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They're smart and charming. They have an aura of success about them and exude respectability. Above all, they instill confidence.

Which is, after all, why they are called con men.

Bernard Madoff, the Wall Street trader accused of running the biggest Ponzi scheme in history — $50-billion — dealt in more astounding numbers than others but shares many of the basic qualities of Ponzi swindlers through history, according to law enforcement authorities and others who have studied such scams.

"They seem trustworthy because of their charm, their command of finance and the unshakable confidence that they portray," said Jacob Frenkel, a former Securities and Exchange Commission enforcement lawyer. "The Bernie Madoffs of the world are the people you want to sit next to on an airplane."

In a case that played out over the past couple of years in Florida, former boy-band promoter Lou Pearlman was brought to justice for cheating investors out of more than $300-million in a scheme that lasted more than a decade. Pearlman, a rotund man nicknamed Big Poppa, is now serving a 25-year federal prison sentence.

The original Ponzi schemer, Charles Ponzi, was an Italian immigrant to Boston who worked as a waiter, bank teller and nurse before he talked investors into sinking their money into a complex — and, it turned out, bogus — scheme involving postal currency.

His short-lived swindle in 1919-20 cheated thousands of people out of $10-million but was so wildly lucrative for some early investors that he was hailed as a hero in the Italian community. He was convicted of mail fraud and sent to prison before being deported in 1934.

People who run Ponzis generally fall into two categories: hucksters like Ponzi who plan to cheat investors and get out quickly, often fleeing the country, and people who start a legitimate investment venture but lose money, then try desperately to cover it up and dig themselves into a deeper and deeper hole. Ultimately, it all comes crashing down.

Some have speculated that Madoff — once a highly respected figure on Wall Street and a former Nasdaq chairman — falls into the latter category.

Bookish and bespectacled with a wise smile, Madoff had multiple homes, fancy cars and memberships at exclusive country clubs. He gave millions to charity from his own fortune.

"Looking successful is the key because everyone's first question is going to be, 'If this is such a great deal, then why are you wearing a cheap suit?' " said Eric Sussman, a former federal prosecutor from Chicago who helped on about a dozen Ponzi cases. "They have to have all the accoutrements of success."

The Madoff debacle appears to be typical of Ponzi schemes in another way: They are typically orchestrated by people who look to their own churches or ethnic groups for investors. A large number of Madoff's victims are, like Madoff himself, Jewish.

"They are done in groups where people trust each other," said Peter Henning, a former SEC enforcement lawyer and now a professor at Wayne State University Law School in Detroit. "Any Ponzi scheme is built on trust. People can't ask too many questions."

Madoff passed that test long ago. At the exclusive Palm Beach Country Club — founded by Jews in the 1950s, when the other clubs in town were restricted — he proved himself a person of character by giving hundreds of thousands of dollars to charity each year, a substantial portion of it to Jewish causes.


Ponzi schemes are named after Charles Ponzi, left, who offered Boston investors outlandish returns by supposedly investing in postal coupons. Many investment scams are variations of the Ponzi scheme, in which early investors are paid off with money put up by later ones to encourage new, bigger "investments."


You're attracted by tales of high returns, often "insured" or "guaranteed."


Little or none of your money is invested; funds are used for sales commissions, investor withdrawals and promoters' lavish lifestyles.


Phony account statements show great returns, prompting enthusiastic investors to spread the word to others.


The scheme collapses when flow of new money slows.




• John Hogan, a partner with Holland & Knight, sent out word Wednesday morning that he was creating a Madoff Advisory Group to help clients hurt by the implosion of Bernard Madoff-controlled entities. Hogan said it was too soon to say whether Holland & Knight would file suit on behalf of its clients or join litigation already filed. The new advisory group will include attorneys in Florida, New York City, Boston and Washington, D.C.


• Investors were said to have paid hundreds of thousands of dollars a year to remain members of the Palm Beach Country Club in hopes of an introduction to Madoff, the New York Times reported this week.

• With Madoff's clients facing steep investment losses, a few have put their Palm Beach houses on the market to raise cash, the Palm Beach Post said this week. It quoted Paulette Koch, an agent at Corcoran Group in Palm Beach, saying she took on two listings over the weekend.

SCAM ARTISTSWHY PEOPLE TRUST THEM 12/19/08 [Last modified: Thursday, November 4, 2010 1:12pm]
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