Signup for our free newsletter:

Madoff's "Ponzi Scheme" Unravels

Written By Brian Hicks

Posted December 15, 2008





For a money manager, there aren’t many things worse than having your name paired up Charles Ponzi in the same sentence. After all, the words Ponzi and trust are about as far apart as you can get—sort of like the difference between the words heaven and hell. No ordinary con-man, Ponzi was perhaps the greatest swindler of them all.

A nearly penniless Italian immigrant, Ponzi bilked thousands of investors out millions in 1920. His bait, however, was as old as the hills. He promised his investors a 40% return in just 90 days.

Naturally, it worked like a charm. At his peak, Ponzi’s promise had become so irresistible that he was making $250,000 a day.

But behind the scheme there was absolutely nothing at all. The promised investment in postal stamps was never made and Ponzi simply “robbed-Peter-to-pay-Paul.”  Ponzi’s magic as it turns out was in simply using the money grabbed from new investors to pay off the old.

And when no more greater fools could be found, “Ponzi’s scheme” blew up in everyone’s face. Ponzi’s investors lost everything and Charles eventually went to jail.

Of course, the latest and greatest swindler— Bernard Madoff— has offered up nothing but the same, proving that is there really is nothing new under sun.  He also robbed Peter to Paul while delivering returns that were too good to be true.

But compared to Madoff, Ponzi was nothing but piker.

Madoff’s scam fooled them all and may have cost its investors over $50 billion.  That would make Madoff’s handiwork the greatest investment scam of all time.


From USA Today by David Lieberman entitled: Financial world still amazed over Madoff’s downfall

“The financial world begins this week still in a daze over the spectacular collapse of an alleged Ponzi scheme by onetime Wall Street legend Bernard Madoff – possibly the biggest swindle ever committed by a single person.

It’s “a stunning fraud that appears to be of epic proportions,” Andrew Calamari of the Securities and Exchange Commission’s New York Regional Office said in a statement after the FBI arrested Madoff last week.

It’s unclear how many institutions and individuals will suffer from losses that federal authorities say Madoff privately pegged at $50 billion.

The repercussions could affect the entire investment industry if lawmakers decide they must try to prevent additional losses on such a massive scale. “It’s a good thing, because cases like Madoff will lead to tighter and more oversight,” says Roland Eberhard, who oversees $500 million in investments for Basel Asset Management.

Officials allege that Madoff falsified reports from a secretive money management service that he owned – run separately from his main stock transaction firm – to make it appear to be more successful than it was. Madoff allegedly kept it going by taking cash from unwitting new investors to pay customers who wanted to redeem their holdings.

In a January SEC filing, Madoff said he managed $17.1 billion in assets for 23 clients. But potential victims could number in the hundreds and possibly thousands and include major banks, hedge funds, charities and pension funds.

For now, many are amazed at the abrupt collapse of a financier considered so innovative and successful that wealthy individuals and blue-chip firms sought his investment services and advice.

A Hofstra Law School graduate who started his career with $5,000 saved working as a lifeguard, Madoff spent 48 years cultivating a reputation as a pioneer of electronic trading and the development of the Nasdaq Stock Market. He was its chairman in the early 1990s and served on the boards of the National Association of Securities Dealers and the Securities Industry Association. He’s “considered a statesmen in our industry,” says Marianne Brown, CEO of Omgeo, a firm that helps to affirm trades.

Many were stunned that someone so prominent could commit such a massive alleged fraud. “It’s like you find out the Tooth Fairy died,” says Robert Battalio, professor of trading at University of Notre Dame’s Mendoza College of Business.

The end came after Wednesday when, according to the SEC complaint, Madoff told two unnamed senior employees that his fund was “all just one big lie” and “finished” with “absolutely nothing.” Madoff allegedly said that he still had as much as $200 million that he wanted to distribute to family, friends and employees- for example, paying bonuses two months early – before he turned himself in. The employees alerted authorities.”


Separated by eighty-eight years of history, the human condition remains the same.

Madoff was hardly the first, and he certainly won’t be the last-not by a long shot.

As for Charles Ponzi, he continued his scams until practically his last breath. He died in 1949 after a lifetime spent pulling the wool over people’s eyes.

Completely unrepentant, Ponzi told an American reporter before he passed:

“Even if they never got anything for it, it was cheap at that price. Without malice aforethought I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over.”

Even from the grave, Ponzi lives.