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History of the Ponzi Scheme Essay

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History of the Ponzi Scheme Is named after con man Charles Ponzi, a Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.(SEC, 2013) . Typically Ponzi Schemes entice investors with ensuring higher returns rather than alternative investments, in the form of short-term returns that are either abnormally high or remarkably consistent. Top broker, Bernie Madoff, was found guilty of this scheme, which will further be discussed below The essential elements of a Ponzi scheme. These types of schemes are better understood by using an example, for instance say you collect $100 from each investor and promise you will double it in a month. But, you do not…show more content…
Early on, Madoff started his scheme with family and friends and he eventually expanded his circle larger. He was able to extend his fraud for so long due to the marketing of his investment business being by word of mouth rather than publicized. Whenever his business leaked, he would use his charm and reputation built up in the past to take back control of the situation. The SEC’s actions and role in the case As long ago as 1999, an independent investigator, Harry Markopolos, concluded that Madoff’s success could not be legitimate. In 1995, he sent the US Securities and Exchange Commission a 17 page document titled: “The World’s Largest Hedge Fund Is a Fraud”. Two years later the SEC found no evidence of fraud after an investigation that seems to only involve just a little more effort than simply asking Madoff if he was a criminal or not, and then excepting his answer. Red Flags of a Ponzi Scheme Ponzi Scheme’s most of the time are easy to identify and contain similar charcteristics. Some characteristics and their relation to this case specifically include: high investment returns with little or no risk – Madoff’s scheme was constantly generating high returns which appealed to many investors interested in enhancing their wealth. They did not see the risk involved because there appeared to be none in the hands of Madoff as he was well respected and trusted financially. overly consistent returns –
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