Ponzi Schemes and Sophisticated Investors

So when you read about a small, $50 million dollar, Ponzi scheme coming to light, you almost always read about some gullible investors who had no idea they couldn't make 50% returns in a legitimate business deal. The list of victims was recruited from friends or family in an affinity fraud and almost always includes a bunch of doctors and dentists who have too much money and think they need a bunch more but don't understand risk and return. It is very rare that the so-called sophisticated investors who understand risk and return get duped. The following story was sent to me by a former student, Robert Madsen, who pointed out that this is what makes this story incredible...

Only rarely do we hear of sophisticated investors falling for a Ponzi scheme but normally the scheme doesn't carry the unmistakeable red flag of "a 40% return is too good to be true!" In fact, Bernie Madoff is the only real Ponzi schemer that I know of who duped the "sophisticated investors" as he promised much more reasonable returns of about 10-15% but claimed to have a strategy that made his returns bullet proof even in market downturns.

Read the article in its entirety on Mark and Aaron Zimbelman's blog, FraudBytes.

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