Cheap Trick

By Tom Wolfe | Phillips Murrah P.C. | The Journal Record

[ APRIL 23, 2009 - OKLAHOMA CITY, OK ] - What do you tink of when you hear the name Bernie Madoff? Assuming you didn't lose money investing with him (as opposed to the old-fashioned way, inviesting in the stock market), the name conjures up another famous persona: Charles Ponzi of Ponzi scheme fame. Though Madoff may now be the most well-recognized name associated with financial fraud, there are other less infamous swindelers - some from right here in Oklahoma - who have recently been accused of similiar schemes that cost some people their life savings.

So, exactly what is a Ponzi scheme, and how does it work?

First, a little history: Charles Ponzi was an Italian immigrant who duped thousands of New Englad residents into investin in a postage stamp speculation scheme in the 1920s. Ponzi claimed he could take advance of the differences between U.S. and foreign currencies used to buy and sell international mail coupons. Basically, Ponzi told investors he could provide a return on investments of up to 200 percent in 90 days, compared with the more pedestrian 5 percent offered by banks at the time for savings accounts. As you might imagine, Ponzi was awash with new investors. he was living large. He owned a mansion in Massachusetts with air conditions and a heated swimming pool and many other material items, such as pure-gold canes, associated with such wealth.

As it turned out, Barron's financial newspaper examioned Ponzi and along with the Boston Post, ran a series of articles pointing out the probability of fraud in what Ponzi was doing. The media scrutiny caused a run on Ponzi's empire, resulingin the exposure of the scheme, Ponzi's downfall and his place in history. More than 40,000 people - many of whom mortgaged their homs and investied their life savings - were duped out of millions of dollars. Sound familiar?

WHich brings us back to the present. A Ponzi scheme promotes remarkable returns - returns taht are paid to early investors entirely from money paid into the scheme from later investors. New investors fund the returns for the earlier investors. It is similiar to a pyramid scheme, except that it usually does not invovle a heirarchal structure. A Ponzi scheme can run for some time, because investors appear to be making the returns they were promised, which generates reinvestment by the original investors as well as an influx of new investors who continue to unwittingly feed the scheme.

Why do Ponzi schemes fall apart? There are many reasons, but in the Madoff example, the market metldown in the fall of 2008 resulted in investors demanding their cash back, which exposed the fact that their cash was long gone.

What to do? Madoff fooled a lot of smart people, including the U.S. Securities Exchange Commission; that's scary. Be vigilant with your money. View promises of high returns without correspondingly high risk - or investments sold outside the usual channels (spam e-mail, for instance) - with great suspicion.

Losing your money in a Ponzi scheme can be a very expensive trick, so remember these words from Cheap Trick: "I want you want me, I need you to need me..." They may very well have been singing about the masterminds of such shcemes, who need your money to make it all work.

Tom Wolfe is a civil litigator who serves as president and managing partyer of Phillips Murrah P.C. in Oklahoma City.