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Saturday, March 7, 2009

Ponzi Revisited

Every issue of "Skeptic" magazine (Altadena, California, ed. Michael Shermer) is dedicated to some popular delusion -- from holocaust denial and 9/11 conspiracy theories to "Theraputic Touch" and ancient UFOs. The latest issue (vol. 14 no. 3, see www.skeptic.com for details) deals with Ponzi schemes and, in particular, with Madoff's scam. Pick it up!

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Tuesday, February 10, 2009

Another Quick Note about Madoff

Madoff's portrait was on the cover of Shiv'ah Yamim ("Seven Days"), the weekly magazine of Israel's most popular daily newspaper, Yediot Aharonot ("Latest News"), this past weekend. The title on the cover, in huge red letters: "The Traitor". Inside the tale of woe of Madoff's victims in the Jewish community.

In a sense, the fact that Madoff scammed so many Jews is a blessing. It gives the lie to the "Jews scamming the goyim [gentiles]" antisemitic routine. The last time the ethnicity of both parties in an event was so important to the American public's perception of the relationship between Jews and gentiles was probably during the Rosenbergs' trial in the 1950s. Then, that both the judge and the prosecutor were Jews went a long way toward stopping the trial from becoming, however unintentionally, a "Christians hanging the Jews" spectacle in the view of some people.


Monday, January 19, 2009

A Schande for the Goyim

The Yiddish expression in the title -- "A shame in front of the gentiles" -- describes the general reaction of those in the Jewish community and/or Israel to the whole affair. The Jerusalem Post, for example, had an editorial noting that Madoff being a Jew will surely increase antisemitism; and, indeed, the usual gang of idiots on the Internet already sees Madoff as "proof" of the evil nature of the money-grubbing Jews, out to cheat the gentiles. 

The truth is a bit different, to say the least, and more interesting. Madoff actually scammed many more Jews (proportionally, at least) than gentiles. The Israeli papers in the last two months or so since the scam was exposed are full of reports of one Jewish bank owner, fund manager, or investor after another, both in Israel and in Jewish communities abroad, being "burned" by Madoff.

Why did Madoff scam Jews? Trust. Like all scam artists, he built on the natural level of trust that exists between members of a community -- religious, national, or other. You are less likely to believe a Zulu is out to scam you if you are another Zulu; especially if both of you live in the USA and therefore are a small minority among a large number of non-Zulus.

In the Israeli papers, this is seen in detail. Repeatedly, people said with a sigh: "Oy, that one Jew will do that to another Jew..." -- and one who is known as a supporter of Israel, to boot. Surely someone like that won't deliberately set out to scam other Jews?  

Guess again.


Speaking of the naive belief that people of one's own group will tend not to hurt you, Isaac Asimov tells the following story (in "Asimov Laughs Again"): once, he asked Ben Bova, the science writer, to give a lecture in his stead, since he was sick. Bova told him he could not do it -- his Catholic upbringing does not allow him to profit from another person's misfortune. 

--"What are you talking about, Ben?" asked Asimov. "The Mafia--"

--"If you cause the misfortune, things are different." 


Tuesday, January 6, 2009

The Unlucky Lucky Madoff Investors

So you were lucky enough to receive money back from Bernie Madoff before his pyramid scheme collapsed? Think again.

The usual process in pyramid scheme recoveries is for the court-appointed Receiver to obtain all the financial records of the scamster, including bank accounts. Then, disbursements are traced to each recipient, who receive a friendly letter telling that they must send all the money they received back to the Receiver, so that the Receiver can pool the moneys together for distribution to all victims. Oh, and by the way, if the moneys are not returned then the Receiver will either sue the victim or obtain an order to hold the victim in contempt of court.

Upon receiving such a letter, the scam victim yells "Bloody Murder!" and immediately complains that they put more money into the scheme than they ever got back, and are still in the hole.

The Receiver just doesn't care. The money is not that of the victim, the money is that of ALL victims. The Receiver's job is to husband all the remaining assets of the scheme into the pool, and the assets include those that were paid out of the "lucky" victims before the scheme collapsed.

But what if the victim who received money doesn't have any ready cash on hand? Tough. The receiver can bring a lawsuit against the victim, obtain a judgment, and then liquidate the victim's other assets, such as houses, IRAs, etc., until the Receiver gets back all the money received from Madoff.

Brutal? Yes, but necessary to protect all victims. It doesn't make any sense than an investor who received money from Madoff a month ago should be in a better position than one who didn't. The strong powers of the Receiver to claw money out of "lucky" investors is also why there is actually the possibility of some recovery by all victims. In the Reed Slatkin scam, for instance, victims received upwards of 40% of their original investments back. In the Cash-For-Titles scam of the late 1990s, victims received over 70% of their money back.


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Friday, January 2, 2009

Closed End Managed Buy/Sell Program Is A Scam

Question: Are closed end managed buy/sell programs legitimate? I've made introductions to parties claiming they can produce 30% gains per trade as the buyer is under contract to perform. I think it could be a scam.


It is a scam of the type known as a pyramid scheme. The term buy/sell programs is a term often used by scam artists to try to impress investors into thinking they are putting money into a sophisticated hedge fund (many and possibly most hedge funds are scams in our opinion, but that's another matter entirely), where the fund can generate big returns without any risk of loss.

In fact, the risk-reward correlation is as absolute as the earth-gravity correlation: You just can't get away from it. You cannot have big returns without big risks. Nobody can promise 30% gains per trade without extraordinary risk. But this is just a pyramid scheme where old investors are being paid with new investors' money, but no traders are actually occurring. Like the Bernie Madoff scam, they are just making up statements showing trades out of thin air. Run!

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