How does a Ponzi scheme work-
A ponzi scheme is a form of fraud in which an investor invests in a fake business the newer investors money is then used to pay the previous investor perpetuating the fake businesses growth by a social feedback loop.
One of the most Infamous ponzi schemes was first started by Bernie Madoff who stole a 65 billion dollars. He used a social feedback loop from previous clients promised unreal returns on stocks (which they were given at the expense of new investors)when in reality Bernie never sold or bought a single stock with their money.
How was Madoff able to keep his Ponzi scheme for so long-
As I mentioned earlier he used new clients to pay of old ones. Cycling satisfaction by promising 1 percent on all returns he then used the success of previous clients to attract new investors to pay old ones.This makes it very hard to catch on to the scheme since its able to recycle the money.I recently learned all Ponzi schemes are nearly destined to fail since they will eventually run out of "customers" to cycle the pay in short his reputation as a investor solidified everyone's trust in him.
What type of person is a Ponzi like-
Ponzi characters tend to be charismatic liars with a powerful magnetic confidence needed to ensure the scheme lasts as long as possible.They also are sociopaths who show little to no remorse for their crimes. Madoff was very knowledgeable of the stock market which he used to create the ponzi scheme appealing to closer relationships to invoke a sense of trust. Unfortunately for Madoff I recently learned his son killed himself of the grief created by the controversy.
Why did the SEC not do anything despite the warnings-
I personally believe the SEC decided not to investigate Madoff due to his powerful authority as a investigator at the time.He also sat on the SEC committees so they likely wouldn't question someone of their own ranks.
Why did Madoff create the scheme-
I believe Madoff likely cares for no one but himself. Because of this he would likely want to continue this scheme despite the pain it brought to so many others. In short the money was more important to him than anything else.
3 random facts- He is currently serving 150 years in prison. After 5 years in prison Bernie Madoff suffered from a heart attack. Bernie had a stage 4 kidney disease during his fifth year in prison.