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Understanding Ponzi Schemes and Investment Decisions

How the Ponzi scheme began and worked

According to Chen (2021), the Ponzi scheme originated in 1920 and was named after Charles Ponzi, a fraudster through a security exchange company at the US postal service. The system is a fraud that promises investors significant returns with minimal risk. Returns for existing investors are paid using money from new investors. The number of new investors decreases, lacking enough money to go round, and the scheme unwinds.

Why Madoff got away for so long

Madoff was able to get away with the scheme for an extended period because, First, his returns were high of about 18% and consistent, which could not allow the investors to look any other way. Madoff had a great strategy to win over investors who wished to exit. He would fund a payout with new capital, which attracted more investors due to the unbelievable returns and eventually won trust. He also claimed to be using a strategy of minimizing risk where the underlying investment is protected by purchasing investment from new investors.

Standards that an individual investor can be involved in

Standards that an individual investor can be held to in such a case of fraud are safety of the investment; investors are obligated to look for a safe investment scheme which the risks involved. The income level in an investment where investments with high risks gain more revenue and those with low risk generate low income. Therefore an income investor should go for investments that pay good dividends. (Hayes 2022)

I do not think it is the government’s responsibility to ensure that investors make good decisions. Investors should conduct their due diligence and decide from the findings. However, it can put in place policies and guidelines that guide and govern the investment field, provide information and advice to investors and work closely with the public and media to identify market gaps.

Why the Madoff’s case is study in ethical business practices

This is a good lesson in ethical business practices since most investors did not conduct due diligence to understand its operations. Madoff had imposed a condition to all firms not to mention him as an investment advisor since he was not registered with the Securities and Exchange Commission(SEC). He did not tolerate any questions and threatened investors who questioned his operations which should have alarmed all firms investing in his company. Madoff’s operations in his business followed ethical business practices at work example, and he held the leaders of other employees to high standards. He also had hired many employees since his company had spread all over the country and had attracted thousands of clients. The employees were also happy with their job. One of the former employees states that it was a great company to work for, and no one ever left the organization unless they were fired for serious allegations.

The least credible person interviewed was Harvey Pitt, the chairman of SEC between 2001-2003. He appeared not to understand most information considering he was the chairman: he also stammered when answering specific questions and avoided answering the questions directly. For example, he could not explain why Madoff was not registered with SEC as an investment advisor despite servicing 3200 clients.


Hayes, A. (2022, January 15). Basic Investment Objectives. Investopedia.

Chen, J. (2021, October 21). Ponzi Scheme. Investopedia.,Howe%20in%20the%20United%20States.


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