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On June 29, 2009, Bernard Lawrence 'Bernie' Madoff was sentenced to 150 years in prison for perpetrating what has been called 'the largest investment fraud in Wall Street history.' Actual losses have been estimated at $64.8 billion by prosecutors. Apparently, Madoff admitted to his sons that his company, Bernard L. Madoff Investment Securities LLC, was nothing more than a giant Ponzi scheme.
What is a Ponzi scheme? The phrase was coined in the 1920's to describe a fraud orchestrated by Charles Ponzi, a clerk in Boston. A Ponzi scheme is defined by Wikipedia as 'a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned.' Ponzi did not invent the scheme, but his became known throughout the United States because of the enormous amount of money it took in.
While there are no hard and fast rules to define a Ponzi scheme, some clues that a financial fraud may be occurring are:
Unusually high or consistent returns - Charles Ponzi was able to defraud investors by promising 50% return on their money in 45 days at a time when annual interest rates were only 5%. Madoff consistently delivered 10% to 12% annual returns no matter what the securities markets were doing. Even Warren Buffett has experienced negative returns in his portfolios.
Friend or family euphoria - The key to making a Ponzi scheme work is to attract a steady stream of new investors. Typically, the first few investors are paid the promised returns, often with their own money or funds from new investors, to make the scheme look legitimate. They get so excited they re-invest their returns and recruit their own friends and family to invest. In July 1920, Ponzi was taking in a million dollars per week.
Meaningless words - The promoter may use terms like 'proprietary investment strategy', 'high-yield investment programs', 'offshore investment' or 'hedge future trading' to deceive an unwary investor. These phrases are essentially meaningless, but may sound impressive to someone who is not familiar with financial jargon.
History has documented many get-rich-quick scams all over the world that bilked billions of dollars from investors. We've all heard that 'if it seems too good to be true, it probably is,' yet a little bit of greed or desperation can cloud the judgment of just about anybody. There is no such thing as high returns with no risk. Remember, the higher the return, the greater the risk of loss.
Copyright © 2009 Life Letter. All rights reserved. For informational purposes only and
not intended to provide specific financial advice. Readers are advised to seek professional advice before making any financial decision based on any of the ideas presented in this article. This copyright information presented online is not to be copied, or clipped or republished for any reason. The publisher does not guarantee the accuracy and will not be held liable in any way for any error, or omission, or any financial decision.
This publication and website are intended for Ontario residents only and the information contained is subject to change without notice. Mutual Funds are offered and regulated through Global Maxfin Investments Inc. (GMII). Insurance products (including Segregated Funds) and Income Tax Planning is provided under the name of Ausim Mobeen. GMII does not supervise these activities and will not be accountable, responsible or liable for such activities. This publication contains opinions of the writer and may not reflect opinions of GMII. The information contained herein was obtained from sources believed to reliable, but no representation, or warranty, express or implied, is made by the writer or GMII or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any of the securities. The securities discussed in this publication may not be eligible for sale in some jurisdictions. If you are not a Canadian resident, this report should not have been delivered to you. This publication is not meant to provide legal or account advice. As each situation is different you should consult your own professional advisors for advice based on your specific circumstances.
