Perhaps they should re-christen it a Madoff scheme.
To judge by the charges against him, to which his lawyer says he will plead guilty on Thursday in Manhattan, Bernard Madoff not only ran the biggest Ponzi scheme of all time but one of the purest. In some ways, his alleged fraud outdid Charles Ponzi’s own effort.
The US attorney’s case against him, which seeks his imprisonment for 150 years, accuses him of having run a Ponzi scheme – using investors’ capital to pay out returns, rather than investing their money – from “at least the 1980s”.
In other words, his vaunted “split strike conversion” strategy of trading in the 100 largest US companies, was an illusion for a quarter of a century or more. He transferred more than $250m of the money he gained from investors to support his broking business and his family.
That is quite a contrast from most financial frauds in investment banks and asset managers, which start off as genuine efforts to make money and descend into fraud only after things go wrong. Nick Leeson’s hiding of loss-making trades at Barings is a classic example.
Ponzi himself started off with what was a plausible idea for making money by arbitraging the prices of postal coupons inside and outside the US. However, despite taking in $15m he was only ever shown to have bought $60 of the postal coupons.
Still, at least when Ponzi was caught, investors got more than a third of their money returned to them – far more than Madoff investors are likely to obtain. His fraud was also far briefer than the one Mr Madoff is alleged to have undertaken – it lasted for less than a year.
Incidentally, Mr Madoff racked up 40 years of the 150 year sentence the prosecutors want because he spread his operation to London. By transferring some money there, he triggered two international money laundering charges with a tariff of 20 years each.
If he had stuck to the US, he might have got away with a mere 110 years.
