For as long as there have been markets, there have been charlatans, con-artists, and fraudsters getting rich selling hope to the uninformed. In every case, the returns turned out to be “too good to be true.”
Charles Ponzi is probably the most infamous. He wasn’t the first to do it, but they named the scam after him anyway. He defrauded clients with promises of 50% returns in a month and a half or 100% in three months investing in postal stamps.
Of course, there was no investing going on. The only strategy Ponzi followed was to rob Peter to pay Paul. He used money from new clients to pay old clients. As long as he maintained a big enough supply of new clients, he could keep the fraud running. Ponzi’s scheme latest about three years before it finally fell apart.
So right away, there are things to watch out for from Ponzi’s scheme. The returns are unbelievably high and the claimed method of earning them is complex.
Now, Ponzi pails in comparison to Bernie Madoff. Historic market crashes tend to expose fraud going on right under our noses. The 2008 financial crisis was no exception. Multiple cases came to light but Madoff’s was the biggest. Continue Reading…