Following the first part published last week, this second part covers two notorious Ponzi cases that made the headlines globally: The story of the ones that emerged in Albania in 1996-1997, and Bernie Madoff’s company.
Albanian Ponzi Schemes
What happened in 1996-1997 in Albania, a small Balkan country in Europe, is definitely an important case to look into. This is because its scale relative to the size of the economy and its socio-political consequences were unprecedented.
Albania is a country in Southeastern Europe with a coast to the Mediterranean. After its liberation from the Nazi occupation, the country became a communist state. The communist regime was dissolved in 1991-92 and a democratic state was founded.
During the communist era, all forms of private property were banned. Having lived under this regime for decades, the majority of the Albanians were completely unfamiliar with free market institutions and practices when the transition began in 1991.
During this transition, Central Bank put restrictions to limit banks’ credits because of increasing bad loans. This led to the emergence of various lending institutions. And besides these, grew companies that collected deposits not to lend them to others! These became Albania’s Ponzi schemes.
In the beginning, the market was unregulated. Even when the banking legislation was put into effect, it became apparent that the government was not in favor of taking any actions against these schemes. On the contrary, the government and the officials were supportive of them, appearing in these companies’ social events.
Some of these companies were exact Ponzi schemes with no real investments involved, some were in the “grey zone” and some were even said to have been involved in criminal activities.
In the early days of 1996, the leading Ponzi schemes in Albania were offering 4-6% monthly interest rates. In the following months, this increased to 8% a month. One of these companies started offering a monthly interest of up to 19%! Country’s yearly inflation rate though, was about 17%. Albanians were selling whatever they had, including their houses, cars, and animals on the farms to invest in these schemes.
Then, even more aggressive offerings started pouring in. One of these businesses announced it started offering 30% monthly interest, then another promised to increase people’s deposits by “three times in three months”.
While all these were happening, Albanian government was only passively watching. And this was despite all warnings coming from the national Central Bank, and the international bodies like the IMF and the World Bank.
Then, the inevitable happened and one the largest schemes started having difficulties in making its payments and that was the first signal of the collapse. Investors started questioning all schemes. In January 1997, two companies declared they were bankrupt. They were followed by others.
In March 1997, Albania was in a complete chaos. The government lost control. Many officers in the army and members of the police force deserted, firearms were looted from army bases. Foreign countries started evacuating their citizens living in Albania and the Albanians themselves started emigrating to other countries. The government resigned and an interim government was appointed to take the country to a new election.
People’s losses in these schemes said to have reached $1.2 billion and more than 2,000 people were believed to have been killed in this country-wide chaos.
Bernie Madoff is the last and the most recent case we will look into. His company is also known as the biggest fraudulent scheme in history.
Madoff had a prestigious career before being famous for his Ponzi organization. Shortly after graduating from the university, he started his investment firm, Madoff Investment Securities. His company became quite successful and by the end of 1980s, it was estimated to be handling more than 5% of the trading volume on the New York Stock Exchange. Madoff’s company was among the earliest ones to use the computer technology for stock trading. This wave helped to give rise to the NASDAQ where Madoff later served as its Chairman for three years.
In late 2008, Madoff admitted his sons, who also were working at the asset management branch of his firm, that he was actually running a large Ponzi scheme. In the HBO movie “The Wizard of Lies,” where Robert De Niro plays Madoff, he says, “There are no investments. I made them up. I took some money from some people and gave it other people. There’s nothing left.” Madoff’s sons reported their father to authorities and Madoff was arrested to be charged with securities fraud.
Bernie Madoff was said to have admitted to investigators that he had lost $50 billion of his investors’ funds. Others say this was in fact, $65 billion. In 2009, he pleaded guilty to counts that included investment adviser fraud, money laundering, false statements, and theft from employee benefit plan. Later, the court sentenced Madoff to 150 years in prison, the maximum possible.
No one exactly knows when Madoff began stealing from his investors. Madoff’s former account manager, Frank DiPascali, Jr., said in a court testimony that this had been going on “for as long as he remembered.” He had started working at the firm in 1975!
In February 2016, it was announced that more than $11 billion of victims’ total principal investment of $17.5 billion had been recovered. However, Madoff’s scheme was often referred to as a “$65 billion scheme”. In fact, he actually stole less in principal funds. But his firm produced account statements telling the investors that they earned returns making them worth a total of $65 billion. So, from the investors’ point of view, what they really did lose was $65 billion.
A group of researchers at Cornell University quantified the impact Madoff’s scheme in had on the total financial industry. They found that it was $363 billion!
In 2020, Bernie Madoff said that he was dying from kidney disease and was seeking an early release from prison. His request was denied.
Hakki Ozmorali is the Founder of WDS Consultancy, a management consulting and online publishing firm in Canada, specialized in providing services to direct selling firms. WDS Consultancy is a Supplier Member of the Canada DSA. It is the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.
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