The simple Ponzi scheme, as drawn up by Charles Ponzi himself in the early 1900’s, involved one schemer recruiting suckers one by one. While this is effective, it is not nearly as efficient in an “earnings by the hour” analysis. To increase the scam’s efficiency, it requires big suckers, not little ones.
Bernie Madoff wanted to earn the big bucks. In order to do that, Madoff
knew he would have to steal large sums of money from each victim. Using
his sophisticated financial networking skills, he decided to go after
large investment funds. With his background as an investment advisor and
former president of NASDAQ he reviewed his old rolodex cards and began
soliciting monies from familiar investment funds. Although he knew he
could steal from his neighbor, why not steal from the whole neighborhood?
Individual investors in the funds funneled to Madoff lost tens of billions
of dollars when Madoff’s scheme collapsed. Most of these investment
funds were unable to repay their investors. These funds were the “feeder
funds” that allowed Madoff to accumulate a dishonest personal wealth
of billions of dollars.
One of the largest of these feeder funds was a custodian for IRA investments
located in Denver, Colorado. NTC and Co. served as an investment depository
for wealthy investors who preferred to self-direct their IRA investments.
While traditional IRA’s invest in mutual funds, stocks or bonds,
the self-directed IRA’s invest in riskier ventures such as hedge
funds, limited partnerships and the like. Some of the NTC investors probably
directed investments to Madoff. However, many others did so upon advice
of NTC and financial consultants. Some of these feeder fund were licensed
under security regulations but many others were not. And pity the investor
seeking recovery against the unlicensed feeder fund.
There are many important ideas to keep in mind when litigating these types
of claims. In a future post, I will discuss the legal roadblocks to claims
against feeder funds.