I recently saw an episode of Law & Order: LA called “Angels Knoll” whose villain was intended to be like Bernie Madoff, the swindler who took investors for billions in an enormous Ponzi scheme. Now I’m not naive enough to think that it’s the role of television shows to educate the masses, but I was disappointed that the show perpetuated a widely-held misconception about Ponzi schemes.
Parts of the show involved prosecutors searching for the billions the Madoff-like character stole from investors. However, in real life, most of the “stolen” money in Ponzi schemes never existed. When a Ponzi scheme blows up and the perpetrator is found out, investors hold statements saying they have large accounts, but the money doesn’t exist.
In fact, in most cases the hapless investors have been receiving phony statements for years. With each passing year, the gap between the statement figures and the real money keeps getting larger. By the time the scheme collapses, there is usually very little real money to back up the phony statements.
Not only does the total amount owed to investors not exist, but most of it never existed. To keep the scheme going, most Ponzi operators show fictitious high returns on each statement sent to investors. The total amount of money that flowed through the scheme may be only a small fraction of the amount that investors thought they had just before the scheme collapsed.
So, searching for the billions made little sense in the television show, but I liked the episode anyway.