Keys to starting a Ponzi Scheme
How To Start A Ponzi Scheme
Joan Lappin, Gramercy Capital, 12.17.08, 06:50 PM EST
Bernie Madoff paid meticulous attention to the finer points of scamming. You can, too, and here's how.
Every investor on the planet has experienced a range of emotions in recent days in response to the Bernie Madoff Ponzi scheme, in which Madoff says he scammed unsuspecting investors out of $50 billion. The biggest question now is where did he stash the money?
The economy is desperately weak. You may be among the millions who are now out of work. You might be retired, and now that your pension and benefits or the assets in your 401(k) are depleted, you, too, might be looking for a new way to make a living. If so, listen up. I have just spent days thinking back over all the Ponzi schemes and other rip-off scams that I have observed over my 43 years on Wall Street. Each time, the methodology is the same so the formula obviously works.
Human nature never really changes with the centuries, or there wouldn't have been a tulip bubble in the 1630s or repeated stock market crashes in the past century. Remember alchemy? That was the idea that you could turn base metals into precious gold. Submerged Florida real estate was a prominent one three quarters of a century ago. These schemes were about as successful, while they worked, as Madoff's. Greed is so delicious. Many of us want what our neighbors have or, even better, we want more. They may have a fancy house. We want a McMansion.
Each time, well-known people are high on the suckers' list. They are a prominent part of the crook's marketing plan. We think because someone is famous, they must be smart. By investing alongside them, we must be smart, too. The aura of prosperity expands to include us by association.
Famous families are not immune to dupery, however. Entertainers, including sports figures, are often targets just for their name-recognition value to the crook. New Jersey Sen. Frank Lautenberg seems to have been one of Madoff's victims through a foundation he established, as was movie-maker Steven Spielberg. Then there are the Wilpons, who own the New York Mets and supposedly lost $300 million. As a member of a long-standing family of Mets fans (gluttons, you would say, for punishment) you can imagine our concern about our team. The Mets insist this will not affect their new contracts for some important starting pitchers added to the team just last week or the new Citi Stadium that is about to open in the spring to house the team. We learn that maybe Wilpon will have trouble personally paying off the debts he took on when he acquired the rest of the team that he didn't already own from the Doubleday family a few years ago. That, however, will not harm our Mets.
We shouldn't limit this conversation to investments. Think of people you know--lonely widows and widowers or divorced men and women--who are scammed by people who pretend to have a lot of money and really don't. These creeps aren't regulated by the SEC. Instead, they saddle the person they convince to marry them with unending bills or prior debt obligations of which the new spouse knew nothing.
The short moral to that story is to run a credit check on the person before you tie the knot. Even if you think the person is lovely, handsome, pretty, charming, wealthy or just of average means, find out about their past before you embark on a new future with them. Remember, it's a financial transaction, too, and it requires the same due diligence that your investment portfolio deserves.
Now, how to run a Ponzi scheme:
Be gracious and endearing. Everyone who knows me well knows that disqualifies me immediately. To undertake your scam, you must be witty, charming, pleasant, modest and gentle in your dealings with your targets. You must convey to them a sense of intelligence and something special about your scam. You have a special investment insight that is proprietary. Madoff claimed to have "proprietary algorithms," which he refused to discuss or explain. That created an aura of something unique that nobody else had figured out. It helps if you are good looking because people always trust people they like to look at more than ones who are average in appearance. But to be blunt, I don't think this last item was part of Madoff's allure. You also must be seen on the society pages of the local newspaper, whether it's the PalmBeach Post or TheNew York Times.
Look very prosperous. If you want people to envy your success, you darn well better look really successful. Drive a fancy car or have your chauffeur drive it for you. Fly around in a private jet. Get a face lift. Follow "The Donald," and trade in your wife every few years for a new and younger version to enhance your image as a stud-muffin, even if you might need a lot of Viagra in the privacy of your own bedroom.
Pretend you have a lot if special wisdom even if you don't. Have somebody ghostwrite a book for you. Belong to the right clubs. Show up at all the local charity balls, and never give money anonymously. Make sure your contributions are large and attributed to you. Appear to care a lot about the causes you support, and help them to raise money from others. It is also good if your early customers in the scam tell others how much money you have made for them and show off their fancy jewelry, real estate and expensive cars.
Wrap yourself in your religion. Religion is a great thing to embrace while scamming people. It puts a halo over your head and underscores your integrity to everyone who watches you. Bernie Madoff definitely worked the Jewish enclaves into which he had ingratiated himself. The largest clusters of his victims surround his Jewish community in Long Island, Jewish charities in various parts of the country and the Palm Beach Country Club, which was started years ago by a group of Jews who weren't welcome in another local club.
Madoff gave large amounts of money to Jewish causes, and he made sure everyone knew about his giving. He was always out on the social circuit at important events in the Jewish community. Because he had this aura of integrity, people were shocked last week to learn that he had evaporated their money.
It is hard to understand what made this man who had been a prominent leader in the stock trading community flip out and become Darth Vader. But to me, the most unconscionable thing he did was take 100% of the money of older retirees he suckered who are now left penniless. He could have taken half. He could have limited what he would allow them to place with his firm. But he took it all, knowing that these people in their 70s, 80s and 90s would be destroyed and left penniless.
No amount of religion or praying for forgiveness on Yom Kippur will ever repair that.
Joan E. Lappin, CFA, is president of Gramercy Capital Management in New York. Contact her via e-mail at firstname.lastname@example.org.