How a Pyramid Scheme Takes Shape

Boston Globe ^ | 12/16/08 | Ross Kerber

[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.....

[Still Thinking]

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.

[nufsed]

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.

[nufsed]

they certainly didn’t include bad spelling.

[IYAS9YAS]

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%.

[nufsed]

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

[IYAS9YAS]

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.

[JoanVarga]

No. Read that first graf again.

[JoanVarga]

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)

[nufsed]

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

Best wishes!

[Still Thinking]

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.

[dirtymac]

A later post indicates that the perpetrator of the scheme daughter is married to one of the chief lawyers in the compliance investigation unit of the SEC.

Nothing to see here folks, keep moving.

When will this country clean house?

[IYAS9YAS]

When will this country clean house?

Unfortunately, short of armed conflict, I don't see this happening.

[Michael.SF.]

I ... welcome facts to the contrary.

My posting of the headline was intended to be humorous. However, humor is most effective when there is an underlying truth in the point of the joke.

Yes, Roosevelt did start Social security, which has developed into a massive ponzi or pyramid scheme to disenfranchise taxpayers of a sizable portion of their earnings.

It was not my intention to get into a serious discussion here, but it appears that you would like to. I am not being flippant or intending to avoid the discussion with you, but in all seriousness, if you want to learn more of how FDR's first two terms were used by him to boost socialist type programs, award and penalize friends or enemies, and was a complete economic disaster, I would advise you to read the book referenced below. I have and it is an eyeopener.

For example:

** Worse year of the depression? 1937. After five years of Roosevelt we were worse off then under Hoover (1929-1932)

** Bank closures in Canada? zero. In the USA? Hundreds. Why? Partial answer: FDR did not follow or encourage banking solutions as practiced in Canada (this was changed much later).

I would encourage you to spend the $18.15 and read the book. After doing so, you may change your mind on FDR.

Take Care

[wizr]

That’s OK, if the bottom has their own money to spend.

But then buyers sign for a loan that they can’t, or won’t, pay back.

Those, they are trying to make money on, below them
in the pyramid, decide they cannot afford to buy into the game.

That’s an uh, oh.

[Michael.SF.]

Of course HE (FDR) paid the people who hadn't paid in. Government does that all the time. It's called welfare.

Is that not an admission that "Social Security" is a fraud?

If we are going to give people money to ensure that they live at some sort of subsistence level, let's call it what it is: WELFARE or Government Assistance (to dress it up a bit). I can appreciate that this was required at the time and is today.

However, if we are going to pay (invest?) into a fund, based on our earnings, and then receive a fixed amount in return, and my money is being taken to pay non investors, then that is a scam and not a securing of my social future.

I would favor a solution along the lines of:

1)Grandfather in all current investors under the program, the way it is (to do otherwise is political suicide.

2) New Investors can sign up to a tiered system. A portion goes to keep the above program alive, and a second portion goes into an individual fund where your return on investment is based on your earnings and the return gained on those earnings (no cap).

3) After a period of time (25-30 years?) The amount used by new investors to pay off the old investors would be decreased.

4) Eventually (50 years or more?) -- All investors would be funded based on their earnings and their investments.

NOTE: rules and guidelines for investment would be required and would be monitored by local banks or investment firms (I know, this is where many would dispute the appropriateness of this plan).

[Still Thinking]

While a thousand times better than the present scam, you still have government mandating retirement savings, so you wouldn’t have completely erased the stain shit out by FDR [spit]. The government’s involvement will distort the results, probably diminish returns, and interfere with peoples fundamental freedom of choice. Maybe the next phase after that could be to phase out even that.

[Michael.SF.]

you still have government mandating retirement savings

Unfortunately we have a large number of people who have no savings for retirement because of their own stupidity and/or laziness. Thus we need to aim at the lowest common denominator.

The intention though of the plan outlined would be to mandate a minimum level of savings, each one receiving based on what they put in. At least if that occurred then public funds would not be used to bolster the ignorant.

[Still Thinking]

I know, that is a conundrum. I still can’t get past the whole right/wrong thing though.

[dirtymac]

Read my tag line

[Minn]

Start putting them on some sort of commission program, for finds that result in convictions and prison terms for the perps

That's what I want; to live in a country where prosecutors and investigators are working on a quota system, and have a financial interest in convicting every individual, whether or not you are guilty of anything,.