If it sounds too good to be true........is it a Ponzi scheme? Bernie Madoff was running a “Ponzi scheme.” He took over $50 billion from his investors, including his own synagogue. The SEC alleges that the owners of GPB Capital took millions of investors’ money in a “Ponzi scheme.”
What is a Ponzi scheme? It is an investment scheme where early investors are paid money from later investors’ money. The con artist promises either high returns or consistently excellent returns. But, the problem is that the “Ponzi” or “Madoff” is really sending money received from “Peter to pay Paul”. There is no real investment that’s generating the touted returns.
The original Mr. Ponzi was an Italian immigrant to Boston who, in 1920, claimed he could pay 100% return to investors in 90 days by buying postal coupons at a discount overseas. He advertised in newspapers in Boston’s North End, and the money came pouring in. Within a month, he had four clerks counting the money, while he lived a life of luxury and spent the money on himself and gambling on the horses. He never actually bought any postal coupons.
Policemen were among the eager investors who lined up every morning to invest. The scheme collapsed when an investigative reporter did the math and proved that fewer postal coupons had been sold or redeemed overseas than Ponzi claimed. Eventually, his employees admitted the fraud, and he was jailed. However, con artist that he was, when paroled he began another investment scheme. Again, he was arrested and jailed. He died penniless.
Bernie Madoff repeated the scenario. He was also successful at creating bogus statements, showing consistent high returns. Like Ponzi, his investors were led to believe in him because early investors were able to cash out and received the promised returns. Meanwhile, he owned a house in France, mansions in Palm Beach and on Long Island, while his staff and he concocted bogus monthly statements.
All Ponzi schemes are doomed to collapse when the amount of new investors’ money is no longer sufficient to pay earlier investors wanting their money. It was because of the 2008 real estate market collapse that Madoff’s clients began demanding their money. There wasn’t enough money and, finally, he confessed that he was running a Ponzi scheme.
If you have learned that your investment advisor, planner or broker has borrowed money from you, or has refused to allow you to redeem your investment and receive your money, you should seek immediate assistance from an attorney who can help investigate and then help recover your losses.