The financial history is full of unfavorable results that come up either due to economic drifts, inherent and political uncertainties or human error. Common in the financial sector is Ponzi schemes which are usually fraud investments, promising investors abnormal returns on their investments. The operators of the Ponzi scheme draw new investors and use new investments to pay off the promised high returns to old investors. Eventually, the investment reaches a point where the principal amount invested by new investors cannot pay off the enormous dividends of former investors, causing it to collapse. Mostly, operators run away with investors’ funds before they can realize that it was a scam. In some cases, they are discovered and prosecuted (Jory and Perry,). Therefore, using Madoff Ponzi scheme, it is critical for one to understand how such plan materializes and the effects on individuals.
Madoff used the common Ponzi scheme mechanism where he sorts investors by promising them bizarrely high returns on their investment. The plan was to use new investors’ principal amounts to pay off dividends to old investors. Such schemes operate well as long as the capital the investors are asking for returns or pulling out does not exceed money from new investors. For Madoff, things began to fall apart when the request from client went up to 7 million dollars. However, Madoff only had a balance of approximately three hundred thousand dollars to give. Madoff was a well-known personality in the financial industry with adequate experience to make people believe that he knew what he was doing. Eventually, in 2009 Madoff was caught in a 65billion dollar scheme and charged with accounts of fraud, theft and money laundering among others. He was sentenced to 150 years in prison (Yang, 2014). Madoff case is among the biggest in the history of financial crises due to acts of human irresponsibility.
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Investors feel the impact of such schemes to a vast extent. The effect of the collapse of the projects to the investors is usually devastating. A significant impact of the scams is a financial and psychological crisis. A financial crisis occurs whereby investors lose their savings and are unable to meet their financial needs. Most people invest their life savings, children trust funds and even take up loans to invest in such schemes hence leaving them in financial crisis after the collapse of the regime. Psychologically, individuals go through guilt shame, regret, and depression as they try to figure out how they fell for such scams (Willikins, Acuff & Hermanson, 2012). They blame themselves for not doing due diligence on their part. Others go through periods of denial where they still hold on to the conviction that the returns are still possible in one way or the other.
Another significant effect of Ponzi schemes to individuals is that they lose confidence in investment companies and shift towards more reliable platforms such as well-established banks. Others abandon the whole idea and prefer to keep their savings intact. Nevertheless, investors tend to always go through wealth deficit in the future because they hardly recover the money invested in the schemes. People become more conscious of investment programs and to some extent lose interest. The shift in consumer focus from investment to savings leads to significant economic hurdle (Cortes, Santamaria, & Vargas, 2016). Investors hardly recovered the Madoff investment.
In conclusion, the existence of financial incidents resulting from human acts such as Ponzi schemes is usually a fault of the operators and the investors. Individuals fail to conduct due diligence on specific deals that naturally look too good. On the other hand, negligence from financial institutions also represents a great deal of irresponsibility in the occurrence of such financial incidents. People need to take caution when it comes to financial matters and establishes a good background on the businesses in which they invest. Otherwise, people seem adamant to take responsibility given the many incidents of investment frauds which show that people are unwilling to learn.
References
Cortes, D. Samantara, J. & Vargas, F. J. (2016). Economic shock and crime: Evidence from the crash of Ponzi schemes. Economics Department, the University of Rosario . Retrieved on 27 October 2017 from http://repository.urosario.edu.co/bitstream/handle/10336/11880/dt185.pdf?sequence=3.
Jory, R. S. & Perry M. J. Skip navigation LinksPonzi schemes: A critical analysis. Journal of Financial Planning . Retrieved on 27 October 2017 from https://www.onefpa.org/journal/Pages/Ponzi%20Schemes%20A%20Critical%20Analysis.aspx.
Willikins, A. M., Acuff, W. W. & Hermanson, R. D. (2012). Understanding a Ponzi scheme: Victims perspective. Journal of Forensic & Investigative Accounting, 4(1), 1-19.
Yang, S. (2014). 5 years ago Bernie Madoff was sentenced to 150 years in prison: Here's how his scheme worked. Business Insider . Retrieved on 27 October 2017 from http://www.businessinsider.com/how-bernie-madoffs-ponzi-scheme-worked-2014-7?IR=T.
