Thursday, October 1, 2009

The Ponzi Retirement Plan

Being a victim of a Ponzi scheme is a terrible blow. However, life doesn’t seem to work out very well for the Ponzi scheme operators either after they get caught and go to prison. There must be some way to come out ahead with one of these schemes. Here’s my best shot.

Start by setting up an investment company with some confusing-sounding plan that purports to make 20% return each year. Maybe the marketing would include stuff about sector-rotating bottom-up technical analysis wave theory. A potentially tricky bit is that investor funds would have to be protected by either the Canadian CIPF (Canadian Investor Protection Fund) or the American SIPC (Securities Investor Protection Corporation).

Next, find some reasonably healthy 70-year old and make him the following offer. If he pretends to be the person who owns and runs this investment company he’ll get a pile of money. Then find investors who agree to sink $10,000 into the fund for the long term. You would be one of these investors. No money could be taken out for at least 20 years.

Send out statements showing the assets growing by around 20% each year. This should draw in more investors in the first few years. The statements would be completely false. The money would be invested reasonably safely at lower returns, and the old guy pretending to run the company would be spending some of it.

Suppose that the old guy dies at age 90 after 20 years. At this point the fraud gets found out. There isn’t anyone left to throw in jail because he seemed to have run the show alone. The tearful investors would cry in front of television cameras about dashed retirement dreams.

All the investors would just get back their initial investment plus some modest returns and less the money the old guy spent. This might be only, say, $30,000 when their account statements indicated they had, say, $400,000. Next the investors, including you, go the CIPF or the SIPC to recover the remaining money. Of course the money never really existed. But that doesn’t matter.

I say all this in the hope that such a scheme couldn’t work. However, a letter from the Ponzi Victims Coalition states that some of Bernard Madoff’s victims will be compensated by the SIPC.

This (highly illegal) scheme illustrates why Ponzi victims shouldn’t be fully compensated for their perceived losses. It may make sense to give them back their initial investments and possibly any assets that are proven to have actually existed before being stolen, but it doesn’t make sense to give them assets that were purely fantasy on paper.


  1. Thicken My Wallet: I will be interested to see how this plays out as well. I certainly hope that a distinction is made between real assets and fantasy assets. Suppose that a swindler convinces me that I'm going to receive $100,000 when I'm really only going to get $1000. Suppose further that some regulator is responsible for overseeing the swindler's actions. When the swindler gets found out, the regulator shouldn't be on the hook for the additional $99,000. If I can demonstrate that I suffered loss as a result of reasonable actions I took when I believed I would receive the larger sum, I might get some compensation, but the $99,000 never existed and isn't owed to me.

    1. The comment above is a reply to Thicken My Wallet's comment:

      To quote the legal saying: "It is a slippery slope" to start the compensation chain.

      I will be interested to see if there is a lawsuit against the SEC (if one already has not started). Regulators have a wide range of legal defenses they can rely on if they acted reasonably. I am not sure in this particular case they can rely on these defenses (especially if they have already fallen on their sword by admitting they missed this on several occasions).

  2. I totally agree - the ponzi scheme investors should only get back their principals and those who got paid 'interest' over and above their principals should have it clawed back to repay others. This was on 60 minutes on sunday as what 'they' plan to do about madoff investors.

  3. Anonymous: I like the idea of a claw back from Madoff's family members and friends, but I'm not sure it is very practical to do it to all investors. However, the messier this gets, the more money the lawyers will make, and so I'm guessing that the lawyers love the idea of clawing money back.