The Ponzi Scheme

Background on Ponzi Schemes

Ponzi schemes can be complex, even when they operate on a relatively small scale. They can be run by a single person or group & to keep the scam going, those behind the plan convince numerous victims that they’re investing in a legitimate fund that promises great returns. Then the scam artists take money from new “investors” and use it to pay off existing investors. But for the scam to truly work for everyone’s benefit, the orchestrators would need access to an infinite supply of new victims.

Sooner or later, the pool of new participants runs out and funds dry up. Sometimes, this trouble starts earlier than the Ponzi schemers expected because of outside factors like sudden changes in the economy. When the scheme starts running low on victims, it starts to fall apart and investors lose everything they put into it. Often, the person behind the scheme vanishes before anyone figures it out since if they’re caught they’ll face the impossible situation of needing to return all of the lost money to all of the participants.

The largest such scheme to date was run by an American financier Bernie Madoff. Who in 2009 pled guilty to running a Ponzi scheme. He successfully swindled investors out of $65 billion. Unfortunately, Ponzi schemes are fairly common, but this one was one of a kind. Most Ponzi schemes operate on a very small scale, but Madoff was clearly a big thinker who caused major damage.

How did Madoff do it?

Madoff set up his portfolios to look like he was matching the returns of the S&P 500. This strategy prevented him from needing to pay too much to existing investors, but it still made his purported holdings appeal to new targets. And he remained under the radar by doing everything he could to keep his scheme low key. He targeted specific, elite groups of investors, keeping his victims close and the regulators off his back. He also stayed below the parapet by keeping his paperwork up to date and consistent. While most other Ponzi schemes operate by giving out large returns and then collapsing, Madoff was able to tread water with his smaller returns and keep his scam going for years.

Madoff did very little to arouse suspicion among his victims. As investors, they believed they could withdraw their money almost immediately, so they had no reason to think anything was wrong.

How Madoff’s Scheme Started to Fall Apart

After more than a decade of duping the regulators and his investors, Madoff saw his scheme lose steam in late 2008. He was borrowing money and couldn’t keep up with all of the investors who were desperate to liquidate their assets as the market continued to deteriorate. Eventually, Madoff realized he was in over his head and confessed to his sons, who were partners in Bernard Madoff Securities. Mark and Andrew Madoff turned their father into the FBI, putting an end to the scheme. After his arrest and guilty plea in 2009, Madoff, at seventy years old, was sentenced to 150 years in prison.

Madoff wasn’t and isn’t alone

While Bernie Madoff’s scheme was legendary, there are thousands of similar schemes going on at any given time. IYE Global are involved in a current investigation that has now been handed over to the Police and Inland Revenue for investigation and prosecution where victims in the UK have been duped out of at least £10 million. Many of these victims have had their entire pensions savings wiped out.

Ponzi schemes are particularly prevalent during bad economies and recessions. When people are desperate for easy money, victims are abundant. To avoid getting caught, you need to know what to look for.

  1. Unclear business models. Creators of Ponzi schemes will try to distract you with big numbers and will often discourage you from asking questions or run around them every time you do.
  2. Aggressive sales techniques. Have you noticed how scam artists will go to any length to get someone to sign up with them? If they were for real, they would just let their results speak for themselves.
  3. Promises of high returns for no work. Anyone who tells you that you can get rich quick is probably doing something illegal. If it sounds too good to be true……
  4. Difficulty withdrawing funds. Generally, a Ponzi scheme discourages its investors from withdrawing and creates delays in dispensing funds.

A trail of destruction.

The Madoff case left a trail of destruction and heartache in its wake, the carnage he caused sent a rippling effect that affected everyone he ever worked with. After his scheme fell apart, investors realized they had lost billions of dollars. Some former employees and associates were investigated & arrested for their involvement. At least three committed suicide, including Madoff’s oldest son Mark.

One of the biggest lessons that the Madoff scheme taught investors was that Ponzi schemes can seem legitimate, so buyers should always be on the lookout for scams. Madoff’s practice seemed legitimate and was even praised by many Wall Street investors, despite the fact that his numbers simply didn’t add up.

Though an unclear business model is a primary sign of a scam, the scheme itself is very carefully thought out. You really need to pay attention to what you are getting yourself into so that you don’t fall victim to one of these scams. IYE Global specialises in the in-depth due diligence of investments. We forensically examine the investment, including its performance or proposed performance, we fully investigate the people involved, which includes full background intelligence checks on them and their known associates. If there is property or land involved, we check title and ownership. At the end of our investigations, our clients are given a written report in plain English which is always explained in person telling our clients if it is safe to invest or not.

If you feel you may be a victim of a Ponzi scheme or wish to have a proposed investment investigated please call IYE Global on +44 (0)20 8914 7923 or complete the contact form on our website