5 Ways to Avoid a Ponzi Scheme: Madoff Edition

Investment Ponzi Schemes

Here are the top of my list, where new monies are used to pay off accounts until a run on the money shows nothing but blue sky - your basic Ponzi Scheme:

1. Large banks like CitiGroup, WAMU, BofA, and WellFargo who have received hundreds of billions of dollars from government (taxpayer) bailouts and still have nothing to show as the blue sky has fallen and there are few tangible assets.

2. Large insurance companies like AIG who have also received over $100 billion in federal bailout money to prop it up while it sells off any tangible assets that remain - not much compared to all the blue sky that has fallen.

3. WallStreet bankers, stock brokers and securities peddlers who kept pushing the value of stock beyond what was rational - some upwards to 50 times earnings... bamm... the bubble bursted and investors, retirees, and pension funds got burned big time.

Tony Lee of CA @ Mar 06, 2009 11:19:07 AM

Missed most important advice

Most of your advice would not have avoided an investment in Madoff Securities except being suspicious about too good to be true returns and using a custodian. However, not following those two points of advice could easily be rationalized. While a careful look at many years of his published returns might raise suspicion that information may not have been readily available and certainly the returns would have tracked some other investments with similar returns for periods of time. Didn't he have a 40 year track record and a stellar reputation? The most important advice is to diversify your investments and you missed that entirely. The people who put everything or a substantial portion of their assets in that one investment account violated that rule. They left themselves open to that loss. Don't get me wrong, I do sympathize with the victims.

CO of Queens of NY @ Jan 03, 2009 11:51:02 AM

madoff scheme

I have to agree with the custody issue. If you are making checks directly to the money manager and not a third party (the custodian) and your statements are coming from the money manager and not a third party( the custodian) then who else is looking over the money managers shoulder?

ds of AR @ Dec 29, 2008 14:15:15 PM

SpongeBob of NY - unfortunately you're missing the point here - and I'm afraid you're not as sophisticated as you suggest. Ensuring that statements detailing your account balance, allocation and activity come from a custodian (such as Fidelity, TD Ameritrade, Schwab, Pershing, etc.), as opposed to on letterhead from your 'advisor', is an easy way to avoid fraud. This scheme is truly tragic, and I would never suggest that those affected are learning a lesson; however, others should take note of how to avoid this for themselves.

PD of MA @ Dec 17, 2008 21:43:40 PM

I guess these are reasonable rules, but the fact is none of these applied to Madoff except for him being the custodian of the money, which is a fairly obscure concept for individual investors. I'm pretty sophisticated and I've never asked about a custodian for my brokerage.

In short your articla would not have helped any of Madoff's victims.

Madoff appeared legit, he was the chairman of the Nasdaq for chrissake.

Madoff would only take people who had been recommended to him and he was a member of many organizations where he met his investors. So, he had a personal relationship with many. The only complaints against him were registered with the SEC and never addressed. So, investors would never have seen these. He wasn't selling obscure products. And he didn't chase investors, he made them come to him. So, how could any of these people have avoided this?

SpongeBob of NY @ Dec 17, 2008 15:02:06 PM