Bernie Madoff ran the largest Ponzi scheme on earth, perhaps thinking that he could perpetuate the fraud for the rest of his life. After all, it had been going on for a very long time, and Madoff was—in addition to being rich—widely respected, even held in affection, by great numbers of people around the world. Pensions, charities and individuals were ripped off by his scam, which seems to have stolen at least $50 billion.

Named for Charles Ponzi, an Italian immigrant who arrived in America in 1903, the Ponzi scheme—which has actually been around for centuries-- uses money from later investors to repay the earlier investors, and the more investors the schemer manages to attract, the more he can pay to the earlier investors—and, of course, to himself. When no more money can be raised, the scheme collapses. If money continues to come in, the scam could go on indefinitely. Ponzi became a millionaire in no time. He was eventually deported, but not before he had jumped bail and fled to Florida, where he sold “prime real estate” which turned out to be swampland. Even Emma Lazarus would have beaten him back with a frying pan as soon as he stepped off the boat. After his expulsion, he continued his scamming until his death in 1949 in Rio de Janeiro.

As for Madoff—an apt name, according to Keith Olbermann, in that the man “made off” with people's money—he was somehow overlooked for years by the Securities and Exchange Commission. The SEC chairman, Christopher Cox, said the SEC received “credible and specific allegations regarding Mr. Madoff's financial wrongdoing,” but did not investigate aggressively.

“Over the decades,” Alex Berenson and Diana B. Henriques relate in the New York Times, “Mr. Madoff steadily expanded his circle of investors, drawing in small individual investors, charities, pension funds, prominent billionaires and European banks.” Cox says that not only did Madoff lie to regulators in previous examinations of his firm, but he also produced false documents and kept several sets of books. Harry Markopolis, a financial analyst, alerted the SEC's Boston office in 1999 that Madoff warranted investigation because it was impossible legally to be making as much money as Madoff claimed from the investment strategies he claimed to be using.

In 2005, Markopolis sent a 17-page memo to the SEC entitled “The World's Largest Hedge Fund is a Fraud.” Madoff was either front running, said Markopolis, or conducting a Ponzi scheme—probably the latter. Somehow, Madoff stayed in business.

In December 2008, Madoff admitted to senior executives at the firm that the management division was in fact “a giant Ponzi scheme.” Two of those executives—his sons—tipped off the authorities and Madoff was arrested.

Here are a few simple steps to avoid being victimized by a Ponzi scheme (actually these are good investment rules to follow, Ponzi or no Ponzi):

Don't sink your life savings into any one investment. As Paul Sullivan says in the New York Times, “The most basic book on investing will tell you never to put more than 5 or 10 percent into any one investment, particularly one intended to preserve wealth.”

Any investment that promises consistently high returns is not to be trusted. “Good investment advisors plan for a modest return over the years,” Sullivan notes. “They know that one year they will get you 11 percent, the next year 6 percent, and the year after that lose you 2 percent—so count on 5 percent. Mr. Madoff's returns were too good to be true, but no one wanted to believe that.”

Do not invest with someone just because you enjoy playing golf with him, or because you are from the same geographical region, or went to the same college.

For heaven's sake, don't be afraid or embarrassed to ask questions. Had more questions been asked of Bernie Madoff, he may not have inflicted as much damage as he did.

And the online 'Lectric Law Library warns, “You should be particularly cautious when an investment opportunity emphasizes a very high yield, a quick return, a 'once in a lifetime' opportunity, and the chance to 'get in on the ground floor.'”

Finally, and this is often overlooked: Vet your investment advisor. Don't automatically assume that he is competent just because this is what he does for a living. A lot of investment advisors encouraged a lot of people to invest with Ponzi—I mean, Madoff.

 BreadStreet Author: James F.  Cotter

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