Scam

Bernie Madoff was an Investment Manager. His company would accept subscriptions from the Investors to invest in Financial markets with the expectation that the value of assets would increase over time. He was paid a fee to manage the assets and therefore it is reasonable to assume that he would make investment decisions that are riskier than the safer investment decisions like keeping money in reputed banks or buying US Government bonds. Over time Mr. Madoff became a major investment manager because of the consistently high returns he produced for his investors (after his fees). He was a well respected person in his community and many in community invested their savings with him due to his reputation.

When the economic upheaval of 2008 unraveled and the investor asked for their money back, it was discovered that Mr. Madoff was running a ponzi scheme. The value of assets managed by him was reported to be much higher than what he had disclosed to investors. To hide the real facts of his business, he engaged in unethical and illegal practices of bookkeeping. The previous redemption requests from investors were satisfied from the subscriptions of new investors as opposed to sale of assets of assets held by the redeeming investors. In effect the people who invested with Mr. Madoff were effectively buying underlying assets at a significantly inflated price.

As a result, Bernie Madoff is in jail, his ill gotten gains have been confiscated and his family has fallen apart. One of his sons committed suicide. But the real losers are the investors who invested their money with Mr. Madoff. Some of these investments were the life savings (pension) of people which evaporated overnight. At a systemic level it created a suspicion in the mind of people about the professional investment community and new rules were placed in effect to avoid repeat of such crimes, as is typically done after any major event. Events like this are an important reminder of the common sense approach that blind trust can lead to unfortunate events and that we should always perform some level of due diligence on people we place our trust (and savings) with.

MMM Scheme