Question

Describe the specifics of a "Ponzi" scheme. How does this relate to Bernie Madoff?

Answer 1

A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. A Ponzi scheme is a fraudulent investing scam which generates returns for earlier investors with money taken from later investors. This is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier backers.Both Ponzi schemes and pyramid schemes eventually bottom out when the flood of new investors dries up and there isn't enough money to go around. At that point, the schemes unravel.Ponzi schemes rely on a constant flow of new investments to continue to provide returns to older investors.The concept of the Ponzi scheme did not end in 1920. As technology changed, so did the Ponzi scheme. In 2008, Bernard Madoff was convicted of running a Ponzi scheme that falsified trading reports to show a client was earning a profit on investments that didn't exist.Bernie Madoff was a money manager responsible for one of the largest financial frauds to date.With Ponzi schemes, investors give money to a portfolio manager. Then, when they want their money back, they are paid out with the incoming funds contributed by later investors. With a pyramid scheme, the initial schemer recruits other investors who in turn recruit other investors and so on.A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Organizers of this type of fraud promise to invest the money and generate high returns for investors, often boasting of minimal risk.Madoff used a so-called Ponzi scheme, which lures investors in by guaranteeing unusually high returns. The name originated with Charles Ponzi, who promised 50% returns on investments in only 90 days. The "investing strategies" used are vague and/or secretive, which schemers claim is to protect their business.Ponzi schemes aren't usually very sustainable. The setup eventually falls apart after: (1) The operator takes the remaining investment money and runs. (2) New investors become harder to find, meaning the flow of cash dies out. (3) Too many current investors begin to pull out and request their returns.