Madoff’s $50 Billion Ponzi Scheme

Bernard MadoffIf you haven’t read the news lately, you should because one of the biggest scams of all time was uncovered in what could see the term Ponzi scheme renamed the Madoff scheme. Bernard L. Madoff was once the head of the Nasdaq (yes, the head of the Nasdaq) and started his own investment firm, Bernard L. Madoff Investment Securities. Over the course of decades, Madoff took investor’s money, lived the high life, and soon lost it all when investors started pulling out their money when the market went south this year. In classic Ponzi scheme fashion, once the money starts leaving, the scheme is discovered.

Some of the individual ensnared include J. Ezra Merkin, chaiman of GMAC; Fred Wilpon, principal owner of the New York Mets (miss the playoffs badly two years in a row and discover your money’s been lost due to fraud? That’s a rough run…); and Norman Braman, former owner of the Philadelphia Eagles. In total, it’s an estimated $50 billion in losses and some people don’t even know they’ve lost money because various funds invested with Madoff. For example, Merkin founded several hedge funds and one, Ascot Partners, had all of its $1.8 billion invested with Madoff.

Until his recent foray into Ponzi, Madoff was a well-respected member of the investment community. He was credited as being a pioneer in market-making, which is the act of being the middle man between buyers and sellers of stocks. It was that work that led him to become the chairman of the Nasdaq, bringing in a tremendous amount of business. However in the 1990s, he used that success to launch the asset management firm that, sometime in 2005, would turn into the largest Ponzi scheme ever.

Despite his gains, a growing number of investors began asking Madoff for their money back. In the first week of December, according to the SEC suit, Madoff told a senior executive that there had been requests from clients for $7 billion in redemptions. On Wednesday, Madoff met with his two sons to tell them the advisory business was a fraud — “a giant Ponzi scheme,” he reportedly told them — and was nearly bankrupt. The sons reportedly contacted their lawyer, who then alerted federal authorities to the fraud. Before being caught, Madoff was working on a scheme to dole out his funds’ remaining $300 million to the firm’s employees and his family members.

It’s an absolutely stunning story. How are you supposed to protect against that?

(Photo: AP)


Mona Vie Scam? The Magical Acai Berry Juice Product

Mona Vie Acai Berry Juice ProductMona Vie. One of my friend’s wife was targeted to join Mona Vie. I’ve seen a lot of references to both Mona Vie and one of the components in its mixture, açaí, but never really looked into it. I knew that it smelled fishy, in part because its a classic multi-level marketing program, and that alone gives me reason to pause. However, I wanted to take an objective look at it, since there are a lot of MLMs out there and they can’t all be bad right?

Multi-Level Marketing / Pyramid Schemes

Only two words are needed to describe Mona Vie, the brand name of the juice: pyramid scheme. Mona Vie is a “standard multi-level marketing program,” commonly referred to as a pyramid scheme, that relies on people marketing their products. Every time you make a sale, you earn a commission. The people who recruited you, and the people who recruited that person (your “upline”) into the program will also earn a commission. If you recruit someone into the program (your “downline”), you will earn a commission on their sales. The classic pyramid scheme.

There’s is nothing inherently illegal or disreputable about multi-level marketing programs. They aren’t illegal in the sense that Ponzi Schemes are illegal , it’s just that most implementations of MLM programs only really benefit the people at the top of the pyramid. This is because many of these programs have quotas that members need to sell and, when they can’t, members often find themselves buying the products themselves just to meet quota. Anyway, enough with the generalities, what’s specifically scammy about Mona Vie?

Mona Vie Scam?

What’s this Açaí berry juice product? It’s supposed to jump all over the antioxidant health craze people have been clamoring all over and Açaí berries are a very good source of antioxidants (most dark colored berries are, like blackberries, raspberries, etc.); that part is legitimate. The drink itself is 19 juices blended together.

There are two parts of Mona Vie that are suspect. First, many agree that antioxidants are beneficial for you but Mona Vie makes some big promises such as improving cardiovascular health, improving joint function, etc. It claims that it can cure many ailments because it contains components that have been shown to address some of them. Nothing they say is a flat-out lie but it’s like saying you can do laps in a kiddie pool. Possible? Yes. Probable? Not really.

The second part that’s suspect is the fact that the stuff is $30-$40 a ~26 oz. bottle and proponents say you have to drink 2 oz. in the morning and 1 oz. in the evening. Simple math shows that each month you’ll have to spend $120-$170 on the juice, or $1,500-$2,000 a year. If you want the benefits of these types of juices, you can get it for much much less. Oh, and any distributor has to buy 4 bottles a month. Sure you can sell them, but what if you don’t? You’re always on the hook.

Other red flags? Their CEO and founder, Dallin Larsen, is a 20 year veteran of the MLM industry and the FDA recently shut down a similar juice product operation, Dynamic Essentials distributed Royal Tongan Limu juice, for illegal business practices. Hmmm…

Finally, check out the MonaVie compensation plan, courtesy of The Fraud Files blog. There are all sorts of crazy exceptions and rules. For example, you have two legs on your “downline,” but are only paid on commissions based on the shorter of the two. It gets really complicated, really quickly, and that certainly doesn’t bode well for people who sell the stuff.

The bottom line is that you’re overpaying for a product and, if you’re a distributor, you have to buy 4 bottles a month. Do you think it’s a scam? (this site, Purple Horror, documents a lot of Mona Vie’s shenanigans)

(Photo: wmode)


Don’t Think It’s A Scam? Request A Fifth Opinion

The human brain is notoriously good at sniffing out fraud, but every so often something comes along that, for whatever the reason, sneaks by our fraud detector and makes us do something we will later regret. That’s why you should do what NASA scientists to… build in redundancy for your fraud detector by getting another fraud detector: your friends. If something sounds too good to be true and you haven’t smelled fraud, get your friend to take a whiff and let you know what he or she thinks. If they think it’s okay, get a third, fourth, or even fifth opinion. If you have an especially cynical friend or one who is a domain expert (or more of an expert than you), make sure you get his or her opinion as one of the first five. If everyone says thumbs up, then go for it!

Let me give you a real life example of this situation. Back in college one of my friends was dreaming up schemes to make millions of dollars and fell upon a scheme where you could buy twelve XBoxes gaming systems off a seller on eBay and then flip them on the local school message boards for a handsome profit. He had convinced two of our friends to go in on the deal and was searching for a fourth when he asked me. I listened to his plan and everything sounded fine until he told me that the source of his XBoxes gaming systems off eBay and that he was getting a great deal. Immediately my fraud detector went off. It’s not suspicious to find a great deal on eBay, it’s suspicious to find a great deal on twelve $200 gaming systems. I told him that the auction sounded fraudulent and that I didn’t want to become involved financially but I’d do what I could to give them advice on how to protect themselves in case there was a problem. Well, eventually the whole scheme broke down as the three of them came to their senses but I was the fourth opinion (counting his own as one) and the first that sounded off the fraud alarm. Had the deal gone through with only three people (say, if the auction was for six XBoxes instead of twelve), it would’ve gone through and perhaps someone would’ve been defrauded (or not, there are plenty of legitimate bulk auctions on eBay).

There’s a reason why Ponzi schemes and the Nigerian scams are still alive and well today, they work well enough that the folks running them still turn a profit. Ponzi schemes are now called HYIP or High Yield Investment Plans (oh, 23049823094% return in one day? Sure!) and Nigerians are still getting people to cash fake million dollar checks and sending back legitimate ten thousand dollar checks. So, the next time you think something is way too good to be true, request all the way to a fifth opinion. If it ends up being a scam, you can at least rest with the psychological benefit of knowing four of your friends would’ve been duped too. 🙂

(Incidentally, some folks are turning the tables on the scammers in a hilarious way)

 Personal Finance 

HYIP = Ponzi Scheme = Scam

High Yield Investment Programs are nothing more than glorified Ponzi schemes meant to do one thing – separate you from your money in a clever and exciting way. Avoid these at all costs. Avoid the brainwashing. Avoid losing your money in a “get rich quick” scheme, they only get a handful of people rich – the creators of the scheme.

What is a Ponzi Scheme? In 1920, Charles Ponzi promised to double your money in 90 days. Guaranteed. His original scheme involved buying postage stamps in other countries and exchanging them for stamps here, earning a great rate of return as long as he could convert the stamps back into cash. He started a business, starting taking in investment money, and when he discovered his scheme was harder than it seemed, he was soon paying off earlier investors with the money from later investors – the classical pyramid scheme. Anyway, you can see where it goes.

Ever heard of 12 Daily Pro? You invest money to buy advertising credits, you autosurf the web (for seven minutes they show you a bunch of websites, 25 seconds each), and you earn a return on the advertising 12 Daily Pro earns. Sounds good right? Check out ABC4 and do a search for 12 Daily Pro and watch all the great expose videos.

Watch Boiler Room and pay very close attention to the poor guy that Giovanni Ribisi’s character gets to buy into the latest “hot stock.” Then watch as he gets him to buy in more after it goes down. Don’t be that guy.

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