By Jonny Lupsha, Wondrium Staff Writer
Bernie Madoff, mastermind of a record-breaking Ponzi scheme, has died. His lawyer released a statement announcing his death, though no cause was given. Madoff conned $19 billion from investors.
After serving less than 12 years of his 150-year sentence in prison, infamous conman Bernie Madoff died at the age of 82. As an investment adviser, Madoff made promises to thousands of clients that resulted in them losing more than $19 billion. He had been imprisoned in North Carolina since 2009. While his lawyer released no information about the cause of death, Madoff requested a reduced sentence in 2020 due to cardiovascular and kidney diseases.
Madoff is the culprit of what’s been called the biggest Ponzi scheme in history. The term “Ponzi scheme” comes from Charles Ponzi, who scammed investors in international postal coupons for millions.
In his video series Crashes and Crises: Lessons from a History of Financial Disasters, Dr. Connel Fullenkamp, Professor of the Practice and Director of Undergraduate Studies in the Department of Economics at Duke University, explained the three components that make Ponzi schemes seem irresistible.
An Honest Face and Open Books
“First, the person in charge is either very charismatic, or intelligent, and often both,” Dr. Fullenkamp said. “Our admiration for the person gives credibility to their investment plan and makes us believe that the person is honest.”
This seems simple enough, but charm alone won’t win the day for a con artist. The second component that lures investors, according to Dr. Fullenkamp, is that the principles of the investment are publicly disclosed. Having this information out in the open makes the con itself seem more credible and more honest—we say to ourselves, “Wouldn’t a scam artist be far more secretive and less brazen in their con?”
“And other people do seem to have made lots of money by investing with this person,” Dr. Fullenkamp said. “This proof—if you want to call it that—pushes several of our psychological buttons at once, and is a powerful inducement to open up our own wallets and take the plunge.”
However, most of this is a farce. Some people do end up making money in Ponzi schemes besides their masterminds, and Dr. Fullenkamp said the masterminds do have to have a degree of respectability to be convincing, but most wallets come up empty.
And All the Rest
“A third characteristic that Ponzi schemes typically share is they promise too much to too many people,” Dr. Fullenkamp said. “In other words, even if they’re based on reputable investments, they eventually spread the winnings too thin, run out of money, and collapse.”
This final ingredient to a Ponzi scheme begs the question: Why do con artists so often stick around long enough to get caught? In the 21st century, with everyone leaving a digital fingerprint with their every action, it may be more difficult for someone like Bernie Madoff to simply disappear.
But why didn’t Charles Ponzi or Ivar “The Match King” Krueger cut and run when both had plenty of opportunity and warning that they should? In fact, they did the opposite. Dr. Fullenkamp said Ponzi voluntarily stopped accepting new deposits and let his records be audited while Krueger agreed to an audit as well. Both were desperate attempts to redeem their reputations.
“They might have been hoping that things would turn around so that they could steal even more in the future, but I think that both also had something to prove to the world, and to themselves,” he said. “They wanted to show that they were great men who deserved respect and admiration.”
It never worked. In fact, Ponzi’s great legacy is that the Ponzi scheme is named after him. Even Bernie Madoff’s lawyer acknowledged that Madoff may forever be known only for the crimes he committed.