A dead Italian, an ex-NASDAQ chief, and a missing $50 billion.

A dead Italian, an ex-NASDAQ chief, and a missing $50 billion.

In 1949, Charles Ponzi died in Italy. Ponzi died in poverty, so he probably never fathomed that his name would live on forever in the investment world. Here we are, almost 60 years later and we are just beginning to uncover one of the biggest Ponzi schemes of all time.

Anyone in the investment industry knows that you cannot guarantee consistent returns of 10% to 12% year after year without undertaking a fair level of risk. These are the kinds of returns that Bernard L. Madoff was offering to investors. As a former chairman of the NASDAQ with over 50 years of Wall Street experience under this belt, Madoff had some impressive credentials. However, his investment program has turned out to be the biggest Ponzi scheme on record. It's funny that this unethical investment practice wasn't even uncovered by the SEC, but instead by the sons of Madoff himself.

It always amazes me that with all the investment industry regulation, a scheme of this proportion can go on for years without the SEC catching on. The SEC had multiple reports to check this guy out, but failed to do so in a timely manner. The question becomes, do we need any regulation if the regulators fail to regulate?

For those of you who don't know how a Ponzi scheme works, you can read all about here But basically it works like this: The first investor will be paid a nice return (at the rate or higher than what was promised). Once the first investor gets his money back, they tell a friend to invest money and those investors get their return from the next set of investors and so on and so forth. Little or no money ever goes into the market for trading or investing. It works up until a point and that is when there is no new money coming in. At that point, the Ponzi scheme collapses and either the organizer of the Ponzi scheme escapes on a long international trip, or they go to jail. For Bernie Madoff it looks like he's going on a trip alright, a trip to jail!

The Ponzi scheme can never work for an extended amount of time, because mathematically you run out of new investors and money. This was the case for Bernard Madoff. When the market made a downturn, Madoff did not have enough replacement funds to hush concerned investors who were eager to take back their initial investment. Eventually, the pressure became too much for Madoff when he blurted out to his two sons that his money management operations were "all just one big lie" and "basically, a giant Ponzi scheme."

Madoff is the founder of the market-making firm, Bernard L. Madoff Investment Securities, LLC, which he launched in 1960. His separate investment advisory business had $17.1 billion of assets under management. Many investors and several hedge funds have exposure by investing through Madoff's investment advisory business.

Walter Noel's, Fairfield Greenwich Group (worth $7.3 billion) and Kingate Management's, Kingate Global Fund (worth $2.8 billion) were the two most prominate hedge funds that invested with Madoff.

There has been rumors circulating throughout the years of how Madoff was making this money. I don't believe that anyone every flat-out-said that he was running a Ponzi scheme, but there were always whispers of doubt as to the legitimacy of his practice. Some argued that he was front running customer orders so he was virtually guaranteed no losses. This has yet to be proven.

Unfortunately, his family's name will be forever tied to this Ponzi scheme. What is really unfortunate is that thousands of people lost fortunes trusting Madoff.

So what is the take away from all of this is? In a nutshell, if it sounds too good to be true, it probably is!

As I am writing this around noon (EST), the price of gold is higher for the week and indices are all lower for the week. This tells you yet again, that gold seems to be a better bet than stocks right now.

Enjoy the weekend,

Adam Hewison
President, INO.com
Co-creator, MarketClub

4 thoughts on “A dead Italian, an ex-NASDAQ chief, and a missing $50 billion.

  1. Ponzi died in Rio de Janeiro, Brazil.

    He got off pretty lightly given the number of people who lost their holdings in his scheme. I'm surprised no-one tried to knock him off; back in those days it would have been easy and surely someone powerful lost money with him. Or perhaps, he paid off such people first? In a scheme of this size - and it was massive - there are always other, important figures in the know. They are the clever, cunning ones who truly profit. The publicity-seeker always pays the price.

    Ponzi was still trying out new schemes later in life, and somehow ended up in Brazil. I don't recall a motion picture about Ponzi, surely it would make a very interesting biopic. Another scammer of recent times whose story should be on the big screen is Indian Harshad Mehta.

  2. Another term for the all too common ponzi scheme is a pyramid, where only the investors at the very top of the pyramid actually get paid...what a rip off. Also in the financial mess, is AIG, which quickly changed its name to "AIU Holdings" which is more like "IOU Holdings"

  3. What a big fraud !!. How can someone fool so many intelligent people ??. Does'nt anyone care about the arithmetic of money except to so implicitly and blindly trust the mechanics of profit to someone else ??

  4. With a face like his who would trust him I can not think I bet that guy isn't wishing any one Merry Christmas. Gene PS

    Still very interested in your services but still waiting to see the live trades as it is actually traded

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