International Law

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Madoff and Ponzi

Here is an interesting discussion between Michelle Singletary and Martin Zuckoff, who wrote an biography of Charles Ponzi.

"To help readers better understand the Bernard L. Madoff case, and to keep others from falling victim, Michelle wrote that she chose this book because "Zuckoff doesn't glorify or crucify Ponzi.

Instead, he's written an engrossing biography explaining how someone from humble roots could so easily dupe thousands of people."

Lots of common questions, which I want to summarize and note my disagreement with Zuckoff.

1. Is it likely that most of Ponzi's victims must have known they were participating in a scam?

Zuckoff: For the most part, Ponzi's victims were less sophisticated than Madoff's, so I don't think a majority of them "knew" they were participating in a scam.

But let's face it -- they weren't stupid. They were being offered 5 percent annually on their deposits in local banks, or double their money in 90 days with Ponzi.

I'm pretty sure most at least wondered if this was legit.

Webster:  The participants in Ponzi's scheme, at the beginning, were risking their little savings -which could not be used for much else.  Ponzi pitched his scheme as something which unsuitable as an investment was quite attractive as a gamble.

Michelle Singletary: As for Madoff's victims, some probably fit the "can't cheat an honest man." But there were some who had no clue their money was iwth Madoff. Are some victims greedy. Yes.

Do they still deserve to be cheated because of that?

No.

2. How long did Madoff and Ponzi keep up their schemes?

Zuckoff: This is one of the key differences between Ponzi and Madoff. Ponzi was only able to keep the ball rolling for about nine months, from December 1919 to August 1920. The fascinating thing about what's alleged regarding Madoff is that his operation apparently went on for many years.

Webster:  I don't think we know when the Madoff fraud began, although I suspec that it start when the brokerages went from quotes in 1/8ths to to quotes in 1/10ths.  My view is the Madoff was likely engaged in front running his clients which no longer payed out after the change in quotes.

3. Also, did either have a real exit plan or did each hope to keep the schemes going indefinitely? Surely they both realized this couldn't last forever and eventually it would collapse?

Zuckoff: As for an exit strategy, I'm certain that Ponzi didn't have one. He was putting down roots when it came crashing down, and he really didn't have time to find a way out (though he did start to diversify near the end, hoping that legitimate investments would allow him to transition from his "business" to a real business)

Webster: This is false.  Ponzi had a short exit plan, which required him stealing from the bank that he was the major shareholder in to prove to the FBI's auditor that his scheme was solvent.  His long term exit plan was to buy up the US's tanker fleet and finance it with another series of ponzi payments.  It was an audacious plan, and one Ponzi had thought about for awhile.

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Full post as published by Misleading Advertising Law on February 13, 2009 (boomark / email).