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Ponzi's Original Swindle

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Sunday, January 11, 2009; Page F01

Oh, what a time we live in when fortunes of everyday folks are being wiped away in seconds. And that's just from honest dealings in the stock market.

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Then there are those who would labor to relieve people of their hard-earned money with schemes and scams that just amaze.

The latest financial scandal comes courtesy of Bernard L. Madoff, who is accused of orchestrating a $50 billion Ponzi scheme. Madoff had been a prominent member of the securities industry. He was a member of Nasdaq's board of governors and served as chairman of its trading committee.

It would not be surprising to read this of Madoff: "Admirers hailed him as a wizard, critics branded him a fraud. Either way, he arrived on the scene at the perfect moment."

But those are the words Mitchell Zuckoff used to describe the man who set the model for the scheme Madoff is accused of perpetrating: Charles Ponzi. If you have a desire to understand people who engage in financial fraud -- and you should -- read Zuckoff's book "Ponzi's Scheme: The True Story of a Financial Legend." Now in paperback, "Ponzi's Scheme" is my pick for the first Color of Money Book Club selection for 2009.

A Ponzi scheme is just another way to describe the concept of robbing Peter to pay Paul. Only in this case, money from new investors is used to pay off earlier investors. Eventually, the con collapses when not enough new money is coming in to pay off existing investors.

Madoff, who is facing charges of securities fraud, may have beaten Ponzi at his own game by possibly creating the largest Ponzi scheme in history.

In complaint filings, authorities allege that Madoff informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The Madoff firm had more than $17 billion in assets under management as of the beginning of 2008, according to regulatory filings.

The Securities and Exchange Commission alleges Madoff conducted a fraud that appears to be of "epic proportions."

That's what was said of Ponzi's scheme after it, too, was finally exposed as a fraud.

In 1920, Charles Ponzi promised a 50 percent return on people's investments in 45 days. With 18 investors and $1,770, he created a scheme that would eventually rake in millions. At the peak of his scam, his firm collected more than $2 million a week at his office in downtown Boston.

Zuckoff doesn't glorify or crucify Ponzi. Instead, he's written an engrossing biography explaining how someone from humble roots could so easily dupe thousands of people.


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