btw, what’d he do exactly?
today, the securities and exchange commission (s.e.c.) pretty much admitted that they screwed up by failing to follow-up on complaints about madoff, the latest finance guy to wreak financial havoc and take another big chunk out of the public trust. rather than rehash the events associated with this mess, i thought i’d do a little background research about the scheme itself. i give you 5 things you wanted to know but were afraid to ask about the ponzi scheme.
what is a ponzi scheme?
a financial operation that usually offers abnormally high returns right out of the gate, required to attract new investors.
why is it illegal?
in order to pay advertised high returns in the short term, the scheme’s organizer takes money from new investors to pay earlier investors; even if there are no actual real gains.
why is it called a ponzi scheme?
in 1921 charles ponzi duped thousands of investors into investing in a postage stamp speculation scheme–he thought he could take advantage of differences between u.s. and foreign currencies used to buy and sell international mail coupons. ponzi told investors he could provide a return of 40% in just 90 days (at the time, a rate 35% more than a straight bank investment). a few early investors were paid off to make the scheme look legitimate, an investigation found that ponzi had only purchased about $30 worth of the coupons.
is the madoff debaucle a one-off?
these types of schemes have a long history. boy band impresario lou pearlman (pictured above) ran one for 20 years. his scheme involved a a fraudulent savings and loans program that was not fdic insured (he claimed it was) and it cost investors an estimated $500M. in 2008 pearlman agreed to plead guilty to charges of conspiracy, money laundering, and making false statements and was sentenced to 300 months in jail. he has the opportunity to cut one month of of his sentence for each $1M he pays back to investors.
how can i detect a ponzi-like scheme?
in short, use your head–if it’s too good to be true, it probably is. look really hard at anything that very high returns without similarly high risk. also, investments sold through weird means like email or cold call or via an un-regulated business that is not appropriately regulated is probably illegal*.
* the article goes on to say that you can check with regulators but um, we know how that went.
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