On June 30, 2009, Bernard Madoff was sentenced to 150 years for his fraudulent financial activities. He defrauded thousands of investors out of $65 billion. What fraudulent scheme did he use?
Explanation
Bernard Madoff was convicted of operating a Ponzi scheme, which pays the first people in the scheme with the money from later people. This scheme usually offers very high and short term returns in order to attract new investors. This scheme takes advantage of investors’ ignorance about the financial system. If the earnings are less than the payments, however, the system will collapse.
The Ponzi scheme takes advantage of peoples’ false expectations about high returns from attractive-sounding investments. Madoff, who was then a non-executive Chairman of NASDAQ, used his reputation to deceive thousands of investors in the fraud.
Key Takeaway: Due diligence is the key to avoiding financial scams. If something seems too good to be true, it probably is.
