Former NASDAQ Chairman, Bernard Madoff has allegedly been running a Wall Street ponzi scheme of epic proportions, bilking investors out of an estimated $50 billion.

Madoff is the founder of Bernard L. Madoff Investment Securities LLC and separately managed money for high-net-worth individuals and hedge funds through an investment advisory business he oversaw. Madoff was charged with securities fraud on Thursday after federal investigators called his operation “a giant Ponzi scheme.”

According to The Wall Street Journal, Madoff was buying and selling options, which are orders that allow someone to buy or sell stock at a given price within a given time frame. The orders don’t have to be placed. The Wall Street Journal Weekend Business Podcast for 12/12/2008 states that, while buying and selling options is a viable investment strategy, it would be impossible to execute given the enormous amount of money Madoff was managing.

What is a Ponzi Scheme?

Ponzi schemes operate on the promise of high rates of return with little risk; no different from most investment schemes in that regard. In a Ponzi Scheme, however, portions of new investors’ funds are siphoned off and paid as returns to older investors. Older investors think they’re getting great returns when the money is actually coming from the new investors. In the end little, if any, real investment actually takes place. The scheme is able to operate as long as there is a constant flow of new investors; as soon as new investment slows or stops, there is no longer money to pay the older investors. We may find that this is just how Madoff got caught…with the slowing economy, he no longer had a steady flow of new investments to pay the old investors. This is just speculation of course, nonetheless, this appears to be the largest investment scam in U.S. history, causing irreparable losses to thousands, including many large charities.

Popularity: 39% [?]