How Bernie Madoff Grew His Ponzi Scheme to $50 Billion Using Four Rules
To scale scale your business to millions of dollars, you only need to follow four simple rules, the same ones used by a notorious con man.
Here they are:
- Sell a benefit
- Secure and use social proof
- Use the law of scarcity
- Leverage influencers to get to your target customer
As an example, I’m going to talk about someone who I really don’t like.
He’s a real schmuck.
He’s such a schmuck he’s in jail for the next 150 years!
And who says crime pays?
His name is Bernard Madoff.
Why am I writing about him?
Well, I used to work on Wall Street and during a recent dinner with friends, Madoff came up in conversation.
My friend asked me how he could get away with it – a massive ponzi scheme. For years. Decades.
How massive? Try about $50 BILLION.
So, I took a careful look at how he perpetrated the greatest ponzi scheme in history.
This post is the result of my findings.
Here are the 4 key rules you need to know to grow your business to unimaginable heights. These are THE rules Madoff followed:
It’s a short video (please let me know what you think in the comments).
I want to be clear…
I’m taking a negative story and turning it into a positive one, hopefully giving you guys some value that you can take back and apply to your own businesses.
I do not condone this guy.
I do not make any excuses for this person.
I personally know people who were hurt by him and very badly.
Also, it’s important to know that thousands of lives were destroyed by this man. Not only did he destroy all the people that invested with him, but he destroyed his own family.
Entire charities were wiped out. Charities that were helping people all over the world.
It’s really important to know that Madoff had two businesses:
The first business is what put him on the map … a credible clearinghouse business for over the counter stocks.
He made a very nice living with this. He could have had a great life, just doing that.
The second was the investment advisory business, this is where he accepted money from other people and invested it for them. This is where he stole their money and perpetuated the ponzi scheme.
First, Sell A Benefit
The first principle, the number one thing that Madoff sold above all else was a benefit, and we all know that benefits sell and features tell.
Well, in this case, the one benefit that he sold above all others was security.
Why didn’t he sell big investment returns — which so many other managers, money managers or wealth managers do?
Because Madoff understood his target customer extremely well.
(I’ll get to how he targeted his customers later)
Because all financial markets are uncertain. They are filled with risks, and as people, as creatures, we inherently don’t like uncertainty.
We don’t like doubts; we don’t like risks.
And the stock, commodity and the bond markets are filled with these uncertainties. This is why they go up and down all the time. Fluctuate.
These fluctuations are called volatility.
And many ultra-rich people suffer from the fears that you and I do; they don’t like change, uncertainty and risk any more than we do.
That uncertainty is equivalent to fear, and Madoff understood this really, really well.
Madoff decided to sell the benefit of security.
He didn’t promise to beat the markets or even other wealth managers.
He promised his customers their money would be safe because he knew the markets than they did.
His mantra was, “You could be safe with Madoff.”
Do you see how powerful this is?
As to how he was able to promise security, he told people he had a secret trading system that performed well in all market environments.
This made his returns what a Wall Street person would call “unusually consistent.”
This should have been a suspicious marker. This should have been a red flag to his investors.
Soon you’ll see why they didn’t question him at all…
Second Rule: Get Social Proof and Use It
The reason investors didn’t question Madoff was because he used the principle of social proof.
Madoff used this one like a pro.
We all talk about social proof and using it in our own marketing:
- Customer testimonials
- Press mentions
- Mentions of prominent people
- We show pictures of ourselves with influential people
Here’s what Madoff did:
The first thing he leveraged to his advantage was the NASDAQ. And if you’re not familiar with it, the NASDAQ is a stock exchange for what’s known as over-the-counter stocks.
I’m not going to get into what all that is, but take my word for it; it’s a stock exchange. It’s a huge one. Companies like Microsoft are listed on it.
Madoff helped found it, and he was the chairman for several years.
This is a huge deal. It gave him immense credibility and it caused people to trust what he said, because he knew what he was talking about.
The other thing was is that he sat on the board of directors for what is known as the NASD.
All you need to know about the NASD is it’s a regulatory organization for the securities industry.
When you think about it, this is the equivalent of being a bank thief and sitting on the board of advisors for the FBI or something.
He also made a point of being included in exclusive clubs and being seen with very wealthy people.
His use of social proof is one of the main reasons people didn’t question his unusually consistent investment returns– because he was hanging out with people that other people think are very smart, very connected.
People assumed that Madoff was legit because of all this and he couldn’t possibly be perpetuating some kind of a Ponzi scheme or fraud, which is what he was doing.
Rule Three: Use Scarcity
The third principle that Madoff really worked to his advantage was scarcity.
He made people think that it was difficult to invest their money with him. His target clientele was the ultra rich people, businesses, and even charities. And his fund was marketed as being exclusive, and sort of behind a velvet rope, kind of like a nightclub.
We all know nightclubs keep people waiting on the line outside to give the impression that, ‘Oh my gosh, that club must be hot, because there’s 1000 people outside waiting to get in.”
Meanwhile, there could be only ten people inside, but those 1000 people outside have no idea.
This sparks the herd mentality in you so that you want to get in. You want to be seen as being on the inside or in the know with the smart, the rich people.
Madoff did something else that was kind of unusual in Wall Street business:
He didn’t normally meet directly with investors.
This gave him a sort of Wizard of Oz aura.
He kept things very buttoned up and secretive and he didn’t allow emails, even, for key staff. He also asked investors who put their money with him not to talk about him or his firm.
And he never actively sold his fund to people.
He usually told them that the fund was closed to new investors.
If you approached him and said, “Hey, Mr. Madoff. I’ve got $5 million, I’d like to invest my money with you.” He’d say, “Sorry, the fund’s closed. I’m not taking any more money.”
If you persisted and you said, “Look, Mr. Madoff, I really want to invest with you. I’ve been trying for a long time, how about if I up it to $10 million?”
“No, no. The fund is closed to new investors.”
“Well, what about $15 million? Okay, I’ll put $20 million with you.”
And this is what he did, he constantly said “no” so that people would want it even more. They knew that the opportunity was scarce.
Finally, Leverage Influencers
Madoff was a master with people. He leveraged influencers who were trusted and respected.
His target customers looked to these influencers for advice, for help, for guidance, and Madoff sought these people out. He wined them and dined them, and once they invested, they would tell other people about it.
This is how he sold without selling. This is the difference between marketing and sales.
So Madoff used influencers to reach out and connect with his target customer. And he was very, very well-aware of who his target customer was.
Madoff is Jewish, so he sought out other rich, Jewish people. His own people.
Madoff made it a point to meet top investment pros who were Jewish or big-time investors.
Big business people. The ultra-rich. Celebrities.
Because with their blessing, many other people in that community would then seek him out and approach him to invest.
That’s not to say he only took Jewish people’s money; he didn’t.
He would take anybody’s money who was willing to invest — all of it in some cases. But he targeted his own Jewish community because he knew those people so well because he was part of it.
This included notable people in our society including Auschwitz survivor, activist, Nobel prize author Elie Wiesel.
Madoff worked hard to make introductions to people like this. This is how he marketed without selling, like I just said.
He cozied up to notable people like this. He gained their trust and then he got the trust of others who respected them.
They were attracted to him.
Let’s Sum it Up
What are our takeaways?
Well, guys, like I said at the beginning of this, we’re here to do good.
We’re here to help people.
We’re here to provide superior value and just because I went through an example involving an evil guy like Bernie Madoff, doesn’t mean we have to behave like him.
We can take those same four principles and we can apply them for good purposes, to build our businesses, to provide our customers with something that they really want, really need, and we can all move forward together, and we can actually improve society that way.
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