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Money Creation Is Not a Pyramid Scheme: Why Is It Okay for Banks to Create Money Through the Process of Holding Fractional Reserves and Lending While It Is Not Okay for Fraudsters Such as Bernie Madoff to Run a Pyramid Scheme?

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History of the Ponzi Scheme Is named after con man Charles Ponzi, a Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Typically Ponzi Schemes entice investors with ensuring higher returns rather than alternative investments, in the form of short-term returns that are either abnormally high or remarkably consistent. Top broker, Bernie Madoff, was found guilty of this scheme, which will further be discussed below The essential elements of a Ponzi scheme. These types of schemes are better understood by using an example, for instance say you collect $100 from each investor and promise you will double it in a month.

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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? 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.

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High-risk investments usually have high returns. On the other hand, low risk investments have low returns. The profit from the investment enables an operator to pay returns to the investors. The investment market is full of fraudsters. Fraudsters usually offer attractive returns on an investment. However, they may fail to offer the returns or disappear with the money altogether. A Ponzi scheme is one of the most common fraudulent investments. A Ponzi scheme is an investment fraud where an operator promises to offer returns that are significantly higher than those of the traditional investments. However, instead of investing the funds the operator pays returns to the investors using the funds from new investors (Kovacich 123). A Ponzi scheme depends on the availability of new investors who would provide funds to pay off existing investors. In addition, the new investors must provide sufficient funds to pay off existing investors. Therefore, it is critical for a Ponzi scheme to attract new investors into the scheme continuously (Kovacich 123). In the US, the Securities and Exchange Commission (SEC) strives to detect Ponzi schemes to protect investors funds. Despite the efforts of the SEC, Ponzi schemes may run for decades without detection. This was the case in Bernie Madoff’s Ponzi scheme. Billionaire Bernie Madoff was an operator of one of longest Ponzi schemes. Madoff’s Ponzi scheme continued undetected for over two decades. The billionaire exploited the image that people had of his success to swindle investors over $50 billion. Madoff’s Ponzi scheme is largest Ponzi scheme ever. People invested in Madoff’s Ponzi scheme since they had trust in the billionaire. This provided Madoff with a leeway to con unsuspecting investors. Madoff’s Ponzi scheme is a clear illustration of the extent to which people may go to exploit unsuspecting investors. Madoff may have engaged in the Ponzi scheme to finance his lucrative lifestyle. The Ponzi scheme provided him with easy cash. The Ponzi scheme may have also him with funds to run other businesses that he owned. Early detection of a Ponzi scheme enables the SEC to save investors from huge losses. To detect Ponzi schemes, investors should be wary of investments that offer high returns with little or no risk

Normally, high return investments have high risks.

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As can be seen, a recent and well-known pyramid scheme involved the fall of Bernie Madoff, who promised and often fulfilled apparently extraordinary investment returns by enlisting new members to part with their money. Madoff has admitted to his crimes and is serving a jail sentence, but only after hundreds of investors collectively lost millions of dollars in the fraud.Regulators have determined that a multilevel marketing structure is not fraudulent if the company makes most of its profits from selling products or services to end-user consumers, as opposed to recruiting new sales agents and requiring those agents purchase their own inventory.

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Arends, Brett. “These red flags can signal Ponzi scheme.” The Wall Street Journal. 16 December 2008. Web.

Benson, Sandra S. “Recognizing the red flags of a Ponzi scheme.” Current Accounts. November/December 2009. Web.

Kovacich, Gerald L. Fighting fraud: How to establish and manage an anti-fraud program. Burlington, MA: Butterworth-Heinemann, 2007. Print.

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