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Bernard Madoff Ponzi Scheme
According to Alex Altman (2008), the Ponzi scheme masterminded by Bernard Madoff, underlines the fact that financial instruments can be used as tools of destruction in the field of financial markets. The $50 billion Ponzi scheme left many investors bankrupt while the market regulators were highly motivated as the scheme has taken place under watch. Although Bernard Madoff Ponzi scheme had previously been investigated by the Securities and Exchange Commission (SEC), a newspaper investigation raised the red flag in 2001 by questioning his investment strategies (Markham, 2006).
The article claiming to have interviewed Madoff scheme investors indicated that even the most knowledgeable investors did not understand how he did it. The lure of pocketing windfalls of money could not help the investors to suspect any anomaly with how the scheme operated. He operated under tightly controlled marketing schemes with great amount of secrecy. When the secrecy of his investment busted, it became clear to all that Madoff investment was a clear Ponzi scheme.
According to Alex Altman (2008), Ponzi schemes are fraudulent games where the perpetrators take advantages of investor’s illusions of investment solvency. They make sure to pay early investors with capital raised from new entrants to the scheme. With early investors receiving huge payouts, attraction of new entrants is always guaranteed. The problem that exposed Madoff investment as a Ponzi scheme was the market failure that made many investors withdraw.
Other Ponzi schemes
The scam was named Ponzi scheme after the Boston business person Charles Ponzi. According to Alex Altman (2008), Ponzi schemes started with a New Yorker named William Miller in 1899. He made more than $1 million out of investors. He claimed that he knew well how profitable companies worked and paid his first few investors before the scam got exposed by newspaper investigations. Despite promising huge returns, his investors got paltry 28 cents per dollar investment.
On his part, Charles Ponzi, an Italian immigrant, enticed people into buying postage stamps using international coupons. The investors would buy the stamps at European currency before redeeming them in US dollars at a higher value. The scheme could not be sustained due to lack of international coupons to sustain it. The general idea of the scheme was the possibility of massive gains from investment (Dunn, 2004).
The schemes including those that followed later made sure to pay the first entrants but always collapsed when they could not make more entrants into the scheme. The Ponzi scheme is managed by a single leader with help from collaborators who recruit new entrants.
Analysis and recommendations
Although literature on Ponzi schemes awareness in the financial markets is limited, sentence to Bernard Madoff in 2009 increased the interest of the public and investors to this type of investment frauds. Perpetrators of the scheme count on finding willing investors. Therefore, investors and other financial advisers need to be educated on how to detect Ponzi schemes. Investors and financial advisers should understand conditions that Ponzi perpetrators work under and what motivates them to engage in the illegal acts. Investors and financial advisers are sometimes used by Ponzi perpetrators as collaborators. They should understand the consequences of engaging in such schemes. Ponzi schemes are a strain in the economy and have devastating effects on investor confidence.
Alex A. (2008). A Brief History of Ponzi Schemes. Web.
Dunn, D. (2004). Ponzi: The Incredible True Story of the King of Financial Cons. New York: Crown Publishing Group.
Markham, J. (2006). Financial History of Modern United States Corporate Scandals. Armonk, New York: M. E. Sharpe.