Been There, Lost That

A pre-Madoff ponzi story

By: Anonymous

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January 19, 2009

I don't think Bernie Madoff could have conned me. Why? Been there, lost that.
“Have I got a deal for you! Give me $2000 and you can make $16,000 in a few days.” That was the too-good-to-be-true promise made in 1995 when “gifting clubs” or “money clubs” were all the rage in Los Angeles.

An enthusiastic leader would gather friends and strangers in his home and hold up a white board with eight squares forming a pyramid. The goal was to get your name on the topmost square of the pyramid. You started at the bottom by making a cash "gift" of $2000 to the person who was at the highest level of the pyramid. Once the top person received $16,000 in “gifts”, his name was put at the bottom of a fresh pyramid and everyone from the old pyramid moved up a level.

No new products or services are created. The new recruits are used to pay off earlier investors, who then brag about their great returns, thereby attracting even more fools, er, investors. Sooner or later, the scheme collapses from its own weight. Unfortunately, I was part of the collapse. I lost my money, BUT I learned three important lessons:

One, this kind of thing is known as a Ponzi scheme. Two, Madoff seems certain to take over the title. It's only fair. You might as well compare a rowboat to a battleship.

Here's a bit of history. In the 1920s, Charles Ponzi duped thousands of investors with a speculation scheme: Ponzi noticed that a postal coupon (essentially a voucher for stamps) cost one American penny when it was bought in Spain. But, because of foreign currency exchange rates, when he redeemed the coupon at his local post office, he was able to get six American one-cent stamps. He told investors they could get a 40% return on their money in 90 days and they lined up at his office. He collected millions of dollars, using fresh funds to pay off earlier investors who could spread the word and also make the whole thing look legit. Customs, tax and currency exchange issues, to name just a few problems, brought the whole thing crashing down. Ponzi gave his name to any deal that relies on the rob-Peter-to-pay-Paul principle.

Madoff, who was arrested on December 11 after admitting to his sons that his global juggernaut of a fund was "basically a giant Ponzi scheme," managed to make something like $50 billion disappear, and his victims are all over the world. We've heard a few of the famous names fleeced by Madoff—Steven Spielberg; Elie Wiesel, through his foundation; Jeffrey Katzenberg. These folks are not stupid.

Like Ponzi, though, Madoff was able to hide away the parts of his money-making operation that wouldn't pass the smell test. In Ponzi's day, it was hard for investors to check up on dealings between Europe and America. In order to unmask Madoff, his clients would have had to track him across the globe. If the whole financial world hadn't flipped upside down, Madoff might still be flying high.

In the L.A. money clubs, many of my friends made up to $32,000. I came later and lost my $2,000. Even if I were the first one invited to a Ponzi scheme, I'd never take part again, because somebody will eventually lose their money.

Which brings me to lesson three: If someone offers you a deal that sounds too good to be true, keep your cash in the bank—you’ll get a better return.

At least I hope so.

Source

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MP

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