Exposing the Con
It should go without saying that almost everyone wants money without having to work for any of it. Think of how amazing it would be if you were suddenly endowed with a multi-million dollar fortune, it would take away all the stress of school (If you even decide to stay there), job hunting, finding a place to live, and basically all of the worries about your future. But in reality we all know this is next to impossible, and normally are not foolish enough to get involved in “get-rich-quick” schemes (most people can identify pyramid schemes or the hilariously fake Nigerian e-mail scams). But unfortunately for us, detecting fraud is not always that simple, there are many swindlers out there who make their deception far more discrete. In fact the real con artists are not the grifters on the street or the scammers on the internet, but rather exist in the form of reputable businessmen and well-educated stockbrokers.
One of the most infamous examples comes from an investment scandal involving the Wall Street firm Bernard L. Madoff Investment Securities. Bernie Madoff orchestrated an elaborate Ponzi scheme through a complex network of investors and businesses that involved over 60 billion dollars worth of transactions. Madoff was considered a well respected financial expert, with a proven track record of success; he helped found a firm that quoted bid-offer prices through stock tickers that eventually developed into the NASDAQ stock exchange, for which he served as chairman. He used this reputation as financial genius to earn the trust of his investors, and he promised them relatively high and consistent returns on their investments. He would then convince a subsequent group of investors to join in, siphon off some of their money for himself, and use the rest to pay his old investors their promised initial returns. The first group is so impressed by their fantastic returns that they decide to reinvest, and Madoff recruits a third group of investors to pay off the second, and so forth. This creates a massive network of clients all connected to Madoff who acts as intermediate “trader” that exchanges the money between groups. One of the key aspects to Madoff’s success was forming strong connections (which could be symbolized as strong edges or nodes) with “exclusive” clientele, particularly Jewish business owners and executives that trusted him because they were part of the same religious community.
Since a Ponzi scheme requires a continuous increase of investors to cover up the promised returns to previous group, its eventual collapse is inevitable. The schemer will ultimately run out of people and/or many of his investors will demand withdrawals. Madoff was able to delay this collapse for decades, mainly by promising more moderate but consistent returns over the long term. He also falsified many of his investors’ account statements to show positive gain and fabricated investment transactions to avoid suspicion. His Ponzi scheme led to losses of billions of dollars for companies such as Fairfield Greenwich Group and Bank Medici, essentially making those phony internet scams look like child’s play.
We have learned through trade models and the network structure of prices and payoffs that everyone is seeking an optimal strategy to maximize their profit. If a certain strategy is not dominant or a best response, you can be sure that they will avoid it. If you are receiving consistently high returns without risk, you have to be suspicious that someone out there has to be constantly losing money and doing nothing about it. Investments always fluctuate up and down over time; an investment that keeps growing continuously like clockwork even during poor marketing conditions is likely illegal. Always be wary; never get involved in investments you don’t completely understand and avoid unlicensed sellers or firms not registered with the SEC. One of the most frightening things about these types of con artists is that they appear so genuine; many of them are wearing well-cut business suits and working for high-end jobs for respectable companies, these are people that earn your trust through their reputation and friendly demeanor, but in fact may be the biggest swindlers of all.
For more info: http://www.forbes.com/2008/12/12/madoff-ponzi-hedge-pf-ii-in_rl_1212croesus_inl.html