Bernie Madoff’s Ponzi Scheme

This is how I understand it. For many years Bernie Madoff’s made huge returns on people’s investments. In fact, his returns have been so huge that many people could not believe his success and ability to analyze the market. But recently he’s admitted to his sons’ (who turned him in) that it’s a Ponzi scheme.

A Ponzi scheme is like a pyramid scheme. What he does is tells people that he can make huge returns on their investments. So they give him a million dollars and by the end of the year he tells them that he’s earned 15% return (hypothetically)! So then either the client will cash out or reinvest it, most of the time, people will reinvest it. If they do decide to take it out, he’ll talk them into reinvesting it. But if they’re persistent, then he’ll give them their 15% or $150,000.

But guess what! Bernie Madoff never really did invest that money, if he did, he probably didn’t get that much of a return on it. Let’s just say for this case, he didn’t invest it all. So he’s held on to your 1 million dollars, has probably spent a little bit of it, and gives you your 15% or $150,000. BUT GUESS WHAT! That $150,000 was part of the original 1 million dollars that you gave him! THAT’S RIGHT! That $150,000 was yours to begin with! Eventually, this boat gets harder and harder to stay afloat, especially in this economy.

It’s like pyramid scheme in the sense that they promise you money for your investment. The pyramid needs more and more people to invest into it for you to continue to make any money out of it. Eventually, people will stop investing into it and/or the truth comes out.

Bernie Madoff also has been using a bogus accounting firm to validate his books and financial position. This accounting firm wasn’t one of the “Big 4” or a even regionally well-known firm. It was actually a firm that has only one employee, who is also a good friend of Bernie Madoff. But that’s just the tip of the ice berg; a couple of people from the SEC have already resigned because of Madoff.

A lot of non-profits have also lost a lot of money because of him. In his free time, he would volunteer on the board of non-profits and promise them big returns if they let him invest their money. Unfortunately, he’s ripped them off as well. I can’t wait to see what other evidence the government will have against him.