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Wednesday, July 01, 2009

Potato Chips ~ Pringles Original

Swindle ~ Ponzi Scheme


Hypothetical Example

Verbal constructions that sound impressive but are essentially meaningless will be used to dazzle investors: terms such as "hedge futures trading," "high-yield investment programs," "offshore investment" might be used. The promoter will then proceed to sell stakes to investors — who are essentially victims of a confidence trick — by taking advantage of a lack of investor knowledge or competence. The Madoff scandal of 2008 showed that investors presumed to be sophisticated, such as hedge fund managers and international bankers, can also be tricked into joining a Ponzi scheme by a promoter with a well-established (if spurious) reputation for financial skill. Claims of a "proprietary" investment strategy, which must be kept secret to ensure competitive edge, may also be used to hide the nature of the scheme. Bernard Madoff, for example, only permitted one accounting firm, run by his brother-in-law, to perform audits on his hedge fund, claiming the need to keep his strategy secret.

Without the benefit of precedent or objective prior information about the investment, only a few investors are tempted, usually for small sums. Thirty days later, the investor receives the original capital plus the 20 percent return. At this point, the investor will have more incentive to put in additional money and, as word begins to spread, other investors grab the "opportunity" to participate, leading to a cascade effect deriving from the promise of extraordinary returns. However, the "return" to the initial investors is being paid out of the investments of new entrants, and not out of profits.

One reason that the scheme initially works so well is that early investors — those who actually got paid the large returns — commonly reinvest their money in the scheme (it does, after all, pay out much better than any alternative investment). Thus, those running the scheme do not actually have to pay out very much (net) — they simply have to send statements to investors showing them how much they earned by keeping the money, in order to maintain the deception that the scheme is a fund with high returns.

Promoters also try to minimize withdrawals by offering new plans to investors, often where money is frozen for a longer period of time, in exchange for higher returns. The promoter sees new cash flows as investors are told they could not transfer money from the first plan to the second. If a few investors do wish to withdraw their money in accordance with the terms allowed, the requests are usually promptly processed, which gives the illusion to all other investors that the fund is solvent.

The catch is that at some point one of three things will happen:

• The promoter will vanish, taking all the remaining investment money (minus the payouts to investors) with him.

• The scheme will collapse under its own weight as investment slows and the promoter starts having problems paying out the promised returns (the higher the returns, the greater the chance of the Ponzi scheme collapsing). Such liquidity crises often trigger panics, as more people start asking for their money, similar to a bank run.

• The scheme is exposed because the promoter fails to validate the claims when asked to do so by legal authorities.


Swindler ~ Bernard Madoff

There's definitely more than meets the eye. Can one man really pull this off, on his own?

"I am sorry, I don't ask for forgiveness. I leave a legacy of shame to my family. I am responsible for a great deal of suffering and pain. I live in a tormented state... I cannot offer an excuse for my behavior... How do you excuse deceiving investors... and 200 employees? How do you excuse lying to my sons and two brothers? How do you excuse lying to a wife who stood by you for 50 years and still stands by me? There is no excuse for that."

Informative Links:

'Evil' swindler Madoff jailed for 150 years
AFP - Tuesday, June 30

NEW YORK (AFP) - - Wall Street swindler Bernard Madoff was sentenced Monday to 150 years in jail for masterminding an "evil" multi-billion-dollar investment scam that cheated thousands of people around the world.

"It is the judgment of this court that Bernard Madoff should be sentenced to 150 years in jail," Judge Denny Chin said as he handed down the maximum term possible on 11 charges of fraud, theft and perjury.

He described Madoff's crimes as "extraordinarily evil" and said it was "not merely a bloodless crime that takes place on paper but one that takes a staggering human toll."

The tough sentence came even after Madoff, the former chairman of the Nasdaq, made a courtroom apology to his victims. "I am sorry," he told them simply. "I don't ask for forgiveness."

"I leave a legacy of shame to my family. I am responsible for a great deal of suffering and pain. I live in a tormented state," said the disgraced 71-year-old financier who now faces spending the rest of his life in prison.

"I cannot offer an excuse for my behavior," he added. "How do you excuse deceiving investors... and 200 employees?"

"How do you excuse lying to my sons and two brothers? How do you excuse lying to a wife who stood by you for 50 years and still stands by me? There is no excuse for that."

Some of Madoff's victims vented their fury as they addressed the court.

Cheryl Weinstein blasted Madoff as "a monster" and a "beast."

"He walks among us. But he is a beast who has fed upon us to satisfy his own needs... I am asking you to keep in a cage behind bars," she said.

Breaking into tears, Burt Ross, who lost five million dollars, said Madoff "has truly earned his reputation of being the most despised person in America today."

"I only hope that his jail sentence is long enough so that his jail cell becomes his coffin," said Michael Schwartz, 33, who said the money stolen from his family had been set aside to take care of his mentally disabled brother.

Judge Chin gave Madoff 10 days to appeal the sentence, but noted there had not been a single letter from friends or family testifying to his good deeds. "The absence of such support is telling," he said.

Madoff's wife, Ruth, finally broke her silence Monday to lash out her husband, saying: "All those touched by this fraud feel betrayed; disbelieving the nightmare they woke to.

"The man who committed this horrible fraud is not the man whom I have known all these years," she said in a statement.

White House spokesman Robert Gibbs weighed in later by saying the maximum sentence handed to Madoff would send an effective warning to other investors.

"The judge wanted to send a very strong signal to anybody that invests money on behalf of others of the amazing responsibility that they have to those investors and to the country," he said, adding "that message will be heard loud and clear."

The former Wall Street icon can expect to face a high security experience in jail rather than a more lax "prison camp" that other white collar criminals might be receive, according to former federal prosecutor William Devaney.

The decision, Devaney told AFP, is not for the judge but the court can make recommendations to the Bureau of Prisons.

Defense attorney Bradley Simon told AFP he thought Madoff would end up "with people who have committed other type of offences, more violent..."

The verdict came some six months after the biting economic downturn forced Madoff to unmask himself as behind one of the biggest financial scams in history.

Prosecutors say about 13 billion dollars was handed to Madoff. The financier himself has talked about losing some 50 billion dollars, which is believed to be the amount that would have been paid out had the funds been properly invested.

Among Madoff's victims were Hollywood celebrities, international movers and shakers, some of the world's most famous banks and Jewish charities, some of which were forced to close after the scheme unraveled.

Madoff told the court in March that of the billions of dollars that passed through his hands during the three-decade scam, he never invested one cent in the market. Instead he stashed the funds in a Chase Manhattan bank account.

The funds were then used to pay out "dividends" to investors in what is known as a "Ponzi scheme."

One lingering issue is how to return the stolen funds. Of the billions of dollars that were lost, prosecutors say only one billion dollars has been recovered.

The judge deferred the issue of restitution for another 90 days to give court-appointed liquidators more time to recover the missing funds.