Free Republic
Browse · Search
News/Activism
Topics · Post Article

Skip to comments.

How a Pyramid Scheme Takes Shape
Boston Globe ^ | 12/16/08 | Ross Kerber

Posted on 12/16/2008 7:22:04 AM PST by marshmallow

About nine years ago, Frank Casey went to New York to check out the competition and came away unimpressed with Bernard Madoff.

Casey was vice president of marketing for Rampart Investment Management in Boston, one of the country's top firms specializing in investing in options. Madoff, at the time, was earning a reputation on Wall Street as a can't-miss money manager who used options strategies to produce double-digit returns without blemish.

But from what Casey saw in 1999, Madoff's system did not make sense.

"Either he wasn't doing what he said he was doing, or maybe he was using the clients' money to help his own positions," Casey recalled in an interview yesterday.

When he reported back to colleagues at Rampart, one in particular grew determined to unravel Madoff's mysterious investment strategy - portfolio manager Harry Markopolos. And when he couldn't, Markopolos undertook a crusade against Madoff that started with asking officials at the Boston office of the Securities and Exchange Commission to investigate him.

Now an executive recruiter, Markopolos declined to be interviewed. But what regulators did - and did not do - in response to Markopolos's entreaties is a now a burning question for the agency, after Madoff's arrest last week on charges of running a Ponzi scheme that lost up to $50 billion, perhaps the largest in history.

The SEC and other authorities say Madoff confessed to running a Ponzi scheme - paying one set of clients with money from another - cheating dozens of investors, including some of the most prominent families in Massachusetts, out of millions. The charges came after Madoff allegedly confessed to employees of his own firm.

Madoff's attorney didn't return messages yesterday.

The SEC did conduct two inquiries of Madoff, in 2005 and 2007. The agency did not find any major problems.....

(Excerpt) Read more at boston.com ...


TOPICS: Business/Economy; Crime/Corruption; News/Current Events
KEYWORDS: chriscox; keystonecops; madoff; ponzi; pyramidscheme; sec
Navigation: use the links below to view more comments.
first 1-5051-83 next last

1 posted on 12/16/2008 7:22:04 AM PST by marshmallow
[ Post Reply | Private Reply | View Replies]

To: marshmallow

I’ll bet there is plenty of Kennedy money in this Madoff theft. THAT IS WHY they will get the govt bail out.


2 posted on 12/16/2008 7:29:11 AM PST by George from New England (escaped CT 2006; now living north of Tampa Bay)
[ Post Reply | Private Reply | To 1 | View Replies]

To: marshmallow

> Harry Markopolos

Now *there’s* an improbable name for you. I wonder if he’s been to China?


3 posted on 12/16/2008 7:32:46 AM PST by DieHard the Hunter (Is mise an ceann-cinnidh. Cha ghéill mi do dhuine. Fàg am bealach.)
[ Post Reply | Private Reply | To 1 | View Replies]

To: marshmallow

Well, FIRST you get a pyramid...


4 posted on 12/16/2008 7:33:33 AM PST by WayneS (Respect the 2nd Amendment; Repeal the 16th)
[ Post Reply | Private Reply | To 1 | View Replies]

To: marshmallow
Madoff was a very big contributor to the Democrat Party, it will be very interesting to see who he gave money to and their involvement in the oversight of his actions. As the old saying goes "Follow the money"
5 posted on 12/16/2008 7:34:11 AM PST by Rumplemeyer
[ Post Reply | Private Reply | To 1 | View Replies]

To: George from New England

not exactly a pyramid scheme, its a ponzi scheme and they’re different. Pyramid schemes work by the bottom propping up the layer above. Ponzi schemes work by a revolving door. Both schemes always fail as for it to keep going, it requires more new ppl to be fooled.

This one failed because everyone wanted to draw their money out of it, due to the recent market crash and then realize theres no money there


6 posted on 12/16/2008 7:35:23 AM PST by 4rcane
[ Post Reply | Private Reply | To 2 | View Replies]

To: marshmallow

First step is to find a group of greedy investors who are willing to ignore the adage, “If it sounds too good to be true, then it probably is.”


7 posted on 12/16/2008 7:35:49 AM PST by NCjim ("Lies have to be covered up, truth can run around naked." - Johnny Cash)
[ Post Reply | Private Reply | To 1 | View Replies]

To: marshmallow
The SEC did conduct two inquiries of Madoff, in 2005 and 2007. The agency did not find any major problems.....

Crack auditors or auditors on crack?

8 posted on 12/16/2008 7:41:29 AM PST by Still Thinking (Quis custodiet ipsos custodes?)
[ Post Reply | Private Reply | To 1 | View Replies]

To: 4rcane

well the auditors should get jailed time too


9 posted on 12/16/2008 7:42:41 AM PST by 4rcane
[ Post Reply | Private Reply | To 6 | View Replies]

To: marshmallow
How a Pyramid Scheme Takes Shape

Step # 1:


10 posted on 12/16/2008 7:49:07 AM PST by Michael.SF. ("They're not Americans. They're liberals! "-- Ann Coulter, May 15, 2008)
[ Post Reply | Private Reply | To 1 | View Replies]

To: marshmallow

Seems everyone has forgotten the “housing bubble” so soon.

That, too, was a scheme to draw investors in from the bottom, and spread the wealth at the top.

Worked fine, as long as more money was generated from the bottom. Then, oh, oh....


11 posted on 12/16/2008 7:49:27 AM PST by wizr (Merry CHRISTmas to our "one Nation under God.")
[ Post Reply | Private Reply | To 1 | View Replies]

To: marshmallow

Trouble is, the SEC “investigators” are salaried dweebs who will get paid the same whether they uncover any fraud or not. Start putting them on some sort of commission program, for finds that result in convictions and prison terms for the perps (thus pretty firmly eliminating the collusion risk), and perps will start getting exposed much faster, and with the biggest ones getting exposed first.


12 posted on 12/16/2008 7:53:38 AM PST by GovernmentShrinker
[ Post Reply | Private Reply | To 1 | View Replies]

To: Michael.SF.
Did Roosevelt do the ponzi? I thought the fund was set separetly to grow to meet future needs. Then the congress and the president decided in the LBJ administration that they need to money for general expenditures?

Asking for info.

13 posted on 12/16/2008 7:55:32 AM PST by nufsed
[ Post Reply | Private Reply | To 10 | View Replies]

To: marshmallow

For a minute i thought the article was going to be about Social Security..........shucks!


14 posted on 12/16/2008 8:14:18 AM PST by o_zarkman44 (Since when is paying more, but getting less, considered Patriotic?)
[ Post Reply | Private Reply | To 1 | View Replies]

To: NCjim

#7
You just nailed it. It is as simple as that. As W. C. Fields said...You can’t cheat an honest man!


15 posted on 12/16/2008 8:16:50 AM PST by mono
[ Post Reply | Private Reply | To 7 | View Replies]

To: Still Thinking
Crack auditors or auditors on crack?

Often, the discovery of fraud has more to do with luck, than skill. The most skilled auditors out there will never guarantee they'll find fraud during an audit, even if it actually exists. It's the nature of the beast.

16 posted on 12/16/2008 8:18:17 AM PST by IYAS9YAS (Hey Obama, why lawyer up when you can pony up? Show us your vault copy BC)
[ Post Reply | Private Reply | To 8 | View Replies]

To: GovernmentShrinker
Trouble is, the SEC “investigators” are salaried dweebs who will get paid the same whether they uncover any fraud or not.

No audit is guaranteed to uncover fraud, even if it is suspected. The most skilled auditors out there will never guarantee they'll find fraud even if it does actually exist. You can certainly tailor the audit to increase your likelihood of discovering fraud, but there is never a guarantee.

17 posted on 12/16/2008 8:22:25 AM PST by IYAS9YAS (Hey Obama, why lawyer up when you can pony up? Show us your vault copy BC)
[ Post Reply | Private Reply | To 12 | View Replies]

To: DieHard the Hunter

LOL! Marco! Polo! Fish out of water! none!

Greeks rock. I am not one but the guy who figured out the Enron scam was James Chanos, founder and President of Kynikos Associates Ltd.

http://en.wikipedia.org/wiki/James_Chanos

It appears Chanos also exposed Drexel Burnham and Baldwin.

Mr. Harry Markpolos should be put in charge of the SEC. Seems like Greek-Americans are pretty good at exposing scams. Sadly nobody was listening to Harry. :-(


18 posted on 12/16/2008 8:25:27 AM PST by Frantzie
[ Post Reply | Private Reply | To 3 | View Replies]

To: IYAS9YAS

Some of the SEC auditors are not bad. The problem is Congress rides the SEC and hedge funds have been given a free pass. Way too much politics at the SEC.


19 posted on 12/16/2008 8:31:22 AM PST by Frantzie
[ Post Reply | Private Reply | To 17 | View Replies]

To: Frantzie

Agreed. Politics are huge in audits. They shouldn’t be, but they are.


20 posted on 12/16/2008 8:37:57 AM PST by IYAS9YAS (Hey Obama, why lawyer up when you can pony up? Show us your vault copy BC)
[ Post Reply | Private Reply | To 19 | View Replies]

To: marshmallow

If they bail out this schlepp and his clients...they better be prepared for pitchforks.....


21 posted on 12/16/2008 8:39:27 AM PST by mo
[ Post Reply | Private Reply | To 1 | View Replies]

To: wizr
Worked fine, as long as more money was generated from the bottom. Then, oh, oh....

According to 0bamanomics, wealth is spread from the bottom up.

22 posted on 12/16/2008 8:41:20 AM PST by fellowpatriot
[ Post Reply | Private Reply | To 11 | View Replies]

To: NCjim
First step is to find a group of greedy investors...

...to buy in at the top and foot the bills for the setup of the website, the crappy products, and the marketing materials.

Then you build a near-inscrutable points-driven compensation plan that is projected to 12 levels for costing, no matter that the organization is 90 levels deep, because you know the attrition rates of the revolving door and the endless supply of newbies.

Then you get your big-talkers within your top tier to inspire millions of others to join in.

Give it a nice, patriotic sounding name.

Stir.

-Joan

23 posted on 12/16/2008 8:49:23 AM PST by JoanVarga (Contain Your Freakness)
[ Post Reply | Private Reply | To 7 | View Replies]

To: 4rcane
not exactly a pyramid scheme, its a ponzi scheme and they’re different. Pyramid schemes work by the bottom propping up the layer above. Ponzi schemes work by a revolving door. Both schemes always fail as for it to keep going, it requires more new ppl to be fooled.

Charles Ponzi never intended to create an impossible investment scheme. He had an idea that could have worked to some degree. He wanted to make an arbitrage play on international postal coupons after WWI. There was an arbitrage opportunity but it took some patience and careful study to manipulate. Ponzi did not have the patience and capital to make the arbitrage work. He began taking in lots of investor money by promising impossible returns (doubling money in 90 days). Ponzi invested the proceeds by buying banks and other assets. However, he could not pay the promised returns. After some bad newspaper bad press, regulators shut him down. Ponzi did not flee after his scheme collapsed. He was prosecuted perhaps unfairly and died a broken man.

Ponzi schemes were not invented by Ponzi. These schemes were known as "Peter for Paul" schemes. These schemes were common in the early part of the 20th century. Ponzi was honest compared to most operators of these schemes. Ponzi's scheme grew very large and he was prosecuted so he has the fame that other operators of these schemes did not obtain.

24 posted on 12/16/2008 8:55:49 AM PST by businessprofessor
[ Post Reply | Private Reply | To 6 | View Replies]

To: IYAS9YAS

Never a guarantee, but you can sure improve the discovery rate. And how many auditors have you heard of whose compensation packages would result in a huge windfall for them if they uncovered a huge fraud? There’s a huge amount of pressure on auditors to keep the client happy (in the case of outside auditors hired to produce audited financial statements), and on internal auditors not to rock the boat and to play along with internal politics (which are controlled by the senior executives whose units are producing the highest profits), and on regulatory auditors to follow procedures and follow orders from above. There is no category of auditors which is incentivized to uncover fraud beyond the level of scams operating out of a boiler room.


25 posted on 12/16/2008 8:57:03 AM PST by GovernmentShrinker
[ Post Reply | Private Reply | To 17 | View Replies]

To: Frantzie

You can be sure the top job at the SEC doesn’t carry a compensation package that would attract the likes of Harry Markopolos, much less incentivize them to continue working the way they did in the private sector.


26 posted on 12/16/2008 8:59:26 AM PST by GovernmentShrinker
[ Post Reply | Private Reply | To 18 | View Replies]

To: nufsed

I would think we could safely say Roosevelt, aided and abetted by a Democrat Congress, was step one (of several steps) in the development of turning Social security into an illegal money confiscation gambit (if it was practiced by a private company).


27 posted on 12/16/2008 8:59:44 AM PST by Michael.SF. ("They're not Americans. They're liberals! "-- Ann Coulter, May 15, 2008)
[ Post Reply | Private Reply | To 13 | View Replies]

To: nufsed

I remember somewhat that Social Security funds became a part of the accounting magic that our brave leaders used as a justification for more taxes. They started counting those funds as assets or liabilities, depending on what new scare tactic was needed to cow the masses into submission to new taxes.


28 posted on 12/16/2008 9:01:26 AM PST by JoanVarga (Contain Your Freakness)
[ Post Reply | Private Reply | To 13 | View Replies]

To: IYAS9YAS

I’d think they’d be able to tell the difference between a pyramid scheme and a trading operation. Is that not the case?


29 posted on 12/16/2008 9:06:24 AM PST by Still Thinking (Quis custodiet ipsos custodes?)
[ Post Reply | Private Reply | To 16 | View Replies]

To: Michael.SF.

Don’t do that ever again. I don’t like having to clean spit off my monitor.


30 posted on 12/16/2008 9:08:17 AM PST by Still Thinking (Quis custodiet ipsos custodes?)
[ Post Reply | Private Reply | To 10 | View Replies]

To: nufsed
Did Roosevelt do the ponzi? I thought the fund was set separetly to grow to meet future needs. Then the congress and the president decided in the LBJ administration that they need to money for general expenditures?

He paid people who had never paid in. Thus each generation is paying the previous one. Thus it's hard to ever turn off this socialist scam because there will always be a group who has paid in but not collected and the money they paid in is gone.

31 posted on 12/16/2008 9:10:15 AM PST by Still Thinking (Quis custodiet ipsos custodes?)
[ Post Reply | Private Reply | To 13 | View Replies]

To: Still Thinking
Of course HE paid the people who hadn't paid in. Government does that all the time. It's called welfare. It was decided then that people who were impoverished at the time should be paid at the beginning. That's why he pushed the program to help them Socialism or not, you make the call.

My question is what did Rooosevelt do with the money? It was my understanding the moeny was held separetly until LBJ and then sucked into the general fund. If that's true, all this yelling about Roosevelt's ponzi scheme is false and hysterical.

If it's not true, I welcome facts to the contrary and will stand corrected.

32 posted on 12/16/2008 9:16:16 AM PST by nufsed
[ Post Reply | Private Reply | To 31 | View Replies]

To: Michael.SF.

Avoids the question of who started the ponzi. I recall LBJ, but welcome facts to the contrary.


33 posted on 12/16/2008 9:17:30 AM PST by nufsed
[ Post Reply | Private Reply | To 27 | View Replies]

To: nufsed

I stand by my previous analysis whether the SSI money is held in a separate fund or not. FWIW, I believe your recollection is correct. But in my mind that doesn’t cleanse the scheme of Ponzi-ness.


34 posted on 12/16/2008 9:18:08 AM PST by Still Thinking (Quis custodiet ipsos custodes?)
[ Post Reply | Private Reply | To 32 | View Replies]

To: JoanVarga
-----------I remember somewhat that Social Security funds became a part of the accounting magic that our brave leaders used as a justification for more taxes. --------------

And when was that?

35 posted on 12/16/2008 9:18:33 AM PST by nufsed
[ Post Reply | Private Reply | To 28 | View Replies]

To: IYAS9YAS
You are correct in your statement that no audit can guarantee to find fraud. However, in this case they had a request for an audit and the person making the request must have had his reasons. Reasons enough to warrant the audit. Either they ignored his criteria or they failed to request information on where to look. In my book, and I an an accountant/finance officer, the auditors are just a culpable as the rest. And the investors will be made whole by uncle sugar daddy.
36 posted on 12/16/2008 9:22:03 AM PST by dirtymac (Now is the time for all good men to come to the aid of their country. Really! It's time; NOW)
[ Post Reply | Private Reply | To 17 | View Replies]

To: Still Thinking
I am not syaing that it's not currently a ponzi scheme. I'm saying, if Roosevelt through Kennedy kept the funds separately and dedicated to soc sec and the fund was solvent, then those presidents did not set up or maintain a ponzi scheme.

It's easy to blame Roosevelt as the father of American socialism, but let's get the facts right or we're just brainlessly piling on.

37 posted on 12/16/2008 9:24:46 AM PST by nufsed
[ Post Reply | Private Reply | To 34 | View Replies]

To: Still Thinking
I’d think they’d be able to tell the difference between a pyramid scheme and a trading operation. Is that not the case?

One would hope.

Madoff simply could not have been the only one in-the-know on this. He had to have had help. With collusion, fraud gets much harder to detect.

38 posted on 12/16/2008 9:27:22 AM PST by IYAS9YAS (Hey Obama, why lawyer up when you can pony up? Show us your vault copy BC)
[ Post Reply | Private Reply | To 29 | View Replies]

To: nufsed
That people were paid who didn't pay in leads to it meeting my definition of a Ponzi scheme.

Since people were paid with others contributions, a debt is created to those others who did contribute, and new contributors must be recruited (shanghaied in this case) to meet that debt, thus creating another unfunded debt. Thus there is always a debt needing repayment, thus the difficulty in shutting it down, thus the Ponziness (at least in my definition of Ponziness).

39 posted on 12/16/2008 9:35:51 AM PST by Still Thinking (Quis custodiet ipsos custodes?)
[ Post Reply | Private Reply | To 37 | View Replies]

To: nufsed
From Social Security's inception, operations of the OASI and other trust funds had not been included in the Federal administrative budget. To give an example of how confusing this became, beginning in 1967, budget documents included three sets of totals. The Johnson Administration, congressional Republicans, and the media each used and emphasized dif ferent sets of totals, showing deficits of $2.1 billion, $43 billion, and $8.1 billion, respectively, for fiscal year 1967.

To remedy the confusion, President Johnson created the President's Commission on Budget Concepts. The commission's report recommended a unified summary statement to replace the three competing and confusing budget concepts. Using this statement, all Federal trust funds, including the OASI trust fund, would be shown together with other governmental programs in a single budget. The first unified budget was presented for fiscal year 1969. The effect of including the Social Security trust funds was to transform a $1 billion deficit into a $3 billion surplus.

The whole SS timeline is here.

40 posted on 12/16/2008 9:36:33 AM PST by JoanVarga (Contain Your Freakness)
[ Post Reply | Private Reply | To 35 | View Replies]

To: nufsed

And all the things I said in my #39 are inherent characteristics of the scam, and would still be so whether the funds were sequestered in a “lawwwwkbawx” or not.


41 posted on 12/16/2008 9:37:25 AM PST by Still Thinking (Quis custodiet ipsos custodes?)
[ Post Reply | Private Reply | To 37 | View Replies]

To: Still Thinking

They are not ingherene tif the government collects enough money to meet the benefit requirements as indicated. The problem with fund ocurred when they redirected the money into other expenditures.


42 posted on 12/16/2008 9:40:38 AM PST by nufsed
[ Post Reply | Private Reply | To 41 | View Replies]

To: nufsed

they certainly didn’t include bad spelling.


43 posted on 12/16/2008 9:41:10 AM PST by nufsed
[ Post Reply | Private Reply | To 42 | View Replies]

To: GovernmentShrinker
Everything you mentioned is true, especially on internal audits. Internal auditors should report only to an independent audit committee, but that isn't always the case. Audits are very political. Keep the client happy at the cost of your reputation. It really didn't work too well for Arthur Andersen.

You most certainly can improve the discovery rate, but it still won't give you 100%.

44 posted on 12/16/2008 9:41:38 AM PST by IYAS9YAS (Hey Obama, why lawyer up when you can pony up? Show us your vault copy BC)
[ Post Reply | Private Reply | To 25 | View Replies]

To: JoanVarga

Thanx JV. Am I reading correctly that in 1967 the soc fund was $1 bill in the red?


45 posted on 12/16/2008 9:42:59 AM PST by nufsed
[ Post Reply | Private Reply | To 40 | View Replies]

To: dirtymac
However, in this case they had a request for an audit and the person making the request must have had his reasons. Reasons enough to warrant the audit. Either they ignored his criteria or they failed to request information on where to look.

Unfortunately, it looks as though it is one of two things - the SEC was not up to the task, or it was given an offer it couldn't refuse (bribe, threat, political heat - you name it).

The more I read about this, the more option 2 keeps coming out the winner.

46 posted on 12/16/2008 9:50:07 AM PST by IYAS9YAS (Hey Obama, why lawyer up when you can pony up? Show us your vault copy BC)
[ Post Reply | Private Reply | To 36 | View Replies]

To: nufsed

No. Read that first graf again.


47 posted on 12/16/2008 10:01:09 AM PST by JoanVarga (Contain Your Freakness)
[ Post Reply | Private Reply | To 45 | View Replies]

To: nufsed

You know, that is a bit confusing. The first graf showing 8.1B and the 2nd graf saying 1B. I just did a copy/paste, so it could be a typo in the story. I’d have to re-read, but it’s so lovely out, I think I’ll take my doggie to the beach.

:o)


48 posted on 12/16/2008 10:03:29 AM PST by JoanVarga (Contain Your Freakness)
[ Post Reply | Private Reply | To 45 | View Replies]

To: JoanVarga
LOL. I'm looking at the beach. We're in Oceanside and between storms.

Best wishes!

49 posted on 12/16/2008 10:05:08 AM PST by nufsed
[ Post Reply | Private Reply | To 48 | View Replies]

To: nufsed

Not true. Since no money was ever collected from the initial recipients, it’s a whether it’s in its own separate fund or not. I hope I haven’t been unclear.


50 posted on 12/16/2008 10:10:11 AM PST by Still Thinking (Quis custodiet ipsos custodes?)
[ Post Reply | Private Reply | To 42 | View Replies]


Navigation: use the links below to view more comments.
first 1-5051-83 next last

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
News/Activism
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson