For several days this stunning, fraudulent, Ponzi Scheme has been in the news. First here's the definition of a Ponzi Scheme
Ponzi scheme – Wikipedia, the free encyclopedia
A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi.[1] A Ponzi scheme has similarities with a pyramid scheme though the two types of fraud are different.
It usually offers abnormally high short-term returns in order to entice new investors. The perpetuation of the high returns that a Ponzi scheme advertises (and pays) requires an ever-increasing flow of money from investors in order to keep the scheme going.
The Washington Post over the weekend had a feature on Madoff's scheme, with emphasis on the great damage done to philanthropies, especially Jewish philanthr
'All Just One Big Lie' – washingtonpost.com
Deborah Coltin learned yesterday morning that the $8 million foundation she has led for a decade, which supported a wide range of Jewish programs on the north shore of Massachusetts, did not actually exist.
The foundation had invested its endowment with Bernard L. Madoff, a storied name on Wall Street. Every year, Madoff paid out several hundred thousand dollars to the foundation. But on Thursday, Madoff was charged with securities fraud after confessing to his sons that his business was a Ponzi scheme, according to a complaint filed by the Securities and Exchange Commission. The returns paid to investors came from money invested by other people. And there was almost nothing left.
It may be the largest fraud in the history of Wall Street, authorities said. Madoff is charged with stealing as much as $50 billion, in part to cover a pattern of massive losses, even as he cultivated a reputation as a financial mastermind and prominent philanthropist.
Coltin, executive director of the Robert I. Lappin Charitable Foundation, said she spent the day at her office as a woman in mourning, taking condolence calls and trying to understand what happened.
"I laid off five people today," she said.
"Our foundation was the lifeblood of this community," she said.
"It's just very, very sad."
Madoff's investors included a number of prominent hedge funds and the firm of Fred Wilpon, the owner of the New York Mets. Several may have sustained billions of dollars in losses.
But the damage appears to be deepest in the small world of Jewish philanthropy, where Madoff was a leading figure. The North Shore-Long Island Jewish Health System said it lost $5 million. The Julian J. Levitt Foundation, based in Texas and focused on Jewish causes, lost about $6 million. Yeshiva University, a New York institution where Madoff served on the board, said it was examining how much money it invested with his firm.
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Madoff built himself into a brand. He came to Wall Street with money saved as a Long Island lifeguard and built a family business employing many relatives, including his sons, and refused to sell the business or take it public. He advertised his integrity.
"In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door," the company's Web site said. "Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."
By the late 1970s, and perhaps earlier, Madoff began managing money for investors, at least in part because he could require people to process trades through his firm. Madoff eventually attracted billions of dollars from investors. Some he knew personally. Others belonged to clubs he was a member of, including the Palm Beach Country Club in Florida and Glen Oaks Country Club in New York. Several large hedge funds invested with Madoff in part because he did not charge traditional fees, instead collecting money solely for processing trades.
The key attraction, however, was Madoff's remarkably successful track record. A hedge fund run by Madoff, which described its strategy as focused on shares in the Standard & Poor's 100-stock index, averaged a 10.5 percent annual return over the past 17 years.
This year, amid a general market collapse, the fund reported that it was up 5.6 percent through November, while the S&P 500-stock index fell 38 percent.
The SEC charged in its complaint that the returns were artificial. Madoff at some point started paying investors with money received from other investors, a Ponzi scheme, according to the SEC.
"Mr. Madoff lured investors to entrust him with substantial sums of money — in some cases massive amounts of money — with the false promise of great interest returns," said Mark S. Mulholland, a New York lawyer who filed a class-action lawsuit Thursday against Madoff. He said his firm has been approached by two dozen investors, who lost up to $90 million.
The SEC said it is not clear when Madoff started using new investments to create the appearance of profits. But the alleged ruse was finally exposed by the global financial crisis.
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