Bernie Madoff is dead. He died in a prison hospital a few days ago. Madoff ran the largest and perhaps the longest lasting Ponzi scheme in the world, at least among those that have been discovered so far. I’ve heard it being said that for times to come, what used to be called a ‘Ponzi Scheme’ should be renamed ‘Madoff Scheme’, and I quite agree. Charles Ponzi, the 1920s fraudster after whom these kinds of schemes are named was a small fry compared to Bernie Madoff. So let us now use the term Madoff Scheme instead.
So what is a Madoff Scheme? It’s actually quite simple. A Madoff Scheme is an investment business where investors who need to be paid back are given money from other investors’ fresh investments. They all believe that the returns they are getting are from some kind of actual business or investing activity. While there may well be some kind of rudimentary activity to maintain the illusion but there is no real source of returns. Obviously, as long as the fresh inflows from investors are enough to meet the demand for outflows, the business will continue. However, at some point, something happens that breaks the cycle.
In Madoff’s case, his illusion lasted an incredible 35-40 years. In all, investors put in some $17 billion dollars into his investment firm. When it all collapsed in 2008, the value of the stocks that were held on behalf of investors were supposed to be around $60 billion. In rupees, that’s more than Rs 4 lakh crore but that was an illusion. In reality, after more than a decade of effort, barely about $14 billion have been recovered—so around 75% of value was a lie. Madoff had a huge list of celebrity investors and was himself a prominent Wall Street luminary. He even served as the Chairman of the NASDAQ exchange for a while and advised the SEC on the setting up of the exchange. According to Madoff’s confession, he did not actually trade at all from 1992 till the end in 2008. For 16 years, everything was a fabrication.
On first hearing about the contrast between Madoff’s public image and his reality, many of us are amazed. However, this public image is always an integral part of such schemes. The image was not incidental- Madoff worked hard at cultivating and nurturing it. The image was the guarantee that no one would think of questioning him. In fact, all perpetrators of financially dodgy schemes work hard at their image. When any individual victim has any doubts his or her first reaction would be that so many other people can’t be all wrong. Surely everything must be all legal and above board. That’s not the mistake of the victim, but the success of the criminal.
9 checks for cyber-safety of your money in today’s digital world
The dark side of digital life
For cyber criminals and fraudsters, now is a busier time than ever. As the population shifts its activities online amid a scenario of lockdowns, social distancing and work-from-home, all due to the deadly global coronavirus pandemic, scamsters have a bigger pool of prey to choose from, a bigger hunting ground.
The line between the real and virtual world is becoming finer each day and online frauds more frequent. As we continue to spend more time online, fraudsters are also coming up with newer ways to con us out of our hard-earned money. Keep these 10 things in check to be safe.
Don’t share OTPs or scan random QR codes
Share one time passwords (OTP) with unknown entities or scan unverified quick response (QR) codes and you are sure to lose your money. Many fraudsters are misusing the ‘collection facility’ allowed under UPI wherein he may send a collection request and ask you to approve it to receive money. Most sites, including banking sites, allow you to change passwords with OTP authentication. So by sharing the OTP you could be allowing scamsters to take control of your online banking logins.
QR code with malicious software is yet another new threat. When you are scanning the code, a malicious code will capture details linked to your wallet, bank account, etc. and these can be misused. Exercise caution while scanning. Scan only those codes with known merchants and make sure that the merchant’s name is appearing on the screen.
Don’t open that link
Fraudsters may send you a mail that is masked to show the sender as a genuine entity, this is basically phishing. You could also get several messages that seem to be from genuine sources such as your bank. Hovering your mouse on and checking the link is of little use due to the increased usage of tiny URL, a system that allows users to hide their long, expanded URLs.
Prevention is better than cure and it is best to not click on any link at all since you cannot distinguish between genuine and fake ones. If at all you have to click, make sure the site opened is secured. Look out for a small lock emblem at the extreme left side of the URL before parting with any personal information.
Unsubscribe, delink from offers
The best way to keep frauds at bay is by updating contact details stored with your bank. However, banks and other financial institutions tend to bombard customers with regular doses of promotional mails and SMSes. By ignoring these altogether, you may miss out on important messages too. Your safest bet is to unsubscribe from these promotional offers.
Don’t store card details
Many of us save our debit and credit card details on several sites and apps. However, this is best avoided. This happens when you fail to turn off the auto fill facility in your browser. Turning it off will increase inconvenience but it will make your online transactions more secure.
Recently, there was news that Sebi fined Yes Bank Rs 25 crore for selling its AT1 bonds to its customers as ‘Super FDs’. When the bank went under, the customers were shocked to discover that AT1 bondholders were carrying the same risk as shareholders and were all wiped out. The regulator takes this as ‘misselling’ but it’s clear that fraud would be a better term. The fact that AT1s were disguised as fixed deposits makes it the same sort of activity as Madoff making sure that his image was perfect.
There will always be frauds in finance (although that does not absolve anyone) and investors have to always be sceptical of new kinds of financial products and services. In India, we have had all kinds of Madoff Schemes in recent decades, disguised as everything from tree plantation to emu farming to housing. What distinguished them from proper financial assets was their novelty and complexity. Some people are attracted to the idea of anything new (Taleb calls this neomania) while others are alarmed by it. Not wanting change or something new is supposed to be a bad thing in these times but I would say that people who are always suspicious of new things would be much less likely to be defrauded.
(The writer is CEO, Value Research)
