Odds are, you’ve heard ofBernard Madoff. The once-storiedinvestmentmanager enjoyed an illustrious career onWall Street, even serving as the chairman of theNASDAQ stock exchangeat one point, before his arrest in December 2008 for operating the largest Ponzi scheme in history. Madoff's victims collectively lost nearly $20 billion, and Madoff is currently serving a 150-year prison term with an expected release date of 2139.
While Madoff is undeniably the modern-day face of the Ponzi scheme, many are unaware that the carnage inflicted by his scheme was hardly a one-time event. Unfortunately, the reality is that, while Madoff’s scheme ushered the term “Ponzi scheme” into the mainstream vocabulary (The Associated Presscrowned 2009 as “The Year of the Ponzi Scheme”), the true toll ofPonzi schemesis much greater.
I recently compiled a database of all Ponzi schemes uncovered and prosecuted during the six-year period from 2008 to 2013. The Ponzi Database, which was recentlypublishedatPonzitracker.com, represents the first single comprehensive source to provide a window into thefinancial scourge that has inflicted irreparable damage on an investing public over the past six years. The significant sample size also allows for a truly birds-eye view at just how widespread Ponzi schemes have become. Indeed, in thesix-year span from 2008 to 2013, Madoff’s scheme was only one ofover500Ponzi schemes that collectively involvedover $50 billion. That’s billion with a “B.” On average, a Ponzi scheme was uncovered or busted every four days in that six-year period.
“Only When The Tide Goes Out Do You Discover Who’s Been Swimming Naked”
Ponzi schemes can generally be thought of as a laggingeconomic indicator– in prosperous times, the usually-outsized gains promised by the fraudsters are more easily accepted as possible with the backdrop of a booming economy, and investors are generally content to let their money work for them. As long as these times continue, and newinvestorfunds continue rolling in, the scheme stays afloat and is able to meet its obligations to existing investors. Indeed, from October 2002 to October 2007, theS&P 500 Indexgainedover 100% – nearly 2% per month. Unsurprisingly, very few Ponzi schemes were uncovered during that period.
In 2008, the metaphorical tide began to go out. In the midst of unprecedented market turmoil,stock indicesplummeted. Jittery investors began safeguarding their capital, including withdrawing their investments from those purported wealth managers that had produced too-good-to-be-true results while the markets were roaring. As new investor funds dwindled and investor redemptions soared, Ponzi schemes collapsed in droves.
In 2008 and 2009, at least 157 Ponzi schemes collapsed – including 117 in 2009 alone – involving nearly $40 billion in investor funds. These included the top three Ponzi schemes in history: Madoff’s scheme ranked first with an estimated $17 billion in investor losses, followed by R. Allen Stanford’s scheme with an estimated $7 billion in losses, and Thomas Petters’ $3.6 billion Ponzi scheme. While the number of schemes uncovered from 2010 to 2013 averaged about 100 per year, the disparity is best illustrated in the following charts:
As these charts show, both the average scheme size and the total amount uncovered declined each year from 2008 to 2011, and seem to have bottomed in 2011. However, both metrics have since risen - a potentially ominous sign.
In total, over 500 Ponzi schemes would collapse - and that figures includes only the schemes that involved at least $1 million of investor funds. Of these schemes, the average scheme size was approximately $98 million - while the median scheme size was only $10 million. This significant disparity was likely skewed due to the inclusion of the top three Ponzi schemes. When the figures are re-calculated without the largest three schemes included, the average Ponzi scheme size drops to $43 million.
Even more striking is the massive evaporation of investor wealth. A comparison of these losses to the annual gross domestic product ("GDP") of world countries provides some alarming statistics. For example, the $50 billion uncovered in Ponzi schemes from 2008 to 2013 would rank in the top 75 countries in the world by GDP. This equates to roughly $6.3 billion per year of investor wealth ensnared in Ponzi schemes - or nearly the annual GDP of the African country Niger.
Thousands Of Years In Prison Sentences, Average Schemer Serves Almost 10-Year Sentence
A majority of the Ponzi schemes uncovered since 2008 have worked their way through the criminal justice system and resulted in significant prison sentences. Since 2008, nearly 400 prison sentences, totaling nearly 5,000 years,have been handed down to Ponzi scheme perpetrators. The longest sentence still belongs to Bernard Madoff, which seems fitting given that the severity of his scheme will likely (hopefully?) never be duplicated. And Allen Stanford's 110-year sentence corresponds accordingly with his conviction for the second largest Ponzi scheme in history.
A closer look at these numbers shows that the average and median sentence are nearly identical, coming in at 114 months and 108 months, respectively. Thus, based on this data, the average Ponzi scheme during the "Madoff Era" was a $98 million scheme that resulted in a ten-year prison sentence. Applying that 'average' sentence to the nearly 400 other individuals who were sentenced during that period paints quite a compelling picture.
California, Texas, and Florida: A Ponzi Mecca
Not surprisingly, Ponzi schemer statistics show a disproportionate concentration in California, New York, and Florida. Indeed, of the over-500 schemes chronicled in the Ponzi Database, approximately 170 of those schemers hailed from one of those three states. New York, with the dubious distinction of calling Bernard Madoff a citizen, had an astonishing 40% of the dollar losses. Florida followed suit with approximately 10% of the dollar losses. Interestingly, while California had at least 73 schemers call the state home, it had only 3.5% of the dollar losses - likely owing to its lack of a high-dollar schemer as a citizen. Of the 50 states, 42 states saw at least one Ponzi scheme take place on their soil, with only Arkansas, Delaware, Kansas, Kentucky, Mississippi, Rhode Island,South Dakota, and Wyoming unrepresented.
A closer look at the list of schemers by state revealed several disparities. For example, while Utah had only 2.14% of the money losses, it had 4.31% of the total number of schemers. Similarly, while Michigan had 1.78% of the money losses, it had nearly 4% of the total number of schemers. Finally, Illinois had 1.41% of the total money losses, but over 7% of the total number.
A link to the Ponzi Database is here.
Jordan Maglich is a securities law attorney in Tampa, Florida. Follow Jordan on Twitter at@Ponzitracker.
