I read today that Bernie Madoff died in prison at the age of 82.
If you are not familiar with the name Bernie Madoff, he is the most famous Ponzi Scheme culprit of all time. Bernie is more famous for his Ponzi Scheme than the namesake of Ponzi Schemes – Charles Ponzi.
What is a Ponzi Scheme?
Ponzi schemes are based on fraudulent investment management services—basically, investors contribute money to the “portfolio manager” who promises them a high return, and then when those investors want their money back, they are paid out with the incoming funds contributed by later investors. The person organizing this type of fraud is in charge of controlling the entire operation; they merely transfer funds from one client to another and forgo any real investment activities.
In the 1920s, Ponzi promised investors a 50% return within a few months for what he claimed was an investment in international mail coupons. Ponzi used funds from new investors to pay fake “returns” to earlier investors.
Madoff bilked a reported $65 billion from 37,000 duped investors. The next best scam of its type was $7 billion. Heck, Ponzi’s victims were out a mere $20 million, which would be valued at $250 million today. Child’s play compared to Madoff.
Many confuse Ponzi Schemes with Pyramid Schemes and even Multi-level Marketing. The main thing to know is that Ponzi and Pyramid are unscrupulous. Multi-level marketing has morals.
Pyramid schemes are structured so that the initial schemer must recruit other investors who will continue to recruit other investors, and those investors will then continue to recruit additional investors, and so on. Sometimes there will be an incentive that is presented as an investment opportunity, such as the right to sell a particular product. Each investor pays the person who recruited them for the chance to sell this item. The recipient must share the proceeds with those at the higher levels of the pyramid structure.
Multilevel marketing is a strategy some direct sales companies use to encourage existing distributors to recruit new distributors who are paid a percentage of their recruits’ sales. The recruits are the distributor’s “downline.” Distributors also make money through direct sales of products to customers.
There are many very successful legitimate and legal multi-level marketed companies. AMWAY is the most successful one that I can think of, AVON, Mary Kay and Herbalife come to mind too.
I’d like to say RIP Bernie, but…no thanks. I’m sure there is a special place in hell for him. It is a good guess that 37,000 people have similar but more intense thoughts on the subject.