Thursday, August 20, 2009

Questions about Ponzi Scheme Operators

It’s understandable that victims of Ponzi scheme operators like Bernard Madoff and Earl Jones focus mostly on trying to get their money back and on seeing criminals punished. Not being a victim myself (so far) allows me enough detachment to question the mindset of the guilty.

Do these people enter into their occupations planning to defraud investors or do they get tempted to dip into the money or to overstate the returns they generate? Once there is a gap between actual amount invested and the amount investors are told they have, it wouldn’t take too long for this gap to grow out of control.

The part that is most baffling to me is why more Ponzi scheme operators don’t try to run off to some other country and hide. As the end is drawing near and the amount of money still in their control dwindles, it becomes obvious that they will eventually be found out. Perhaps the onset of the recession sped up the demise of the Ponzi schemes enough that their operators hadn’t finalized plans to hide from their victims in some remote corner of the planet.

Maybe there is nowhere in the world to hide from authorities who would try to track down Madoff given the incredible size of his fraud. But in Jones’ case, you’d think that he might be able to take the last $3 or $4 million and try to hide. Maybe he just waited too long until he didn’t have enough money to live on if he ran away.

Another puzzling part of all this is that Madoff and Jones ran their schemes with enough skill that it seems that they could have run a legitimate business and made a very comfortable income. When it comes to the risk of doing jail time, it seems that some are far less risk-averse than I am.


  1. "When it comes to the risk of doing jail time, it seems that some are far less risk-averse than I am."

    No doubt.

    But they also lack the ethics that would prevent you or me from doing something so nasty in the first place.

  2. Easy - greed and fear.

    Once they start showing strong returns, and business picks up, they realize they can't suddenly pull back on those return and turn the business legit without losing a ton of clients. Or at least they fear they will. Since the fraud is built on new business coming in and old clients staying put, a loss of clients and downturn in new clients would collapse the scheme instantly.

    So they have to keep it going, because there's no way they can pay out investors the principal + "gains".

    As for the greed side - that's what keeps them in the country. $50 BILLION under your control? The kind of lifestyle that funds isn't cheap. And if you keep the truth from your family, then how can you upend them one day and say "we're moving to the Cayman Islands!" The money would stop coming in, and you'd have to drop your lifestyle to living off "mere" millions.

    That, and even though they're crooks, they might have an honest affection for their staff and company. If they take off, then they pretty much automatically destroy the lives of everyone who worked for them.

    They get caught in their own scheme, unable to escape. This is why Madoff turned himself in - to protect his family and employees.

  3. Astin: I think your reasoning works well for Madoff. It's not clear that he could have hidden from US authorities (unless he chose to hang out with the elusive Bin Laden). The Jones case seems different, though. Surely, the desire not to spend a decade or more in jail entered the equation somewhere.

  4. I am puzzled as well about EJ. If you can knowingly defraud a kind old lady of her life savings how can you not take the time to research an escape route. I mean, just google the subject and I'm sure you'll quickly start to form a plan.

    I did and came up with a site on Caribbean properties and the life of pirates. Maybe these guys are just modern day pirates that aren't too bight ;-)