Bernie Madoff pulled off one of the biggest financial scams in history. Learn more about Ponzi schemes.
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How to Avoid a Bernie Madoff Scam
Rebecca Brighton: If it sounds too good to be true it probably is, especially when it comes to money. Hi I’m Rebecca Brighton and welcome to WatchMojo.com and today we’ll be learning more about ponzi schemes and how to avoid them.
What is a ponzi scheme? How is it set up?
Marc Larente: A ponzi scheme is basically one person benefiting from another person and as soon as the first investor comes in we’ll only be able to reap a benefit because another investor comes in afterwards that next investor invest their money pays for the first person that comes out. It’s also known as a pyramid scheme. The first person at the top of the pyramid makes all the money that people at the bottom of the pyramid lose all their money.
Rebecca: Is there ever a scenario where a ponzi scheme might succeed or that it might be a good investment?
Marc: A ponzi is a scam it’s a con. The only way you can make money is if you’ve made it on the detriment of somebody else so I would basically say no, you should try to avoid these all cost no matter if you get into the beginning or at the end.
Rebecca: What kind of terminology is important to keep in mind when discussing this kind of fraud?
Marc: If everybody knew it was a ponzi scheme they wouldn’t be investing in the first place but terminology that you can listen to find out if it will become or is a ponzi scheme is people guarantying something that doesn’t really make any sense. Something better than what makes sense. If market rates are currently running 3 or 4% some of the pharmacies in 12 or 15 or more asking you to invest quickly, asking you to put money in a overseas accounts and make checks be able to the wrong part anything that stands out from the normal you know day to day activity that you usually see often you actually asks yourselves an extra questions. The more questions you ask sooner or later some of these are going to sound uncomfortable and you’re going to sort of get the idea that something wrong is going on.
Rebecca: Now in terms of the Bernie Madoff case which is obviously a recent example of a ponzi scheme how was he able to get away with this for so long?
Marc: When things are going well when the markets are going up and so on and you say I’m going to get you a 10% rate of return its really easy to do when the markets are going up and the markets are going up and the markets going up there’s more and more money coming in all the time. His ponzi schemes get bigger and bigger and bigger as soon as the market goes down and people started to take their money out but then realize there’s no money left and to predict other scheme the whole situation falls apart.
Rebecca: What can we learn from the Madoff case what signs might alert us to the fraud?
Marc: Some of the wealthiest people in the North America were invested and obviously overseas at the same time we’re invested the Bernie Madoff people came in and said that how could it be wrong, how could it be a fraud, how could it be anything if these people are invested obviously there’s not any risk involvement. It just proves every single time no matter how big or how small you are you have to ask the right questions and the right questions is you know actually safety, how safe is my investment. How can I get my capital out and so on, there’s nothing wrong with asking questions so me of the things that people get caught in is the terminology gets to complicated the terms all the documentation. The prospectuses, the research and they say oh somebody must have looked into it.