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Ponzi Schemes Revisited
The unraveling of a $50-billion dollar Ponzi scheme allegedly perpetrated by Bernard L. Madoff has brought a new magnitude to an old but hardy scam. Although Ponzi schemes are all too familiar, the size, longevity, and global reach of the alleged Madoff fraud has broken all records. The list of potential victims spans the globe and ranges from individuals who invested their life savings to charities and educational institutions like Yeshiva University.
The basic structure of a Ponzi scheme (one common type is referred to as a “pyramid scheme”) is that the perpetrator entices a group of investors ' typically with the promise of unusually high profits ' who are then paid at least some part of their principal or profits from the deposits of other, later investors. Because of the continuing need to pay investors profits or principal as the scheme progresses, the perpetrator must continue to bring in more and more investors to keep it going. A Ponzi scheme relies on a strong illusion of profitability in order to attract additional victims. Madoff appears to have been a master of this illusion. As long as investors continue to join the scheme and not too many withdraw, the scheme keeps growing and growing. Until it all falls apart.
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