From Wikipedia, the free encyclopedia

1920 police mugshot of Charles Ponzi

A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns to investors out of the money paid in by subsequent investors, rather than from the profit from any real business. It is named after Charles Ponzi.^[1] A Ponzi scheme has similarities with a pyramid scheme though the two types of fraud are different.

It usually offers abnormally high short-term returns in order to entice new investors. The perpetuation of the high returns that a Ponzi scheme advertises (and pays) requires an ever-increasing flow of money from investors in order to keep the scheme going.

The system is destined to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903. Ponzi was not the first to invent such a scheme, but his operation took in so much money that it was the first to become known throughout the United States. His original scheme was in theory based on arbitrating international reply coupons for postage stamps, but soon diverted later investors' money to support payments to earlier investors and Ponzi's personal wealth. Today's schemes are often considerably more sophisticated than Ponzi's, although the underlying formula is quite similar and the principle behind every Ponzi scheme is to exploit investor naïveté.

After reading the article below visit the Madoff web site and then ask yourself:

1)Where were our government regulators?

2)How much did they know?

3) Why did they not step in sooner?

NEW YORK (Reuters) - Bernard Madoff, a long-time fixture and powerful adviser on Wall Street, was arrested and charged on Thursday with allegedly running a $50 billion Ponzi scheme, U.S. authorities said.

The former chairman of the Nasdaq Stock Market who remains a member of Nasdaq OMX Group Inc’s nominating committee, is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he founded in 1960.

But the alleged fraud involved a hedge fund he ran from a separate floor of the building where his brokerage is based.

Madoff told senior employees of his firm on Wednesday that “it’s all just one big lie” and that it was “basically, a giant Ponzi scheme,” with estimated investor losses of about $50 billion, according to a criminal complaint against him.

A Ponzi scheme is a pyramid-type swindle in which very high returns are promised to early investors, who are paid off with money put up by later ones.

The $50 billion allegedly lost to investors would make Madoff’s fund one of the biggest frauds in history. When Enron filed for bankruptcy in 2001, one of the largest at the time, it had $63.4 billion in assets.

Prosecutors charged Madoff, 70, with a single count of securities fraud. They said he faces up to 20 years in prison and a fine of up to $5 million.

“Madoff stated that the business was insolvent, and that it had been for years,” Lev Dassin, acting United States Attorney for the Southern District of New York, said in a statement.

Authorities said that, according to a document filed by Madoff with the U.S. Securities and Exchange Commission (SEC) on January 7, 2008, Madoff’s investment advisory business served between 11 and 25 clients and had a total of about $17.1 billion in assets under management.

‘UNFORTUNATE SET OF EVENTS’

“Bernard Madoff is a longstanding leader in the financial services industry,” his lawyer Dan Horwitz told reporters outside a downtown Manhattan courtroom where he was charged. “We will fight to get through this unfortunate set of events.”

A shaken Madoff stared at the ground as reporters peppered him with questions. He was released after posting a $10 million bond secured by his Manhattan apartment.

The SEC filed separate civil charges.

“Our complaint alleges a stunning fraud — both in terms of scope and duration,” said Scott Friestad, the SEC’s deputy enforcer. “We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors.”

The SEC said it appeared that virtually all of the assets of his hedge fund business were missing.

Madoff had long kept the financial statements for his hedge fund business under “lock and key,” according to prosecutors, and was “cryptic” about the firm.

Bernard L. Madoff Investment Securities has more than $700 million in capital, according to its website. It is a market maker for about 350 Nasdaq stocks, including Apple, EBay and Dell, according to the website.

The website also states that Madoff himself has “a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark.”

The company’s web site may be found here: www.madoff.com/