Even in Ponzi Schemes, the Rich End Up Richer

If you're going to invest in a Ponzi scheme, look for the biggest and most exclusive ones. Find scams in which really wealthy people and large, prominent financial institutions are involved. A swindle in the Hamptons or Palm Beach is a much better choice than a scam in Moline, Ill. or Tulsa, Okla. Why? Look at what's happening in the Bernie Madoff case.

Irving Picard, the trustee in bankruptcy for the case, has collected about $1.5 billion so far. The time for him to file claims to recover money for injured investors is expiring, and he has recently brought a flurry of additional cases. Big banks, like J.P. Morgan Chase, UBS and HSBC, have been sued. Other financial firms and people that may have fed investors into the scheme have been targeted. Overall, Picard has filed claims for over $50 billion recently. Since he reportedly estimates actual cash losses from the scheme in the range of $20 million, he's trying to collect more than the actual losses (evidently on the theory that some actors, like those soliciting or providing investors, may have liability for damages). His chances of recovering 100 cents on the dollar of actual losses is likely to be low, and the chances to obtain damages probably lower. Nevertheless, many of the recently named defendants are important players in the financial services industry with reputations to protect. If their cases go to trial, unflattering information about them might be revealed in court. They could have strong incentives to settle. Many of them, like the large financial institutions, can't claim inability to pay. That means they will have to pay something.

We're still a long way from the end of the Madoff case. But his victims, who two years ago may have thought they had lost everything, may receive non-pathetic recoveries. For many, recovering 20 or 25 cents on the dollar could bring a little champagne and a new leased Mercedes into their lives. The Bentley may not reappear. But dog food (other than for the pet) could be dropped from the grocery budget.

In the grand scheme of things, being duped in a big and brazen scam of the wealthy is better than being ripped off by a guy selling investments in the parking lot of a big box store. When the wealthy are victimized, other wealthy people and large institutions can possibly be made defendants. Such defendants will often be inclined to settle. Con artists who practice their chicanery in middle class settings are likely to spend the money as fast as it comes in, and there's nothing to collect when the house of cards collapses. Even when victimized by con artists, it would seem, the rich end up richer than everyone else.