying new investors out of money that he’d gotten from other people, rather than the business itself.
In essence, this is what Bernard Madoff, a former chairman of NASDAQ, did, only with larger dollars. Under his business name, Bernard L. Madoff Investment Securities LLC, which was founded in 1960, what he claimed his company did was bypass traditional investment strategies and concentrated on 30 to 35 of the S&P’s (Standard and Poor) top 100 stocks, and by doing that was able to generate profits averaging around 10.5% a year for close to 17 years in a row. Oddly enough, since other fraudulent companies that had tried to do similar things in the past, doling out returns of around 20%, he was able to stay under the radar all these years.
Still, the problem was that the math didn’t quite work out. There were some companies that complained to the SEC that something wasn’t quite right, yet they didn’t do anything to investigate any of the claims at the time. It only came to pass, finally, when the stock market started to crash, falling around 38%, and yet his company was claiming that they were up 5.6% at the time. Supposedly, there was no way it could be done, and finally investigators started looking into the business.
And it couldn’t be done, but Madoff didn’t have to worry about it because, just like Ponzi, more and more businesses and people were ready to give him more money because of his name and reputation. Greed can put blinders on everyone, and in this case, it certainly did. So, he just paid people extraordinary amounts of money out of what he was taking in, then put everything else on paper, where no one asked questions because they figured they were being taken care of pretty well. Even one of the banks where I have a savings account, HSBC, gave him $1 billion dollars; seems no one was immune to the greed factor.
Of course, there were other signs that were totally ignored. His company regularly wouldn’t file yearly disclosures of its holdings, getting around it by supposedly selling all of its holdings at the end of every year, which just doesn’t happen. They also used an accounting firm whose only client was Madoff. Also, Madoff helped to pioneer electronic online trading, yet he wouldn’t allow any of his clients to access their accounts online, always sending everything by traditional mail.
When he was finally arrested and admitted to running this big Ponzi scheme, everything came crashing down. Right now they’re saying that close to $50 billion dollars may have been lost by investors who just gave this man their money without thoroughly checking him out. True, it happens, but when the numbers are this high it’s just staggering. Multiple charities that depended on Madoff money have had to close, and today, it was reported that one of his investors had possibly committed suicide after losing around $1.8 billion dollars.
Yet, Madoff’s punishment right now is to restrict him to his own place of residence, under house arrest; even as an apparent criminal, Madoff lives better than almost everyone else. There’s something inherently wrong with that.