What Is a Ponzi Scheme, and How Does It Rob People of Their Life Savings?

Ponzi scheme

In December 2008, Bernard Madoff, the founder and chairman of Bernard L. Madoff Investment Securities, was arrested by the FBI. Feds discovered that Madoff, a broker and former NASDAQ chairman, operated a multi-billion-dollar fraud operation, robbing people of approximately $18 billion in total and much more in gains.

Madoff lied to his customers for year about gains they made, while trying to get more people to invest with him. This resulted in Madoff and a select few people walking away with billions, while the rest of his clients lost everything they had originally invested. Many wealthy, well-to-do people suddenly faced financial hardships for the first time ever, all because they invested with Madoff.

Yet how did Bernie Madoff convince people to give him billions of dollars, only to then con them out of more. How did incredibly wealthy people fall for such a scheme and lose billions in the process?

Pyramid schemes vs. Ponzi schemes

Madoff conducted something called a Ponzi scheme, an intricate and deceptive pyramid scheme with no good outcome. Like multi-level marketing schemes, Ponzi schemes help those at the very top of the pyramid, while effectively cheating those on the bottom out of their hard-earned money. Unlike pyramid schemes, however, a Ponzi scheme promises and often shows falsified evidence of success in the form of financial returns.

To get an idea of how a Ponzi scheme operates from start to finish, the folks at Epipheo.TV created this short, informative video on the Ponzi basics. When you see how a Ponzi scheme works, you’ll know which mistakes to avoid for your own financial security…and maybe even spot a Ponzi scheme in the making.

If an investment opportunity sounds too good to be true, it probably is. Making continuous gains despite the condition of the stock market sounds nice, but the market must go down the same way it goes up. If an investor or broker is guaranteeing you returns even if the market goes through a rough patch, you might want to think twice about working with them. They could be setting you up for a Ponzi-like scam.