|
FROM: MAY-JUN 2009 ISSUE | BY VERN KRISHNA
There are three essential ingredients to a good Ponzi scheme: a gutsy schemer; gullible and greedy investors; and a somnolent regulator. A Ponzi will stand as long as there are sufficient new dupes.
Charles Ponzi gave the scheme his name in 1921 when he duped New England residents into investing in a postage stamp speculation. Ponzi told investors that he could provide a 40 per cent return in just 90 days based on differentials in foreign currency rates. Banks were paying just five per cent on savings accounts.
The Madoff investment scandal makes history as the world’s largest swindle of the financial world’s most sophisticated bankers and advisors, who believed that he could deliver 12 to 14 per cent annual “earnings” consistently regardless of market conditions. Naturally, his investors were ecstatic and gave him even more money. Little did they know they were simply receiving a return of someone else’s principal. The only difference between Ponzi and Madoff is that the latter managed to dupe his investors of a much larger amount – $50 billion US.
Seventy-year old Mr. Madoff – a kindly looking gentleman – ran his scheme for more than 20 years right under the noses of the financial regulators – the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority.
To make matters worse for the investors, they would declare their fictitious “earnings” as income for tax purposes. Thus, governments made a substantial killing – about $3 billion each year – by collecting taxes on non-existent earnings.
Faced with huge losses and little hope of recovering their assets, investors must now scramble with a myriad of complex tax and bankruptcy laws. They will need to establish that their so-called declared “earnings” on their income tax returns were not in fact income at all, but merely non-taxable returns of their own capital.
And there is an additional wrinkle to the scandal: earlier investors must give back the money that they “earned” from the Ponzi.
[ TOP ] |