Madoff vs. Ponzi and the Uncomfortable Truth

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Today marks the four-year anniversary of when Bernard Madoff's multi-billion dollar heist was exposed. Fortunes were shattered and lives were lost.

Yet, mis-reporting about the facts of Charles Ponzi versus Bernard Madoff is still widespread.

Take Madoff's extravagant investment scam, which is consistently mislabeled by the media. Calling the Immaculate Deception a "Ponzi Scheme" isn't just bad reporting - it's blasphemous. Ponzi's victims lost around $225 million dollars in today's money vs. around $18 billion or 80 times more in Madoff's Scheme. See a difference?

While it's true that Charles Ponzi was the originator of multi-level financial perversity, Madoff was the master. Therefore, classifying multi-billion dollar swindles as "Madoff schemes", and not something less, is good for humanity as well as journalism.

Here are other overlooked but major dissimilarities between Charles Ponzi and Bernard Madoff:

• Madoff was an insider, Ponzi was not. As ex-Chairman of the NASDAQ and the CEO of top market making businesses at the time, Madoff was the ultimate Wall Street insider. This is a major contrast from Ponzi, who failed in his many attempts to become an insider.   

• Madoff was private about his scam, Ponzi was not. Whenever asked about his investment strategy, Madoff rebuffed inquiries saying his methods were "proprietary." In contrast, Ponzi was very public about his scam and even bought newspaper ads promoting it. There were even times when Ponzi arrived at his Boston office with crowds greeting him like a rock star!  

• Madoff targeted wealthy individuals, Ponzi did not. Madoff was private about his scam, preferring to target high net worth people/institutions and to use word of mouth via a tight network of financial intermediaries to gather money. In contrast, Ponzi took money from average people and just about anyone willing to give him a chance.

• Madoff promised steady returns, Ponzi promised the sky. Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days. On the other hand, Madoff promised modest but steady returns through up and down markets. 

Here's another nugget: Madoff's Scheme was worse than Ponzi's, not just because it was larger, but it occurred right under the Securities and Exchange Commission's nose. On multiple occasions they missed their chance to nab Madoff, even blatantly ignoring informants like Harry Markopolos. In contrast, Ponzi operated in a highly unregulated era, more than a decade before the SEC's formation in 1934.

In the tone of a cold blooded killer, Madoff himself even proclaimed, "In today's regulatory environment, it's virtually impossible to violate rules" along with "it's impossible for a violation to go undetected, certainly not for a considerable period of time."

Another interesting fact is how analysts were badly wrong.

Ponzi's business got a stamp of approval from the venerable credit rating firm Bradstreet Corp. ( DNB ), now known as Dun & Bradstreet. "Mr. Ponzi bears a favorable personal reputation," is what Bradstreet said, according to the book Ponzi's Scheme: The True Story of a Financial Legend. Madoff quietly achieved his endorsements from feeder funds like Fairfield Sentry, Maxam Capital Management, and Rye Investment Management. 

You will also find the media politely referring to Madoff's throng of duped souls as "investors". I'm not so sure they were ever "investors" any more than buyers of lottery tickets are "investors". And if we continue calling them "investors", that means we have to begin calling slot machine degenerates and craps players "investors" too. Do you see how one bad teaspoon of inaccurate reporting causes a tidal wave of confusion?

The aftermath of the Madoff Scheme leaves a few questions.

Why hasn't the SEC taken the bold initiative to declare Dec. 11 as "National Madoff Scheme Day?" Do they not think it would be in the public's interest? Or is it because they embarrassingly never caught Madoff? (Remember: The Burn-ster was ratted out by his sons.)

How could the "smart money" be so dumb and have they learned their lesson?

In the end, Madoff was found guilty in 2009 and sentenced to 150 years behind bars, which is a pretty good deal. In the Republic of Congo - for similar offenses - they rope you to a tree and come back for you in three months. And if you're dead when they return, that means you escaped. 

Ron DeLegge is the Editor of ETFguide.com and author of Gents with No Cents: A closer look at Wall Street, its customers, financial regulators, and the media (2011, Half Full Publishing) and the Wall Street Coloring Book (2012, Half Full Publishing). DeLegge also hosts the  Index Investing Show , a weekly syndicated radio program.  

Follow us on Twitter @ ETFguide

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs

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