How to Avoid the Ponzi Scheme Trap

I spent a sad and depressing, but highly instructional evening with Dr. Stephen Greenspan, who had lost most of his personal fortune to Bernie Madoff.

The University of Connecticut psychology professor had poured the bulk of his savings into Sandra Mansky's Tremont feeder fund; receiving convincing trade confirms and rock-solid custody statements from the Bank of New York.

This is a particularly bitter pill for Dr. Greenspan to take, because he is an internationally known authority on Ponzi schemes and published a book entitled Annals of Gullibility-Why We Get Duped and How to Avoid It.

It is a veritable history of scams, starting with Eve's subterfuge to get Adam to eat the apple, to the Trojan horse and the Pied Piper, up to more modern-day cons in religion, politics, science, medicine, and yes, personal investments.

Madoff's genius was that the returns he fabricated were small, averaging only 11% a year, making them more believable. In the 1920's, the original Ponzi promoting a scheme involving international postal money orders promised his Boston area Italian immigrant customers a 50% return every 45 days.

Madoff also feigned exclusivity, often turning potential investors down, leading them to become even more desirous of joining his club.

By now, most Madoff investors have gotten the bulk of their funds back after several highly publicized asset liquidations. But it took eight years to get them.

Once burned, twice forewarned.

Once in prison, Madoff’s wife divorced him; one son died of cancer, and the other committed suicide. Madoff died in prison in 2021.

Suffice it to say, if it’s too good to be true, it isn’t.