Madoff Ponzi Scheme – How Do Folks Get Defrauded? Comments by White Collar Crime Speaker Chuck Gallagher

Since the middle part of December when the Madoff scandal broke – the main question that has come up with each and every interview I’ve done is – how did these folks get defrauded?  If people can figure out how such a massive fraud was pulled off, perhaps they can begin to understand how to protect themselves.  Madoff’s victims fell into what I call the PIT.  And, once you take that first step into the slippery slop falling into the PIT it is hard to get out.bernie-madoff

THE   P I T:

The first part of most any financial fraud starts with the PROMISE ( P ).  Fortunately I was not a Madoff investor, but from all the reports thus far the attraction was that Madoff – because of his superior mind and amazing system – could produce consistent high returns regardless of market fluctuations.  That was the PROMISE.

Now think of it, if someone told you that he/she could get you a return that practically no one else could get and get that return for you consistently year after year, wouldn’t you be interested?  Sure you would!  So POINT OF ADVICE:  If you wish to avoid being scammed, understand – if it sounds to good to be true – it LIKELY ISN’T TRUE!

The second part of the fraud triangle is the ILLUSION ( I ).  From different sources in different ways, it has been reported that when one actually examines the statements that Madoff provided his clients – one could see that what they said as compared to the actual market actions were inconsistent.  In other words, Madoff seemed to rely on ignorance of the market and complexity to create – what would seem – the perfect ILLUSION.

Mind you, Madoff (and his team) was good.  Really good.  Rarely do Ponzi scheme operators provide such a grand ILLUSION that is sustained for such a long time.

This second component of being defrauded is actually the hardest to crack.  Why?  Well, think of it, if you were that good at investing you wouldn’t need someone like Madoff.  Therefore, with modern technology one can produce printed or on-line statements that can fool most any experienced auditor.  That said, a great ILLUSIONIST should be able to fool you.  Madoff’s clients were fooled and my of them were experienced investors.

That leads to the third and final component of fraud – TRUST ( T ).  In order to effectively pull a fraud off, someone has to trust the fraudster.  Now, having been a fraudster (not something I am proud of), I understand the mentality.  It is much easier to defraud someone who is close to you and trusts you than it is to defraud a stranger.  It isn’t that fraudsters want to hurt those closest to them, rather, it is just easier to convience someone who is close to you to trust you.

In Madoff’s case after his first victims invested and fell prey to the scam, they became the foundation for others to follow.  Not only was it trust in Madoff, but the trust was based on trust that others had done their homework so that investors that followed didn’t have to do theirs.

I believe in trust.  I also believe in logic when it comes to financial investments.  Therefore, RULE OF THUMB don’t invest with friends or friends of friends.  Seek your own investment resources and know that fraud comes more times than not from someone close to you.  If you do business with strangers, then you will be more careful about who you select and how you select.  The solution is simple.


Avoiding fraud is easy if you follow three simple steps:

  1. If it sounds too good to be true – it likely is and you may be on your first step into the PIT.
  2. If you don’t understand the investment then don’t put your money there.  How many people today would have preferred a boring but safe investment vs. taking the beating (we’ve all taken) in the market collapse of ’08/’09?
  3. Don’t invest with people you know.  If you do, expect to lose all your investment.  If that is comfortable then invest with friends.  Otherwise, follow this rule and you’d dramatically improve your odds at avoiding fraud.

Feel like you’ve been scammed…then make a comment.  Perhaps your comments will help others!


One Response to Madoff Ponzi Scheme – How Do Folks Get Defrauded? Comments by White Collar Crime Speaker Chuck Gallagher

  1. Mr. Gallagher, could you please share with your viewer’s information on the Internal Revenue Code 165 (c)(2) deduction? I have victims contacting me every day with questions and as this may be the only source of realistic recovery, any information you could provide would be appreciated.

    Also, another something to think about. As with any unregulated industry, I would not be surprised if victims are victimized again by fly by night 165 firms popping up to help. Please warn victims to beware and check out these firms thoroughly.

    If I can be of any additional assistance, please don’t hesitate to ask. Also, feel free to share my website, with your viewers. I do not charge a fee to individuals and am more than happy to provide some guidance to anyone interested. I can be reached via my cell phone if you have any questions, 813-505-8802.

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