Madoff Ripoff

The Swan fraud is a pygmy compared with the giant Madoff ripoff, which could amount to US$50 billion. Bernard Madoff made off with other people’s money for decades from the inner sanctum of New York’s financial tabernacle via an upmarket Ponzi scheme.

Charles Ponzi arrived in the United States in 1903 with two dollars and fifty cents in his pocket. The scam which bears his name is an illegal investment vehicle that pays off old investors with money from new ones, and relies on a constant stream of new investment. Such schemes eventually collapse under their own weight.

In Ponzi’s case he initially canvassed friends and associates to back his scheme, offering a 50% return on investment in 45 day based on the “great returns” available from postal reply coupons which, he explained to the credulous, made such incredible profits easy. He started his own company, the Securities Exchange Company, to promote the scheme.

By July 1920 he had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested. As long as money kept flowing in, existing investors could be paid with the new money, but colossal liabilities were accumulating.

Ponzi lived luxuriously: he bought a mansion and brought his mother from Italy in a first-class stateroom on an ocean liner. He was a hero among the Italian community, and was apparently cheered wherever he went. When things turned sour, many who were ruined were so blinded by their faith in the man or their refusal to admit their foolishness that they still regarded him as a hero. In November 1920 Ponzi pleaded guilty to mail fraud and was sentenced to five years in federal prison. Other prison terms followed.

Madoff’s modus operandi was more conservative-he only offered 11-14%- and carefully targetted. He operated in a different social milieu to Ponzi , the common denominator being the credulity of investors.

When jailed for an earlier financial infraction before he hit upon the scheme which bears his name, rather than inform his mother in Italy of this career impeding development and his new insider status, Ponzi posted her a letter stating that he had found a job as a “special assistant” to a prison warden. Madoff’s court case is ahead of him. With his background, he can probably aspire to be the Executive Assistant to the Prison Governor.

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