MGMT Madoff Questions[1] - American University MGMT 201

The Madoff Affair Discussion Questions 1. What is a Ponzi scheme? A Ponzi scheme is a scam where investors are led to believe they are making high returns on investments from monies earned by the investment group, whe ...

The Madoff Affair Discussion Questions 1. What is a Ponzi scheme? A Ponzi scheme is a scam where investors are led to believe they are making high returns on investments from monies earned by the investment group, when it fact they are actually being paid by subsequent investors who are investing in the fund. As long as more money is being invested than is being paid out the scam can continue indefinitely. It took a significant economic event to bring the Madoff scam to an end. 2. What is a feeder fund? It is a fund that feeds money into a master or umbrella fund. They are commonly used to pool investment capital for larger funds. They benefit from the economy of scale and make their money by taking fees. 3. How did Fairfield Greenwich make its money? They set themselves up exclusively to invest with Madoff. Madoff did not charge Fairfield Greenwich any fees; therefore they were able to make approximately 100 million dollars a year in fee income alone. They were taking on average 1% of the investments and 10% of the returns. 4. How did the Fairfield Greenwich fund “take Madoff global”? Walter Noel, a partner in the firm, and has extended family were responsible for marketing the company. Several of his daughter’s were married to well­connected individuals from other countries which allowed them to take the company global. They were able to gather investors in Columbia, Latin America, and the Middle East through their marketing efforts. 5. What was the condition Mr. Madoff imposed on people marketing his investments? Why do you think he did this? Funds were forbidden from listing him (Madoff) as an investment advisor in any marketing materials because he was not registered with the SEC as an advisor. He did not want to draw attention to him