Understanding Ponzi Schemes

Understanding Ponzi Schemes

Can Better Financial Regulation Prevent Investors from Being Defrauded?

New Horizons in Money and Finance series

Mervyn K. Lewis

A Ponzi scheme is one of the simplest, albeit effective, financial frauds to engineer, and new schemes keep coming forward. Despite this, however, people continue to invest in them. How are we to account for the seemingly never-ending lure of such schemes? In providing answers to this central question, this concise and well-researched book examines how Ponzi schemes operate, how they differ from pyramid schemes, Ponzi finance and other financial arrangements.

Chapter 4: Bernard Madoff and the ‘mother of all Ponzi schemes’

Mervyn K. Lewis

Subjects: economics and finance, behavioural and experimental economics, economic crime and corruption, economic psychology, financial economics and regulation


History’s largest Ponzi scheme illustrates the ability of a Ponzi scheme, for an extended period, to deceive both individual and institutional investors and escape regulatory detection. There are some question marks about the scale of the losses and the time span of the operation. According to the trustee, Irving Picard, seeking to recoup money for the over 13 000 listed account holders in the Madoff fraud, about $36 billion went into the scheme, with $18 billion paid out before the collapse3 and $18 billion missing (Sarna, 2010, p. 147). If promised returns are included, based on the detailed monthly statements and balances that Madoff sent to clients, along with details of securities and transactions, the losses totalled $64.8 billion. In fact, while transactions were listed on the statements, the trustee handling the liquidation (Irving Picard) could find no evidence that any securities had been bought for clients in the final 13 years of the scheme’s operation. A matter overlooked in other accounts is that these figures demonstrate how difficult it is to measure the ‘scale’ of a Ponzi scheme, and some of these intricacies have emerged in the Madoff litigation (Strumpf, 2013).

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