Recent Big Money Scandal
If you have been paying attention to recent breaking news, you have probably heard a lot about someone named Bernard Madoff. Madoff, a former NASDAQ commissioner and CEO of Maddox brokerage firm, stands accused of orchestrating and operating the largest pyramid scheme in history, nearly $50 billion USD. The size and reach of this criminal plot are far and wide, affecting people in many countries. Also, this plot stole money from not only new investors, but many well known investors and celebrities.
From the owner of the New York Mets, Fred Wilpon, to GMAC Chairman J. Ezra Merkin, many thousands of people have lost a lot of money. Even large corporate investment firms like edge fund Maxam Capital Management lost big. Maxam invested $280 million, all gone missing now, and will have to close. Several international banks have also been infected as they had invested money in Madoff to. The size and scale of this Pyramid scheme are such that everyone should stand up and pay attention. Learn what a Pyramid and Ponzi scheme are, and how to avoid suffering a big financial loss to them.
Video: Madoff and the World's Largest Ponzi Scheme
Pyramid and Ponzi Schemes Defined
Ponzi and Pyramid schemes are one and the same. The latter is the term used around the world while Ponzi is a term used predominately in the United States. The term was coined in 1910 by Charles Ponzi, an Italian immigrant to the United States. Charles Ponzi was the first to bring Ponzi schemes to the attention of the world as a whole by being the first highly publicized, big scam. Ponzi schemes are fraudulent investments. The money invested by one is used to pay other investors their returns back. The Ponzi scheme works for a while, until the amounts become so large that there is not enough to pay dividends. Or it collapses when too many people request their principle investments back. These schemes can last successfully for years before collapsing or being intercepted by the authorities. Many appear, such as in the Madoff case, to be solid investments with no hint of anything illegal happening.
The Cost of Ponzi and Pyramid Schemes
While to an investor, the cost of falling victim to a Ponzi scheme can be painful, their costs affect all of us. Each year billions of dollars worldwide are stolen in this well-known scheme, but is more and more difficult to detect. With the explosion of the internet, international crime rings, and new technology allowing for easier movement of money and goods, Ponzi schemes are on the rise. Many investors have lost all of their retirement savings. Other schemes, Madoffs included, have robbed non-profit charities of millions of dollars. When banks are involved in these schemes, clients of these defrauded banks risk losing their money too. Even though they were never directly invested in the scheme itself. Ponzi schemes are a growing problem that affects everyone, especially in these tough economic times.
Typical Ponzi Scheme Example
A very typical Ponzi scheme goes like this. An investor is offered the opportunity to get in a great business investment. The offer is advertised either by internet or newspaper. The promised returns are high, 20% or more in just 1 month on your investment amount. After the term period for the investment is up, the Ponzi scheme actually pays up the 20% interest as promised. The investor is then offered to keep investing and make more money. The investor, seeing the money is actually coming in, will typically invest more the second time. This investor will probably tell a few of his friends about his good fortune too, creating a huge influx of new investors. This means a lot of money coming in. What happens next is the new investments pay off the promised dividends of the old ones, in a cascading effect that eventually collapses.
Video: Pyramid Schemes (American Greed)
How to Avoid Ponzi Schemes
The best advice to anyone looking to avoid a Ponzi scheme, is know where you are investing. Know all the terms, and read everything through. If you are unsure of an investment, ask a professional. Always keep in mind the old saying, “if it sounds too good to be true, it probably is.”