Ponzi Scheme: Investment Fraud
Ponzi scheme. Why do we fall for it over and over again?
What is a Ponzi scheme?
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.
Ponzi scheme as a term appeared thanks to Carlo Ponzi, Italian immigrant who moved to the United States at age of sixteen in search of better life.
The thought of the most ingenious scam came to Carlo Ponzi 's mind by accident. He received a letter, with a postal coupon, which was carefully enclosed in an envelope. This coupon could be exchanged for stamps, so the receiver didn 't have to spend money to send back the answer. Such coupons existed due to the post agreement among several dozens of countries. Such coupons were equally accepted at any member-country. So, in other words, a coupon could be …show more content…
bought in France, and then used in Russia without losing a single penny of value, regardless of the difference in currency`s value.
Carlito was collecting money from different people, claiming they will get up to 50% return, which actually did happen to some of them. He said that such return is possible thanks to certain operations with mail stamps, currencies. He would never give detail information how he actually invested the money. And of course all he did, was paying interest to old customers with the money from new customers.
According to rough estimates, the victims of "Ponzi 's scheme" were about 40 million people. They had invested in his company over $ 15 millions, which in terms of the current dollars would be equal to 140 millions. Several high-profile trials followed the arrest and the closure of Ponzi 's SEC. Thanks to the scheme some of the other companies and five reputable banks went bankrupt. Carlito himself got off pretty easy. The court sentenced him to five years in prison, but after only 11 months Ponzi was released.
Ponzi scheme has become synonymous with greed for quick, easy money. And seems like this story should have taught us a life lesson. But in real world, history knows many examples of similar fraud. Financial scandal of Bernard Madoff is one of them.
What happened?
Bernard Lawrence "Bernie" Madoff is an American former financier, stockbroker and investment advisor convicted of securities fraud in 2009. He is the former non-executive chairman of the NASDAQ stock market, and the creator of a Ponzi scheme that is considered to be the largest financial fraud in U.S. history. Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest on December 11, 2008. The firm was one of the leaders in market maker businesses on Wall Street, which directly executed orders over the counter from retail brokers. According to his scheme couple of back office workers were creating false trading reports based on the returns that Madoff ordered for each customer. For example, once Madoff determined a customer 's return, one of the workers would enter a false trade from a previous date and then enter a false closing trade in the amount of the required profit. As an indictment showed later on, they even used a computer program specially designed to backdate trades and manipulate account statements. In March 2009 during Madoff guilty plea he admitted that the essence of his scheme was to deposit client money into a Chase account, instead of investing it and generate steady returns, as everybody had believed. When clients wanted their money, "I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds," he told the court.
In contrast to original Ponzi scheme Madoff didn’t promise superior returns, but instead he was giving steady returns in amount up to 10%. Such strategy helped him survive on the market for over 2 decades.
Who got hurt?
In 2008 due to world financial crisis, Madoff`s bubble burst.
Those affected ranged from carpenter-union pensioners to French aristocrats. Many of his victims are still waiting to learn if they will recover even a small fraction of the wealth they lost. And some anxious investors, who withdrew much more than they put into their Madoff accounts, are facing lawsuits that seek to reclaim profits that were paid with stolen money. Originally, Madoff stated that his company had liabilities that topped out at US$50 billion. Prosecutors of his case, however, stated that the size of his scheme 's fraud was around $64.8 billion and that it affected over 4,800 of Madoff 's clients. This makes the Bernie Madoff scandal the largest case of international fraud
yet.
Who benefited.
Bernard Madoff was the main beneficiary of his Ponzi scheme, during the investigation his combined reported assets totaled to 826 millions, plus his wife has 92.6$ millions in her own property, which includes 7$ million penthouse on Manhattan Upper east side, 11$ million mansion in Palm Beach, Florida; a 3 bedroom apartment in Cap D`Antibes on the French Rivera valued at 1.5$ million; 8.8$ million worth of yachts; 2,6$ million in jewelry; 45$ in municipal bonds and around 17 millions in cash. This list doesn’t include the wealth of the rest of Bernard Madoff`s family-2 sons and brother, who had been working with him all this years. His oldest customer, managed to withdraw more that 7 billion dollars during the years of cooperation with Bernard L. Madoff Investment Securities LLC, but his widow agreed to return all the money to the victims of Bernie. The other people who benefited were thousands of investors who withdraw they purported investment income during the financial crisis of 2008 and shortly after Madoff was accused of the fraud. Unfortunately not all of them are willing to return stolen money.
How it got resolved?
Starting from 1999 the SEC investigated Madoff 's company several times.
In the first couple of investigations performed there were reportedly no fraudulent practices in Madoff 's business. In 2004, articles began to appear in popular business journals alleging that Madoff 's business was a fraud. One article went so far as to say that Madoff 's hedge fund was the “biggest fraud in the world.” Unfortunately for the investors involved, this was dead on.
In 2005, the SEC investigated Madoff 's business again. This time, they found that Bernard was doing business as an asset manager while he was registered as an investment adviser. While no serious fines were brought up against Madoff, he was forced to register as an asset manager. The rest of the SEC 's findings were kept secret.
It wasn 't until 2007 when the Financial Industry Regulatory Authority reported that parts of Madoff 's business didn 't add up, which is what finally caused the SEC to arrest Madoff.
Mr. Madoff pleaded guilty, his fate was quickly settled, and he was sentenced to a 150-years prison term. And the US trustee was assigned for the liquidation of the Madoff`s assets. Beside Bernard himself, his sons Mark and Andrew, and his brother Peter were accused of fraud as well. As a result of which Mark Madoff hang him in 2010.
How it should have been resolved?
Both Carlo Ponzi and Bernard Madoff ruined so many lives, wasted people’s life savings and eventually went to jail. But was it enough? Would their punishment stop others from creating a new Ponzi scheme, especially if the temptation is bigger each time? I guess not. Is there anything that can be done to help those people? Yes, certain steps were taken. United States Government created fund to help victims of Bernard Madoff. We are talking about small percentage of all victims. Not everybody will be able to get their money back. His company assets were liquidated, but so much more is still wasted by years of luxurious life style and hidden bank accounts. I have only one question! Why even after so many attempts to warn about his fraudulent business SEC was so careless in auditing Bernard Madoff? In late 1999, Boston-based securities analyst Harry Markopolos discovered in five minutes that former chairman of NASDAQ Bernard Madoff was running a fraud. In 2000, Markopolos presented an initial report to the Boston office of the Securities and Exchange Commission (SEC) in an effort to stop what grew to rig investors around the globe for $65 billion of fake returns. This was the largest Ponzi scheme in world history. Markopolos and other investigators pursued the truth for nearly a decade presenting their findings to journalists, government officials, and executives in the financial services industry only to find no one would listen. Isn’t easier to prevent such scandals from happening instead of dealing with consciences and thousands of legal cases? How many more Ponzi schemes do we need to learn a lesson? I believe that Government should create a special organization to prevent Ponzi schemes from happening. And take any warning more serious, because only since 2009 to 2010 ten more Ponzi schemes were revealed with total damage of more than 10 billion dollars.
Utilitarian point of view on Madoff`s fraud.
Utilitarianism basically states that by doing what is morally right, will benefit the most amounts of people and generate the greatest amount of happiness with least of pain possibly. So in other words doing what is right should be placed above all else. I think it is safe to say that Bernie Madoff stood for everything that utilitarianism is against. The question is-was his sentence to 150 year in prison “fair”, “right” from the utilitarian point of view? Did it benefit anybody who got hurt by Madoff, will it satisfy people who lost everything they had worked for all their life? I guess not! What would be right according to the dogma of maximum benefit and minimum suffering is to return everybody his money. In order to do so the judge and the investigators should have made Bernard to return all the money he had hidden in foreign banks, plus make him work under strict supervision so he can continue paying out the money he had stolen, instead of living at the expense of the tax money from law-abiding citizens. Make every and each day of his life another step towards the benefit of the people he had hurt. This is the only way for Madoff to pay out his debt to the society.
I believe that US Government should be more cautious towards any sign of the new Ponzi scheme and take any alerts from journalists and economists more seriously. In addition they should toughen the punishment of such crime in order to stop other “Ponzi”, “Madoff” from stealing. It is a small price for the benefit of many.
And as for regular people, we should take another look on our life values, and the means we are ready to tolerate in order to achieve our goals. Such change will help to answer the title question-Why do we fall for Ponzi scheme other and other again? It is very simple-greed, carelessness and indifference. Desire to make quick money without asking many questions. There are many proofs that certain economists and journalists had been warning government and society about suspicions profits of Bernard and Carlos, long before they schemes collapsed. Big financial companies didn’t deal with Madoff, however they didn’t try to stop him. I am more than sure that some brilliant investors made great profits using Madoff and Ponzi, while knowing that it’s all fraud. The only rule they had to remember is to take their money out on time. So the fault lies not only on the original two people, but on many more, who unfortunately kept their freedom, physical and financial. And again fault lies on people with bad nature to make easy money, regardless of the hurt it brings. That’s why years pass, but nothing changes, we continue gambling with our own lives, we want to become rich fast, so we are being naïve because we want to. So for the happiness of many we should sacrifice our mercenariness and greed, I think it’s a fair price.
References
http://thedebtweowe.com/the-bernie-madoff-scandal-a-short-overview-of-the-worlds-largest ponzi-scheme http://www.detector-valjut.com/genialnaya-afera-karlo-ponci.php http://www.biography.com/people/bernard-madoff-466366?page=1 http://www.forbes.com/2008/12/12/madoff-ponzi-hedge-pf-ii-in_rl_1212croesus_inl.html http://money.cnn.com/2009/04/24/news/newsmakers/madoff.fortune/
Madoff investment scandal. (2010). In Wikipedia, The Free Encyclopedia http://en.wikipedia.org/w/index.php?title=Madoff_investment_scandal&oldid=609767270
James Rachels, (May 2002), The Elements of Moral Philosophy, New York, McGraw-Hill College.
What is a Ponzi scheme?
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.
Ponzi scheme as a term appeared thanks to Carlo Ponzi, Italian immigrant who moved to the United States at age of sixteen in search of better life.
The thought of the most ingenious scam came to Carlo Ponzi 's mind by accident. He received a letter, with a postal coupon, which was carefully enclosed in an envelope. This coupon could be exchanged for stamps, so the receiver didn 't have to spend money to send back the answer. Such coupons existed due to the post agreement among several dozens of countries. Such coupons were equally accepted at any member-country. So, in other words, a coupon could be …show more content…
bought in France, and then used in Russia without losing a single penny of value, regardless of the difference in currency`s value.
Carlito was collecting money from different people, claiming they will get up to 50% return, which actually did happen to some of them. He said that such return is possible thanks to certain operations with mail stamps, currencies. He would never give detail information how he actually invested the money. And of course all he did, was paying interest to old customers with the money from new customers.
According to rough estimates, the victims of "Ponzi 's scheme" were about 40 million people. They had invested in his company over $ 15 millions, which in terms of the current dollars would be equal to 140 millions. Several high-profile trials followed the arrest and the closure of Ponzi 's SEC. Thanks to the scheme some of the other companies and five reputable banks went bankrupt. Carlito himself got off pretty easy. The court sentenced him to five years in prison, but after only 11 months Ponzi was released.
Ponzi scheme has become synonymous with greed for quick, easy money. And seems like this story should have taught us a life lesson. But in real world, history knows many examples of similar fraud. Financial scandal of Bernard Madoff is one of them.
What happened?
Bernard Lawrence "Bernie" Madoff is an American former financier, stockbroker and investment advisor convicted of securities fraud in 2009. He is the former non-executive chairman of the NASDAQ stock market, and the creator of a Ponzi scheme that is considered to be the largest financial fraud in U.S. history. Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest on December 11, 2008. The firm was one of the leaders in market maker businesses on Wall Street, which directly executed orders over the counter from retail brokers. According to his scheme couple of back office workers were creating false trading reports based on the returns that Madoff ordered for each customer. For example, once Madoff determined a customer 's return, one of the workers would enter a false trade from a previous date and then enter a false closing trade in the amount of the required profit. As an indictment showed later on, they even used a computer program specially designed to backdate trades and manipulate account statements. In March 2009 during Madoff guilty plea he admitted that the essence of his scheme was to deposit client money into a Chase account, instead of investing it and generate steady returns, as everybody had believed. When clients wanted their money, "I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds," he told the court.
In contrast to original Ponzi scheme Madoff didn’t promise superior returns, but instead he was giving steady returns in amount up to 10%. Such strategy helped him survive on the market for over 2 decades.
Who got hurt?
In 2008 due to world financial crisis, Madoff`s bubble burst.
Those affected ranged from carpenter-union pensioners to French aristocrats. Many of his victims are still waiting to learn if they will recover even a small fraction of the wealth they lost. And some anxious investors, who withdrew much more than they put into their Madoff accounts, are facing lawsuits that seek to reclaim profits that were paid with stolen money. Originally, Madoff stated that his company had liabilities that topped out at US$50 billion. Prosecutors of his case, however, stated that the size of his scheme 's fraud was around $64.8 billion and that it affected over 4,800 of Madoff 's clients. This makes the Bernie Madoff scandal the largest case of international fraud
yet.
Who benefited.
Bernard Madoff was the main beneficiary of his Ponzi scheme, during the investigation his combined reported assets totaled to 826 millions, plus his wife has 92.6$ millions in her own property, which includes 7$ million penthouse on Manhattan Upper east side, 11$ million mansion in Palm Beach, Florida; a 3 bedroom apartment in Cap D`Antibes on the French Rivera valued at 1.5$ million; 8.8$ million worth of yachts; 2,6$ million in jewelry; 45$ in municipal bonds and around 17 millions in cash. This list doesn’t include the wealth of the rest of Bernard Madoff`s family-2 sons and brother, who had been working with him all this years. His oldest customer, managed to withdraw more that 7 billion dollars during the years of cooperation with Bernard L. Madoff Investment Securities LLC, but his widow agreed to return all the money to the victims of Bernie. The other people who benefited were thousands of investors who withdraw they purported investment income during the financial crisis of 2008 and shortly after Madoff was accused of the fraud. Unfortunately not all of them are willing to return stolen money.
How it got resolved?
Starting from 1999 the SEC investigated Madoff 's company several times.
In the first couple of investigations performed there were reportedly no fraudulent practices in Madoff 's business. In 2004, articles began to appear in popular business journals alleging that Madoff 's business was a fraud. One article went so far as to say that Madoff 's hedge fund was the “biggest fraud in the world.” Unfortunately for the investors involved, this was dead on.
In 2005, the SEC investigated Madoff 's business again. This time, they found that Bernard was doing business as an asset manager while he was registered as an investment adviser. While no serious fines were brought up against Madoff, he was forced to register as an asset manager. The rest of the SEC 's findings were kept secret.
It wasn 't until 2007 when the Financial Industry Regulatory Authority reported that parts of Madoff 's business didn 't add up, which is what finally caused the SEC to arrest Madoff.
Mr. Madoff pleaded guilty, his fate was quickly settled, and he was sentenced to a 150-years prison term. And the US trustee was assigned for the liquidation of the Madoff`s assets. Beside Bernard himself, his sons Mark and Andrew, and his brother Peter were accused of fraud as well. As a result of which Mark Madoff hang him in 2010.
How it should have been resolved?
Both Carlo Ponzi and Bernard Madoff ruined so many lives, wasted people’s life savings and eventually went to jail. But was it enough? Would their punishment stop others from creating a new Ponzi scheme, especially if the temptation is bigger each time? I guess not. Is there anything that can be done to help those people? Yes, certain steps were taken. United States Government created fund to help victims of Bernard Madoff. We are talking about small percentage of all victims. Not everybody will be able to get their money back. His company assets were liquidated, but so much more is still wasted by years of luxurious life style and hidden bank accounts. I have only one question! Why even after so many attempts to warn about his fraudulent business SEC was so careless in auditing Bernard Madoff? In late 1999, Boston-based securities analyst Harry Markopolos discovered in five minutes that former chairman of NASDAQ Bernard Madoff was running a fraud. In 2000, Markopolos presented an initial report to the Boston office of the Securities and Exchange Commission (SEC) in an effort to stop what grew to rig investors around the globe for $65 billion of fake returns. This was the largest Ponzi scheme in world history. Markopolos and other investigators pursued the truth for nearly a decade presenting their findings to journalists, government officials, and executives in the financial services industry only to find no one would listen. Isn’t easier to prevent such scandals from happening instead of dealing with consciences and thousands of legal cases? How many more Ponzi schemes do we need to learn a lesson? I believe that Government should create a special organization to prevent Ponzi schemes from happening. And take any warning more serious, because only since 2009 to 2010 ten more Ponzi schemes were revealed with total damage of more than 10 billion dollars.
Utilitarian point of view on Madoff`s fraud.
Utilitarianism basically states that by doing what is morally right, will benefit the most amounts of people and generate the greatest amount of happiness with least of pain possibly. So in other words doing what is right should be placed above all else. I think it is safe to say that Bernie Madoff stood for everything that utilitarianism is against. The question is-was his sentence to 150 year in prison “fair”, “right” from the utilitarian point of view? Did it benefit anybody who got hurt by Madoff, will it satisfy people who lost everything they had worked for all their life? I guess not! What would be right according to the dogma of maximum benefit and minimum suffering is to return everybody his money. In order to do so the judge and the investigators should have made Bernard to return all the money he had hidden in foreign banks, plus make him work under strict supervision so he can continue paying out the money he had stolen, instead of living at the expense of the tax money from law-abiding citizens. Make every and each day of his life another step towards the benefit of the people he had hurt. This is the only way for Madoff to pay out his debt to the society.
I believe that US Government should be more cautious towards any sign of the new Ponzi scheme and take any alerts from journalists and economists more seriously. In addition they should toughen the punishment of such crime in order to stop other “Ponzi”, “Madoff” from stealing. It is a small price for the benefit of many.
And as for regular people, we should take another look on our life values, and the means we are ready to tolerate in order to achieve our goals. Such change will help to answer the title question-Why do we fall for Ponzi scheme other and other again? It is very simple-greed, carelessness and indifference. Desire to make quick money without asking many questions. There are many proofs that certain economists and journalists had been warning government and society about suspicions profits of Bernard and Carlos, long before they schemes collapsed. Big financial companies didn’t deal with Madoff, however they didn’t try to stop him. I am more than sure that some brilliant investors made great profits using Madoff and Ponzi, while knowing that it’s all fraud. The only rule they had to remember is to take their money out on time. So the fault lies not only on the original two people, but on many more, who unfortunately kept their freedom, physical and financial. And again fault lies on people with bad nature to make easy money, regardless of the hurt it brings. That’s why years pass, but nothing changes, we continue gambling with our own lives, we want to become rich fast, so we are being naïve because we want to. So for the happiness of many we should sacrifice our mercenariness and greed, I think it’s a fair price.
References
http://thedebtweowe.com/the-bernie-madoff-scandal-a-short-overview-of-the-worlds-largest ponzi-scheme http://www.detector-valjut.com/genialnaya-afera-karlo-ponci.php http://www.biography.com/people/bernard-madoff-466366?page=1 http://www.forbes.com/2008/12/12/madoff-ponzi-hedge-pf-ii-in_rl_1212croesus_inl.html http://money.cnn.com/2009/04/24/news/newsmakers/madoff.fortune/
Madoff investment scandal. (2010). In Wikipedia, The Free Encyclopedia http://en.wikipedia.org/w/index.php?title=Madoff_investment_scandal&oldid=609767270
James Rachels, (May 2002), The Elements of Moral Philosophy, New York, McGraw-Hill College.