ALEXANDRIA, La. (BP)–“For the love of money is a root of all sorts of evil,” the Bible instructs, “and some by longing for it have wandered away from the faith and pierced themselves with many griefs.” Whether they realize it or not, every person burned by Bernard Madoff’s Ponzi scheme has experienced the truth of this verse.
For the uninitiated, a Ponzi scheme is a fraudulent investment plan that involves the paying of extremely high returns to investors on short term contracts, usually no more than a month or two. However, those “returns” are actually and unknowingly paid by subsequent investors rather than from the profits of any real business. (In other words, money invested by investor D is paying for the “returns” of investors A, B and C, without any of them knowing of it.) The perpetrator of the scheme makes his or her money by taking the difference between the subsequent “investments” and the so-called “returns.”
The fraud is named after Charles Ponzi, who is credited with inventing the scheme designed to bilk money from unsuspecting investors. Ponzi perfected the technique after immigrating to the United States from Italy in the early 1900s.
Because the returns are so exorbitant, usually somewhere between 20 to 30 percent, the Ponzi operator is able to persuade investors to continue to reinvest their returns back into the scheme. After all, it works — for a time.
Another way the Ponzi scheme operator seeks to minimize withdrawals is by offering new plans to investors, often where money is tied up for a longer period of time. A Ponzi scheme operator might offer an investor a return of 50 percent a month for a year-long investment. The longer the Ponzi operator is able to put off any real pay-outs, the longer the scheme will continue. Which, it seems, Madoff was able to do quite well.
When news broke of the Madoff Ponzi scheme, the perpetrator was portrayed as heartless and greedy while his so-called victims were described as naïve dupes. There is no doubt that the former is true; Madoff is indeed an unscrupulous cheat. However, his investors bear some responsibility for their losses.
Ponzi schemes are at least 100 years old, if not older. And the only way a Ponzi scheme has ever worked is by playing on the greed of investors. If it were not for people taking the bait of a seemingly unrealistic return on an investment, a Ponzi scheme would never get off the ground.
An examination of those who invested in Madoff’s scheme will reveal the names of wealthy and super wealthy individuals. Even the charities involved invested huge sums of money. These individuals and fund operators are people who should have known better. They, more than most, should have known that if something looks too good to be true, it likely is.
So why did these people throw caution to the wind and invest and then continue to reinvest their money in Madoff’s scheme? More than being taken in by Madoff’s pitch, they were seduced by dollar signs. They jumped at the chance to pour their money into a “fund” that promised to outperform the stock market in ways that did not seem possible.
One person who was not taken in by Madoff was Donald Trump. The multi-millionaire deal-maker recently appeared on Fox News. Trump discussed the Madoff Ponzi scheme with the show’s host, Neil Cavuto.
“I know people that were taken in [by Madoff],” Trump said. He told Cavuto, that he knew people whose wealth had been wiped out overnight. “And these are very wealthy people,” Trump added.
Trump indicated that over the years he had encountered Madoff. “He [Madoff] would always ask me, ‘When are you going to invest in my fund?'” Trump said. “But I never did.”
When asked why he did not fall for Madoff’s scheme, Trump said, “Well I am not much of a fund guy in the first place.” But he added, “You know Neil, when something sounds too good to be true, it is.”
Cavuto asked Trump why he thought Madoff was successful in duping so many wealthy people for so long. Trump answered, “Greed, pure and simple.”
Money in and of itself is not evil. Money is nothing more than a tool. The Bible is clear, however, that the love of money is the root of all sorts of evil — like a Ponzi scheme. The greed of investors is as necessary as the greed of a con-man for a Ponzi scheme to be possible. Even a man like Donald Trump realizes this is true.
Kelly Boggs is a weekly columnist for Baptist Press and editor of the Baptist Message (www.baptistmessage.com), newsjournal of the Louisiana Baptist Convention.