The biggest financial fraud in American history was pulled off by a New York financier by the name of Bernie Madoff. Madoff (pronounced “made off”) made off with more than $50 billion of his clients’ money (for some, their life savings) by promising his clients higher returns on their investments than they could expect elsewhere. And he delivered on this promises with sixteen percent returns in years when the average investor was making less than half that. It seemed too good to be true – and it turns out it was.
None of Madoff’s investors were actually “investing”
in anything. They were participants in an elaborately concealed Ponzi
scheme. It worked this way: Investor A would give Madoff $100,000. Madoff
would put it in his own bank account, not investing it in any securities.
Then he would go out and collect $150,000 from Investor B. He would give
$125,000 to Investor A which would represent a 25% return and Bernie would
keep $25,000 to himself. Now he had Investor B to worry about. He would
go out and get $200,000 from Investor C, giving $175,000 to Investor B
and keeping $25,000 for himself. Now he had Investor C to worry about,
and so on.
Madoff’s criminal enterprise is often referred to as a Ponzi’s
scheme, named after Charles Ponzi, an Italian who immigrated to the United
States in 1903. Also known as a pyramid scheme, the Ponzi scheme is a
fraud whereby the schemer poses as a business financial advisor who promises
investors high returns on their money. In reality this money is never
invested at all. The schemer pays his investors with money obtained from
later investor victims. The schemer’s success is based on paying
investors large returns in a short amount of time in order to attract
more investors which in turn leads to more money. The scam ultimately
falls apart when a schemer like Madoff is no longer able to feed the beast,
i.e. pay off later investors, or legal authorities step in and shut down
In my next blog I will fill you in on some of the details of Charles Ponzi’s life.